Regressive Taxation Burdens the Poor

November 6, 2013

It is well established that indirect taxes are nearly always regressive, which is to say that they take a greater proportion of income from the poor than from the rich. In Britain, the income tax system is progressive, taking 25 percent of the income from the richest fifth of households, but only 10 percent of the income from the poorest fifth. The top 1 percent of earners pay a quarter of all income tax. However, the progressive nature of the income tax system is undermined by the large and growing regressive impact of sales taxes and "sin taxes," says Christopher Snowdon, director of lifestyle economics at the Institute of Economic Affairs.

  • The poorest 20 percent of households in Britain spend an average of £1,286 (approximately $2,063) per year on "sin taxes," including betting taxes, vehicle excise duty, air passenger duty, "green taxes" and duty on tobacco, alcohol and motor fuels.
  • The £1,286 spent on sin taxes represents 11.4 percent of the disposable income of Britain's poorest fifth of households.
  • For every £8 (approximately $13) spent by the poorest fifth of households, £1 ($1.60) is taken from them in sin taxes.

Sin taxes become more regressive as their rates rise and consumption of the products in question are increasingly confined to lower income groups. Tax is the single biggest source of expenditure for those who live in poverty and indirect taxes are a major cause of Britain's cost of living crisis.

  • Tobacco duty is the most regressive tax in Britain today, not only because it is levied at an extremely high rate but because the poor are three times more likely to smoke than the rich.
  • By contrast, alcohol and motor fuels are disproportionately consumed by wealthier individuals, although this is no consolation to the large number of poor individuals who consume these goods.

Despite significantly lower rates of alcohol consumption and car ownership, the poorest income group spends twice as much of their household income on sin taxes and value-added tax (VAT) as the wealthiest income group. Cutting taxes on fuel, alcohol and tobacco by half, scrapping green energy subsidies and reducing VAT to 15 percent would put money back in the pockets of those who are in greatest need of it.

Source: Christopher Snowdon, "Aggressively Regressive: the 'Sin Tax' that Make the Poor Poorer," Institute of Economic Affairs, October 2013.

 

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