UK taxation policy

When the coalition Conservative-Liberal Democrat government came to power in 2010, one of its key objectives was to cut government borrowing.

As a result, changes have been introduced affecting Social Security benefits, including:

  • the introduction of Universal Credit
  • a cap on the total benefit that can be paid to any single household
  • the implementation of the so-called 'bedroom tax' (more properly the removal of the 'spare room subsidy')
  • a cap on total welfare spend

The consequences of the government's 'austerity programme' have been profound. The Joseph Rowntree Foundation (JRF) has reported big rises in the numbers of people falling into poverty, including many of those in employment.

The JRF would argue that too often work does not pay enough – even with a National Living Wage, some pay falls below the 'real living wage’ (£8.75 per hour outside London).

Taxation policy

Taxation policy can be described as either progressive or regressive.

Where taxation is progressive:

  • a greater proportion of total taxation falls on the wealthiest
  • the poorest, proportionally, pay less tax
  • income inequality tends to fall

Where taxation is regressive:

  • more tax, proportionally is taken from people on lower incomes
  • the wealthiest, proportionally, pay less tax
  • income inequality tends to rise

In 2010, under the Labour government in 2010, the top rate of income tax was raised to 50% for those earning over £150,000. This was an example of progressive taxation.

From 2013, under the coalition Conservative-Liberal Democrat government, the top rate of income tax for the highest earners was reduced to 45%. Some in the Conservative Party have called for a further reduction to 40%.

Currently the top 1% of earners pay 27% of all income tax. Depending on your political view this is a progressive tax and is as it should be.

However, the Conservatives would counter by saying that reductions income tax rates reward hard work and that in the long-term total tax revenue increases, allowing government to better support society.

Indirect taxes such as VAT, alcohol and fuel duty also have an impact on inequality. Higher rates of these taxes represent a higher proportion of poorer people's income compared to wealthy people. "Indirect taxes act to increase inequality of income." Office for National Statistics, 2013.