Tax Policy and Inequality in the UK since the 1970s

This article critically discusses the use of tax policy to reduce inequality in society and examines the approaches taken by UK governments since the 1970s. It explores the normative arguments for and against societies permitting a higher degree of inequality, the impact of different tax systems on inequality, and the proportion of tax revenues raised by different types of taxes over the years. The study concludes by highlighting the importance of taxation in reducing inequality and the need for careful implementation of policies.

Accounting and Finance
Critically discuss the extent to which tax policy should be used to reduce
inequality in society. To what extent and how have UK governments used
tax policy to do this since the 1970s?
1

Table of content:
Introduction:...............................................................................................................................3
The normative argument for and against societies permitting a higher degree of inequality....3
The normative argument for and against for using the taxation in order to reduce inequality. .5
The characteristics of different taxes which results in them reducing or increasing inequality 7
The proportion of tax revenues raised by different types of taxes has varied since the year
1970s..........................................................................................................................................9
Conclusion:..............................................................................................................................11
Reference list:...........................................................................................................................12
2

Introduction:
Taxation is defined as the charges which are imposed over the income and the expenditures
of the citizens of the nation so that the collected revenue or amount could be used for the
social and economic development of the nation. However, since the taxation is not the only
source of government revenue but it is by far the most important source of revenue for almost
all the countries in the world (Barr, 2012). There are various researches which are done
around different countries and as per the International Centre for Tax and development, it is
found that total tax revenue account is for more than 80% of the total government revenue in
almost half of the country. In countries like the UK, tax collection is used as one of the
methods for reducing inequality in society. Therefore, since the year the 1970s, the UK
government is known to be using various tax policies and methods so that they are able to
bring equality within the nation and also reduce discrepancy.
The normative argument for and against societies permitting a higher degree of
inequality
The social inequality could be defined as the existence of the unequal opportunities which are
given to the different positions and status of people living in the same society. There are
various dimensions which are considered with social inequality. One of the dimensions is
Income which is known as the earning or the investment of the individual. The next is wealth
which is known as the total value or the total amount of money that an individual is holding
in the society (Piketty and Saez, 2014). However, there are other dimensions which may or
may not be taken into consideration and they are power, race and ethnicity and occupation.
However, there are various factors which could be considered which are both for and against
the permission of higher degree of inequality. When it comes to inequality in the society there
are basically two sides who could be blamed for the following which are mentioned as under:
The first side which could be blamed for the reason of inequality are the poor. In most cases,
it is found that poor people are responsible themselves because of which they are treated
unequally in society. There are various pieces of evidence which show that the society has
plenty of opportunities for the people of the nation; however, what is lacking is the amount of
3

motivation and the lack of skills for finding the work in the society (Piketty, 2015). However,
in order to stay updated in society, people need to more competent and they need to be more
updated regarding the opportunities which are available to the people. Some of the people are
not able to have proper schooling; however, there are certain opportunities which are
available to them that do not require school knowledge or higher education skills. However,
in such a scenario what they really lack is a skill.
Another factor which could be considered and they could be blamed for the inequality in the
society is to blame society. As mentioned before there are two sides of the same coin and
they need to stay together in the same coin. However, when it comes to society the people
who have the proper statuses they are not able to cope with the poor and other ethical
differences in society. When it comes to increasing poverty in most of the countries it is
found that loss of the job is one of the reasons for the increase in poverty level (Piketty and
Saez, 2013). There are various researches which are carried and they show that most of the
losses of jobs in the UK are mainly because of the inequality. Therefore, the UK government
needs to have a balance which needs to be maintained so that they are able to cope with the
differences in the culture and also the ethical factor. Therefore, policies need to be such that
they are able to train the poor and also the people who are backward and they are facing the
wrath of inequality in society. This could significantly help the people so as to increase the
skills and also the knowledge regarding the work.
However, on the other hand, the increase in the social inequality is also helpful because it
impacts the incentives therefore, the people are able to get a higher wage which is beneficial
for the market (Alvaredo et al. 2013). It also creates fairness among the people as they are
paid as per the skills and knowledge. Lastly, it also boosts the growth of entrepreneurs in
society and set up a new business which in turn is also beneficial for the government and
society.
The normative argument for and against for using the taxation in order to reduce
inequality
Income tax has an inequality-reducing impact on society. There are different theories which
could be used in order to explain the case however, in such cases all the income units are
4

