Poorest hit hardest by consumption taxes

The poorest income group spends twice as much on so-called 'sin taxes' and VAT than the wealthiest income group as a proportion of their income, according to a report from the Institute of Economic Affairs think tank. Tax is the single biggest source of expenditure for those who live in poverty, it says.

Key points

  • The poorest twenty per cent of households in Britain spend an average of £1,286 a year on ‘sin taxes’, including betting taxes, vehicle excise duty, air passenger duty, ‘green taxes’ and duty on tobacco, alcohol and motor fuels. This represents 11.4 per cent of their disposable income. In addition, they spend £1,165 on VAT.
  • People in the lowest income group who drink moderately, smoke and drive a car spend 37 per cent of their disposable household income on sin taxes and VAT. The comparable figure for people in the top fifth of the income scale is 15 per cent.
  • All told, the poorest households pay 37 per cent of their gross income in direct and indirect taxes – meaning that tax is the single biggest expenditure for people in poverty.
  • This is a growing problem. In 1977 the poorest quintile spent 22 per cent of its income on indirect taxes, whereas in 2012 it spent 30 per cent. By contrast, the richest quintile has seen its share of income spent on indirect taxes fall from 20 per cent to 15 per cent. This can be partly explained by incomes at the top rising more quickly than those at the bottom, but it is primarily due to indirect tax rates rising and new indirect taxes being introduced.
  • The report calls for big cuts in taxes on fuel, alcohol and tobacco, the scrapping of green energy subsidies and a reduction in VAT to 15 per cent.

The report's author said: 'It’s clear that an increase in taxes on the goods families consume is making life harder for people. This is especially true for the poorest who spend a much higher proportion of their income on high-taxed products such as alcohol and tobacco. At a time when many families are struggling to get by, it’s clear that reducing taxes would help those finding it most difficult'.

Source
: Christopher Snowdon, Aggressively Regressive: The ‘Sin Taxes’ that Make the Poor Poorer, Institute of Economic Affairs
LinksReport | IEA press release

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Publication date: 
Oct 14 2013