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Inequality and two decades of British tax and benefit reform

Author

Listed:
  • Tom Clark

    (Institute for Fiscal Studies)

  • Andrew Leicester

    () (Institute for Fiscal Studies)

Abstract

Microsimulation methods are used to identify the contribution of tax and benefit reforms to the significant growth in UK income inequality since 1979. The total effect turns out to depend crucially on the counterfactual against which the reforms are assessed: compared with the alternative of pure price-indexation, the total effect of reform is small; by contrast, compared with a counterfactual in which benefits rose in line with national income (historically the case before 1979), the effect is substantial - approximately half the total rise in income inequality is explained. The impact of reforms on inequality has varied significantly over time: income tax cuts in the late 1970s and late 1980s increased inequality; direct tax rises in the early 1980s and 1990s, together with increases in means-tested benefits in the late 1990s, reduced it. The robustness of the results to sampling variation and to the measure of inequality used is also investigated.

Suggested Citation

  • Tom Clark & Andrew Leicester, 2004. "Inequality and two decades of British tax and benefit reform," Fiscal Studies, Institute for Fiscal Studies, vol. 25(2), pages 129-158, June.
  • Handle: RePEc:ifs:fistud:v:25:y:2004:i:2:p:129-158
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    Cited by:

    1. Jörg Lingens & Klaus Wälde, 2009. "Pareto-Improving Unemployment Policies," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(2), pages 220-245, June.
    2. Matsaganis Manos & Flevotomou Maria, 2008. "A Basic Income for Housing? Simulating a Universal Housing Transfer in the Netherlands and Sweden," Basic Income Studies, De Gruyter, vol. 2(2), pages 1-25, January.
    3. Olivier Bargain & Tim Callan, 2010. "Analysing the effects of tax-benefit reforms on income distribution: a decomposition approach," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 8(1), pages 1-21, March.
    4. Brewer, Mike & Wren-Lewis, Liam, 2012. "Accounting for changes in income inequality: decomposition analyses for Great Britain, 1968-2009," ISER Working Paper Series 2012-17, Institute for Social and Economic Research.
    5. Bargain, Olivier & Dolls, Mathias & Immervoll, Herwig & Neumann, Dirk & Peichl, Andreas & Pestel, Nico & Siegloch, Sebastian, 2011. "Tax Policy and Income Inequality in the U.S., 1978-2009: A Decomposition Approach," IZA Discussion Papers 5910, Institute for the Study of Labor (IZA).
    6. Olivier Bargain, 2009. "The distributional effects of tax-benefit policies under New Labour : a Shapley decomposition," Working Papers 200907, School of Economics, University College Dublin.
    7. Bargain, Olivier & Dolls, Mathias & Immervoll, Herwig & Neumann, Dirk & Peichl, Andreas & Pestel, Nico & Siegloch, Sebastian, 2013. "Partisan Tax Policy and Income Inequality in the U.S., 1979-2007," IZA Discussion Papers 7190, Institute for the Study of Labor (IZA).
    8. Nicholas Crafts, 2013. "Returning to Growth: Policy Lessons from History," Fiscal Studies, Institute for Fiscal Studies, vol. 34(2), pages 255-282, June.
    9. André Decoster & Serio Perelman & Dieter Vandelannoote & Toon Vanheukelom & Gerlinde Verbist, 2015. "A bird’s eye view on 20 years of tax-benefit reforms in Belgium," Working Papers 1502, Herman Deleeck Centre for Social Policy, University of Antwerp.
    10. Mike Brewer & Liam Wren-Lewis, 2016. "Accounting for Changes in Income Inequality: Decomposition Analyses for the UK, 1978–2008," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(3), pages 289-322, June.
    11. Figari, Francesco & Paulus, Alari & Sutherland, Holly, 2014. "Microsimulation and policy analysis," ISER Working Paper Series 2014-23, Institute for Social and Economic Research.
    12. Olivier Bargain & Tim Callan & Karina Doorley & Claire Keane, 2017. "Changes in Income Distributions and the Role of Tax‐Benefit Policy During the Great Recession: An International Perspective," Fiscal Studies, Institute for Fiscal Studies, vol. 38, pages 559-585, December.
    13. Thor O. Thoresen & Zhiyang Jia & Peter J. Lambert, 2013. "Distributional benchmarking in tax policy evaluations," Discussion Papers 765, Statistics Norway, Research Department.
    14. Jeff Larrimore & Richard V. Burkhauser & Philip Armour, 2013. "Accounting for Income Changes over the Great Recession (2007-2010) Relative to Previous Recessions: The Importance of Taxes and Transfers," NBER Working Papers 19699, National Bureau of Economic Research, Inc.
    15. Decoster, André & Perelman, Sergio & Vandelannoote, Dieter & Vanheukelom, Toon & Verbist, Gerlinde, 2015. "A bird’s eye view on 20 years of tax-benefit reforms in Belgium," EUROMOD Working Papers EM10/15, EUROMOD at the Institute for Social and Economic Research.
    16. Julian Lamont, 2008. "Incentives and reflective equilibrium in distributive justice debates," The Journal of Philosophical Economics, Bucharest Academy of Economic Studies, The Journal of Philosophical Economics, vol. 2(1), pages 5-19, November.
    17. Stuart Adam, 2005. "Measuring the marginal efficiency cost of redistribution in the UK," IFS Working Papers W05/14, Institute for Fiscal Studies.
    18. Matsaganis, Manos & Flevotomou, Maria, 2007. "The impact of mortgage interest tax relief in the Netherlands, Sweden, Finland, Italy and Greece," EUROMOD Working Papers EM2/07, EUROMOD at the Institute for Social and Economic Research.
    19. John Hills & Alari Paulus & Holly Sutherland & Iva Tasseva, 2014. "A lost decade? Decomposing the effect of 2001-11 tax-benefit policy changes on the income distribution in EU countries," ImPRovE Working Papers 14/03, Herman Deleeck Centre for Social Policy, University of Antwerp.
    20. De Agostini, Paola & Paulus, Alari & Sutherland, Holly & Tasseva, Iva Valentinova, 2014. "The effect of tax-benefit changes on the income distribution in EU countries since the beginning of the economic crisis," EUROMOD Working Papers EM9/14, EUROMOD at the Institute for Social and Economic Research.
    21. Stuart Adam & James Browne, 2010. "Redistribution, work incentives and thirty years of UK tax and benefit reform," IFS Working Papers W10/24, Institute for Fiscal Studies.
    22. Pasi Moisio & Kirsi-Marja Lehtelä & Susanna Mukkila, 2014. "Estimating the poverty reduction effect of tax and benefit policies in Finland 1993-2013 using a microsimulation method," ImPRovE Working Papers 14/06, Herman Deleeck Centre for Social Policy, University of Antwerp.
    23. Olivier Bargain, 2012. "Decomposition analysis of distributive policies using behavioural simulations," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(5), pages 708-731, October.

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