done as per the common progression schedule. If the income and expenditure of the citizens
are taxed progressively there could be a drastic impact on the reduction of inequality.
However, this insight has limited applicability when it comes to the real world. The tax which
is being levied on the people is mainly dependent on the non-income attributes of the people
such as the ownership of the home, marital status as well as the income of the people.
However, there are various normative arguments regarding taxation for the reduction of
inequality (Atkinson, 2015). The positive arguments which could be considered for the
reduction of inequality through taxation are as follows. One of the benefits of the tax for the
reduction of inequality is that the government can reduce inequality and poverty through the
tax which is levied on the higher paid people. If the tax is employed progressively on the
higher income then the tax which is collected could be used for the redistribution for the
welfare of the people who are on the lower income benefits. There are other benefits which
could be taken into consideration are free education and also better health care benefits which
are given to the people. This could greatly be used for increasing the final income of the
people, increasing the collection of the taxes and thus, it helps in the reduction of the gap
between the rich and the poor. There are various methods which could be used which are
having a positive impact on reversing the rise of inequality and also closing the disparities
among the subgroups and thus it also helps in enhancing the economic mobility of the
country. Some of the methods which could be used are:
 Increasing the minimum wage: There are researches which show that raising the wage
of the poorly paid individual has the potential to help nearly 4.6 million people in the
society (Ostry et al. 2014). Other than that it also does not hurt the employment
neither does it reduce the economic growth of the nation.
5

 Increasing the EITC: Researches show that increasing the EITC has a positive impact
on the families and also it provides support to the working poor, especially the single
parents who are new to entering the workforce.
 Investing in the education: Collecting the taxes from the higher paid individual and
then investing the money on education can greatly improve the quality of the
schooling of the children and thus, securing their future so that there is an increase in
productivity and also decreasing the inequality among the nation (Taylor‐Gooby,
2012).
6

The characteristics of different taxes which results in them reducing or increasing
inequality
The taxation is the only source which is used by the government so that they are able to
accumulate the taxes and they could be used for the economic growth and development of the
country. However, there are other methods which are used by the government for the
collection of the revenue, but the income tax is by far the most important method which is
used for the collection of the revenue from almost 80% of the country (Atkinson, 2014).
There are different taxation pattern around the world which are revealed large cross country
differences. It is one of the methods which are separating the developing country from the
developed country. The developed countries collect larger tax revenues than that of the
developing country. This is because the developed countries have largely relied on the
taxation system and thus there is an increase in the level of taxation. There are different types
of taxes which are being levied on the people based on the income they have annually. In the
UK there are different types of taxes which are being used by the government which results
in the increase or the decrease of inequality. Some of the tax systems which are used by the
UK government are as mentioned below which are impacting the increase or the decrease of
inequality:
Progressive tax system: In terms of the progressive tax system the person whom the higher
are paid individuals pay a significantly higher proportion of the tax with the rise in the
income. The progressive tax system is always cited as one the significant method for the
reduction of the inequality in the society (Wade, 2014).
Proportional tax system: It is one of the tax systems which are used where all the individual
are paid the same proportion of the money they are earning. The tax rate does not increase or
decrease with the change in income. This is comparatively fair and easy to manage method
(Taylor‐Gooby, 2013).
Regressive tax system: The regression tax method is one of the methods where there is a
decrease in the tax rate as the amount for the subject to the taxation also increases. In the
following the person or the individual with the lower pay scale pay the higher taxes to the
government. This is one of the case or characteristics of the tax system which increases the
level of inequality in the society (Giddens, 2014).
7

