The Effects of Taxes and Benefits on Household Income, 2012/13

Nathan Thomas

The Effects of Taxes and Benefits on Household Income...

• Income data are provided from the LCF and are combined with income imputed from additional sources

• Provides an estimate of the average amount of taxes paid, and the value of benefits received, for households with different levels of income

• Analysis includes indirect taxes such as VAT, which are calculated using household spending data

• Enables a comprehensive analysis of how government activity redistributes income between different types of households

• Data are used by HM Treasury to assist policy forecasting analysis

• Latest publication for 2012/13 published 26 June 2014

Composition of household income...

• Income calculated in five stages beginning with original income –the households market income from employment and investment

• Each stage introduces a different element of government intervention.

• Income is often “equivalised”, adjusting for the cost of living for households of different sizes and compositions, to provide a comparable measure of material living standards.

Original Income...• Annualised income in cash of all members of the household before the deduction

of taxes or the addition of any state benefits.

From the LCF:• Income from employment,• self-employment,• investment income, • private pensions and annuities (which include all workplace pensions, individual personal

pensions and annuities).

Imputed income:

• Imputed income from benefits in kind such as company cars and the benefit from fuel for personal use along with the benefit from rent-free accommodation provided by employers.

• Tax charges on company cars are based on the car’s list price and official CO2emission figure.

Gross Income...

Cash benefits and tax credits include:

• Contributory benefits: State Pension, contribution-based Jobseeker’s Allowance and contribution-based Employment and Support Allowance (formerly Incapacity Benefit), widows’ benefits, and Statutory Maternity Pay.

• Non-contributory: Income Support, income-based Jobseeker’s Allowance and Employment and Support Allowance, Child Benefit, Housing Benefit (Council Tax benefit and rates rebates are treated as deductions from Council Tax and Northern Ireland rates), Statutory Sick Pay, Carer’s Allowance, Attendance Allowance, Disability Living Allowance, war pensions, Severe Disablement Allowance, Industrial Injury Disablement Benefits, Child Tax Credit and Working Tax Credit, Pension Credit, over 80 pension, Christmas bonus for pensioners, Government Training Scheme allowances, student support, and Winter Fuel Payments.

Gross income adds cash benefits and tax credits

Disposable Income...Direct taxes are subtracted from gross income to

form disposable income.

Direct taxes: • Income Tax, Council Tax and Northern Ireland rates and

employees' and self-employed National Insurance contributions

• Disposable income is equivalised to rank households from richest to poorest, using the modified-OECD scale.

Post-tax income...

Indirect taxes on final consumer goods and services include:

• Duties on alcoholic drinks, tobacco, petrol, oil, betting,• Value Added Tax (VAT),• Customs (import) duties,• Motor vehicle duties,• Air Passenger Duty,• Insurance Premium Tax,• Driving licences,• Television licences,• Stamp duties,• Camelot: payments to National Lottery Distribution Fund.

• Taxes levied on final goods and services are imputed from a household's LCF expenditure record. For example, the amount of VAT that is paid by the household is calculated from the household's total expenditure on goods and services which are subject to VAT.

Indirect taxes are subtracted from disposable income to give post-tax income.

Post-tax income...• Expenditures recorded in the LCF on products such as alcoholic drinks, tobacco, ice cream,

soft drinks and confectionery are grossed up to allow for the known under-recording of these items in the sample

• Stamp Duty on house purchase is taken as the product of the hypothetical duty payable on households buying their current dwelling (estimated from valuations given in the LCF) and the probability of an owner-occupying household moving in a given year using the English Housing Survey (EHS)

Indirect taxes on intermediate goods and services include:

• Rates on commercial and industrial property,• Motor vehicle duties,• Duties on hydrocarbon oils,• Employers' contributions to National Insurance, the National Health Service, the industrial injuries fund

and the redundancy payments scheme,• Customs (import) duties,• Stamp duties,• VAT (on the intermediate stages of exempt goods);• Independent Commission franchise payments,• Landfill tax,• Consumer Credit Act fees,• Bank Levy.

Final Income...Final Income adds social transfers in kind (STIK)

Canberra Group Handbook (2011):• “Social Transfers in Kind (STIK) are … goods and services

provided by government and non-profit institutions that benefit individuals but are provided free or at subsidised prices.”

In-kind benefits included in ETB:

• National Health Service (including Health and Social Care in Northern Ireland),

• State education,• School meals and Healthy Start vouchers

(Including nursery milk),• Housing subsidies,• Railway travel subsidies,• Bus travel subsidies (including concessionary

fares schemes).

Final Income...

Measuring health services (NHS)• Insurance value’ approach applied

• Use data on cost of providing various types of healthcare: e.g. hospital inpatient/outpatient; GP consultations; pharmaceutical services, etc.

• Each individual allocated value based on data on average use by age/sex

• No adjustment made for use of private healthcare• Not feasible from data• Argument that all individuals benefit from existence of

public healthcare services

Final Income...

Measuring education services• ‘Actual consumption’ approach applied

• Use admin data on cost per pupil/student for different types of schools, nurseries, universities, etc.

• Value attributed to those recorded in LCF as receiving each kind of state education

• No benefit allocated for pupils attending private schools/receiving home schooling

• Recent improvements included new sources for further and higher education, along with the benefits received by households from nursery, primary, secondary and higher education, estimated separately for each devolved administration.

Final Income...

Measuring public transport subsidies• Subsidies allocated to households based on expenditure

data from LCF

• Rail subsidy calculated separately for those living in London/South East, reflecting higher levels of subsidy for London transport

• Allowances made for use of rail travel by business sector and tourists

• Bus travel calculate in similar way, but with additional benefit allocated for individuals holding a concessionary bus pass

Income inequality...• In addition to assessing the redistribution of income, another key use of

ETB is analysing inequality.

• One approach to measuring inequality is to look at the ratio of the income of the top to the bottom fifth of households.

Income inequality...The Gini coefficient ranges between 0 and 100, with 0 representing total equality – all households having equal incomes and 100 representing total inequality – only one household having all the income in an economy and the others having nothing.

Gini coefficients, 1977 to 2012/13

2012/13 Results...

2012/13 Results...

2012/13 Results...

Recent short stories/publications...

• Middle Income Households, 1977-2011/12

• Measuring National Well-being, Income, expenditure and personal well-being

• The effect of duties on petrol and diesel on household disposable income

• Household Energy Spending in the UK, 2002-2012

• Income of Retired Households, 1977-2010/11

Data availability...

• Microdata from the Effects of Taxes and Benefits is available to registered users from the UK Data Service.

• Detailed data are available on: Income, Taxes, Benefits and Household Characteristics