Fact Check: are those with the broadest shoulders bearing the greatest burden?

Who is paying the most? Tax burden via Orla/www.shutterstock.com

Those with the broadest shoulders are bearing the greatest burden.

George Osborne, chancellor of the exchequer, in his budget speech on July 8.

The chancellor’s claim is a difficult one to test. First, we might argue over what is meant by “burden” and how we should measure it. Second, the budget included a huge number of measures, some of them shifting the burden one way, others shifting it back (such as changes to working tax credits). This makes it difficult to come up with an overall assessment.

It might help to look at Osborne’s supporting claims immediately before and after the statement above:

The analysis produced today shows that the richest are paying a greater share of tax than they were at the start of the last parliament. And more than that, we are continuing to devote a greater share of state support to the most vulnerable. As I said they would – those with the broadest shoulders are bearing the greatest burden. For we are all in this together. And, in the last fortnight we’ve seen independent statistics showing that since 2010, child poverty is down and so is inequality.

In order to see whether Osborne is right, let’s examine these three statements and then discuss how they relate to “the burden”.

The rich paying a greater share of tax

This is technically true as shown in the chart below, taken from the Treasury’s analysis accompanying the budget.

The chart shows a prediction for 2017-18, under the 2010-11 tax/benefit rules and the anticipated 2017-18 rules. It thus shows the cumulative effect of policy changes since the election of 2010. HM Treasury

The bars below the axis show that the richest top income quintile (on the right hand side) pays well over its “fair share” of 20% of the tax burden. In fact it is around 50% and higher under the 2017-18 tax and benefit rules than the 2010-11 rules. However, this is a curious measure of fairness, which implies households should pay the same amount of taxes and receive the same benefits regardless of their level of income.

A better baseline of fairness might be that all people pay tax in proportion to their income. The top quintile earns approximately 50% of the original income so the burden might be said to be shared roughly equally, rather than on the broadest shoulders.

Some might argue that the small change between the 2010-11 and 2017-18 systems suggests that policy has become more redistributive. However, this is not accurate, since it shows how a given tax burden is shared, when that burden might be changing. For example, we could envisage a situation where the top quintile pays 100% of all taxes but, if those taxes were small enough, the amount of redistribution would be small.

Greater share of support to the most vulnerable

Here, the clever use of words creates a claim which is possibly technically correct but is misleading. The claim is that the most vulnerable (we interpret this as the poorest) obtain a larger share of the pie of state support. However, if the pie is shrinking the claim is quite consistent with the poorest becoming worse off.

With £12 billion of benefit cuts the pie is certainly shrinking – but the impact of that reduction is slightly mitigated for the very poorest. Cuts implemented through lowering the income threshold (from £6,420 to £3,850) above which people start to lose tax credits mean that the very poorest are to some extent protected; but credits are going to be withdrawn earlier and more quickly as income rises. Over the threshold, you lose 48p of credit for every £1 earned, compared to 41p before the budget.

The government’s own analysis suggests that this focusing effect on the poorest is relatively small, as the following chart reveals:

Where the cuts bite. HM Treasury

Welfare spending in the bottom quintiles does not change significantly using the 2017-18 rules, which is perhaps curious, given the tax credit reforms.

Child poverty and inequality

The Department for Work and Pension’s (DWP) most recent report on households living below average income summarises the latest information in the following chart:

UK child poverty, main measures, 1998-99 to 2013-14. Department for Work and Pensions

From this it is difficult to see much change since 2010-11, indeed there appears to be a slowing from the earlier downward trend. One of the key messages in the report is that “the percentage of children in relative low income BHC [before housing costs], remained flat at 17% in 2013-14 compared to the previous year. This follows a decrease between 2008-9 and 2010-11 and a period of stability from then onwards”.

It is difficult to see from the chart, and from other tables in the report, how Osborne’s claim for child poverty can be justified. A similar story can be told about inequality in general (using the DWP’s data).

Verdict

The chancellor’s claim about the broadest shoulders appears to rest on the slim foundations of selective and misleading statistics. A budget briefing by the Institute of Fiscal Studies has presented a more representative picture:

IFS analysis of tax and benefit reforms. Institute of Fiscal Studies

This clearly shows the poorest deciles of the population suffering the biggest income falls in relative terms since 2010 (the blue line) as well as being hit the hardest in this latest budget (the yellow bars). However, the very top decile also suffers significant losses due to various changes such as the tax treatment of pension contributions.

Perhaps we should not be surprised at all this. We expect our politicians to put a positive spin on what they do but the extent of it in this case is quite breathtaking. What this reveals is the importance of having institutions such as the Office of Budget Responsibility and the IFS which are relatively autonomous or independent of government. It is quite striking how the IFS in particular is now so central to our understanding of the public finances.

Review

Eoin Flaherty, Queen’s University Belfast

As this fact check makes clear, George Osborne’s budget is beyond spin: it is an assault on public welfare, and on the public understanding of government.

The real issue here is that the source of exchequer income is more varied than income tax. Direct income taxation is only one piece of exchequer receipts, the rest is made up through items such as indirect consumption taxes, levies on capital and import duties. Although the richest may spend and consume more in real terms, this represents a smaller proportion of their total income. In this respect, indirect taxes such as VAT (although not an issue here) are typically regressive, as they extract a greater proportional share of income from the poor. This is also the case with welfare cuts and caps, however, where the proportional reduction in disposable income among the poor will be highest.

The idea of a tax burden and how it is changing is the real issue, and the real hypocrisy in Osborne’s statement is that it doesn’t matter an iota whether the rich pay a higher share of tax or not. Further, since a good chunk of top incomes are made up of capital gains, rents, yields, dividends, they – quite literally – earn money doing nothing, compared to the work intensity of wage-dependent households.