The proportion of tax revenues raised by different types of taxes has varied since the
year 1970s.
Viewing everything from the economic historical perspective, the growth of the government
and the level at which they are collecting the taxes from the citizen of the country is one of
the most significant features of the last two centuries. Below are some of the graphs and the
data which shows the change in the tax system of different countries also taking into
consideration the UK government which also shows some of the significant change in the
graph (Fuentes-Nieva and Galasso, 2014). The taxes mainly started growing in the early
industrialization mainly after the Second World War.
8

From the graph it could be seen after the Second World War that is from the year 1970 there
is a drastic increase in taxation. During the year 2008, the UK was taxation had a significant
increase of 36%. However, with the increase in taxation, there was a change in the
expenditure in the field of education, social welfare and also the healthcare sector (Bruff,
2014). After the year 2008 the taxation has stabilized and until today the differences are quite
significant.
From the next graph, it is clearly visible that the taxation was an increasingly important
source for the collection of revenue in the UK. It is seen that almost 34.89% of the overall
revenue for the government of the UK was done through taxation (Rein, 2017). Thus, it
clearly depicts that revenue from the income tax is an important aspect for the UK
government so that they are able to remove discrepancy and also reduce inequality.
9

10

Conclusion:
Taxation is one of the important gauges which could be used for the reduction of inequality in
the country. Generally speaking, the countries which are able to achieve the largest
redistribution through the taxes and the transfers are considered to be the lower in terms of
inequality. The main purpose of the study was to understand how the taxes which are levied
on an individual help in reducing the inequality among the people in the same society. As per
the UK government it is seen that from the year 1970 if all the policies are being
implemented carefully, then the policies have the potential so that they are able to raise the
families out of poverty, and also support and boost the economic growth and stability of the
nation, thus eradicating the inequality among the people of the same society. However, there
is still some disagreement considering this as one of the best methods to reduce inequality,
there is always a growing consensus in the country that inequality needs to be reduced.
11

Reference list:
Alvarado, F., Atkinson, A.B., Piketty, T. and Saez, E., 2013. The top 1 per cent of an
international and historical perspective. Journal of Economic Perspectives, 27(3), pp.3-20.
Atkinson, A.B., 2014. After Piketty?. The British Journal of Sociology, 65(4), pp.619-638.
Atkinson, A.B., 2015. Inequality. Harvard University Press.
Barr, N., 2012. Economics of the welfare state. Oxford university press.
Bruff, I., 2014. The rise of authoritarian neoliberalism. Rethinking Marxism, 26(1), pp.113-
129.
Fuentes-Nieva, R. and Galasso, N., 2014. Working for the Few: Political capture and
economic inequality. Oxfam.
Giddens, A., 2013. The third way and its critics. John Wiley & Sons.
Martinez-Vazquez, J., Moreno-Dodson, B. and Vulovic, V., 2012. The Impact of Tax and
Expenditure Policies on Income Distribution: Evidence from a large panel of countries.
Andrew Young School of Policy Studies Research Paper Series, (12-30).
Ostry, M.J.D., Berg, M.A. and Tsangarides, M.C.G., 2014. Redistribution, inequality, and
growth. International Monetary Fund.
Piketty, T. and Saez, E., 2013. Top incomes and the great recession: Recent evolutions and
policy implications. IMF economic review, 61(3), pp.456-478.
Piketty, T. and Saez, E., 2014. Inequality in the long run. Science, 344(6186), pp.838-843.
Piketty, T., 2015. About capital in the twenty-first century. American Economic Review,
105(5), pp.48-53.
12

Rein, M., 2017. From policy to practice. Routledge.
Taylor‐Gooby, P., 2012. Root and branch restructuring to achieve major cuts: The social
policy programme of the 2010 UK coalition government. Social Policy & Administration,
46(1), pp.61-82.
Taylor‐Gooby, P., 2013. Why do people stigmatize the poor at a time of rapidly increasing
inequality, and what can be done about it?. The political quarterly, 84(1), pp.31-42.
Wade, R.H., 2014. The Piketty phenomenon and the future of inequality. Real-world
economics review, 69(4), pp.2-17.
13