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This 'new tax' can cut UK's income inequality and help those on low pay

Reforming the UK's tax system could reduce inequality for all income groups, NIESR claims. Photo: PA
Reforming the UK's tax system could reduce inequality for all income groups, NIESR claims. Photo: PA (PA)

Experts have called for reforms in Britain's tax system to ensure fairness and equality amid "deep disparities across households with diverse demographics and socio-economic endowments".

A new report from the National Institute of Economic and Social Research (NIESR) argues taxing consumption directly can help reduce deepening disparities of wealth.

Analysts at the think tank found that a direct progressive consumption tax (PCT) could be implemented without a loss of tax revenue and that it can be modelled in a way that reduces inequality.

"Deep disparities across households with diverse demographics and socio-economic endowments, and associated spatial inequalities are a pervasive and persistent reality in the country," Dr Larissa Marioni, senior economist at NIESR said.

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"Progressive consumption taxes can serve as a potent policy tool to address these inequalities, by placing more agency upon individuals and households as to when in life they wish to work, how much they would like to work, and when they would take breaks for education and retraining."

Chart: National Institute of Economic and Social Research.
Chart: National Institute of Economic and Social Research.

Direct consumption taxation differs from an indirect tax on current expenditure such as Value Added Tax (VAT) because its a tax on an individual’s total consumption across a year, rather than taxation at the point of expenditure every time they buy something.

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"Taxing consumption rather than income could make it easier for people with lower earnings to save, encouraging more households to build up a buffer to protect against income shocks," Karen Barker, head of policy and research of the abrdn Financial Fairness Trust said.

According to the research, published on Wednesday with support from the abrdn Financial Fairness Trust, a properly designed PCT enhances welfare in three ways.

Firstly, it helps households to "smooth their consumption over the life cycle", it claims.

That will even out consumption over time because it allows people to earn and save during their working life without tax disincentives and plan "smooth consumption paths" over their lifetime.

Progressive taxes on consumption only set in once a certain threshold is reached – for example a tax-free threshold of £100 per week – which enables low-income households to consume more of their income, according to NIESR.

A PCT allows households to "make more flexible decisions about the balance between labour and leisure by incentivising employment for all households, not only low-income households but also higher income ones because they are taxed more on what they consume than what they earn".

And finally, it enables Britons to accumulate wealth, according to the report, as the PCT system generates incentives to increase saving for all income groups.

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