IFS press release: More than nine in ten individuals pay more in taxes than they receive in social security over their lifetime

22 September 2015

New findings from leading think tank – Institute for Fiscal Studies, show that 64% of individuals in the UK pay more taxes than they receive in social security in a single year.

However, most individuals are said to experience considerable change over their lifetimes. For example, those not in paid work in one year are often in work another year. New analysis from IFS showed that extending the period of analysis from a single year to an entire lifetime increases the percentage of people who pay more in taxes than they receive in social security to 93%.

In addition, a second key finding demonstrated that in-work benefits were just as good as out-of-work benefits at targeting the lifetime poor (those with lowest incomes over the course of a lifetime). So given that in-work benefits do this without worsening work incentives by nearly so much, it would be of benefit to policymakers to place more weight on in-work than out-of-work support. These were among the main findings of a new IFS report, Redistribution from a Lifetime Perspective.

The key findings on the redistribution achieved by the current tax and benefit system included:

Taking adult life as a whole, 93% of individuals pay more in taxes than they receive in social security.
More than half of the redistribution achieved by taxes and benefits is effectively across periods of life rather than between different people
Income inequality is much lower from a lifetime perspective than a single-year perspective.
The tax and benefit system is less effective at reducing inequality over the lifetime than within each year.

The analysis of the distributional effects of historical tax and benefit reforms showed:

The Labour government’s expansion of in- and out-of-work benefits between 1999 and 2002 was less well targeted towards the lifetime poor than the snapshot poor.
The losses from tax and benefit reforms implemented by the Conservative-Liberal Democrat coalition between 2010 and 2015 are more evenly spread across the income distribution from a lifetime perspective than in a snapshot. However, the reforms still take proportionally more from the poorest half of individuals.
The four-year freeze to working-age benefits and tax credit cuts announced in the July 2015 budget remain regressive from a lifetime perspective, but losses extend into the top half of the distribution.
The report also analysed the distributional effects of hypothetical tax and benefit reforms which highlighted:
In-work (i.e. work contingent) benefits are just as good at targeting the lifetime poor as out-of-work benefits, but do so without worsening work incentives by nearly so much. Changes to the higher rate of income tax do target the lifetime rich reasonably well.
From a lifetime perspective, increasing the main rate of VAT looks close to neutral in distributional terms.
Increases in VAT on zero- and reduced-rated goods are mildly regressive from a lifetime perspective.

Peter Levell, a Research Economist at the IFS, and an author of the report said: “Understanding the lifetime impact of policies matters because individuals experience considerable changes in their circumstances over their lives,” and expressed his concern by affirming that “While over a third of individuals receive more in social security than they pay in taxes in a single year, this is true for very few when you look over an entire lifetime.”

Barra Roantree, another Research Economist at the IFS and co-author of the report, said: “The sharp distinction often made in policy debates between ‘working’ and ‘non-working’ families is not especially useful: in reality very few individuals are permanently out of work, the poor are not always poor and, albeit to a lesser extent, the rich are not always rich.”

Jonathan Shaw, a Senior Research Economist at the IFS, and the third author of the report said:
“The existing tax and benefit system, assessed largely against circumstances in the current year, doesn’t do especially well at redistributing resources towards the lifetime poor. Targeting lifetime redistribution more effectively may require new policies that take longer-run circumstances into account,”

See full release here