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17 Sep 2007 : Column 2240W—continued
Taxation
Dr. Cable: To ask the Chancellor of the Exchequer if he will estimate (a) direct and (b) indirect taxes as a percentage of gross income for households with an income (i) lower and (ii) higher than (A) 95 per cent. of all households, (B) 99 per cent. of all households, (C) 75 per cent. of all households and (D) 25 per cent. of all households for each year since 1997; and if he will make a statement. [155376]
Angela Eagle: The information requested falls within the responsibility of the National Statistician, who has been asked to reply.
Letter from Karen Dunnell, dated 17 September 2007:
As National Statistician, I have been asked to reply to your recent question asking what estimate (a) direct and (b) indirect taxes as a percentage of gross income for households with an income (i) lower and (ii) higher than (A) 95 per cent of all households, (B) 99 per cent of all households, (C) 75 per cent of all households and (D) 25 per cent of all households for each year since 1997. (155376)
Estimates of household income and payments of direct and indirect taxes appear in the ONS analysis 'The effects of taxes and benefits on household income'. The latest analysis for 2005/06 was published, on the National Statistics website on 17th May 2007 at http://www.statistics.gov.uk/taxesbenefits The analysis is based on data from the Expenditure and Food Survey, which is a survey of approximately 7,000 households in the UK. The estimates of direct and indirect tax payments for the groups of households requested, have been calculated from the data underlying the annual taxes and benefits analyses., and these estimates appear in the table below.
Gross income includes income from wages, occupational pensions, self-employment income, investment income, and income from state benefits. Direct taxes include income tax, national insurance contributions and council tax. The indirect taxes include VAT, duties, and a number of smaller items such as television licences. Indirect taxes also include intermediate taxes—these are indirect taxes paid by companies which are deemed to be passed onto households through the prices they pay for goods and services. A more detailed breakdown showing each of the different taxes appears in the annual article.
Indirect taxes, when expressed as a proportion of gross income appears particularly high for those on lower income, although this result needs to be interpreted carefully. Estimates of indirect taxes are estimated based on household expenditure. It should be remembered that measured expenditure will not necessarily balance with measured income for the year. This is especially true for low income households where average measured income is significantly lower than average measured expenditure. For these households, indirect taxes (which reflect expenditure) are not being met solely from current income, and so indirect taxes are very high when expressed as a proportion of gross income.
There are a number of possible reasons why for some households expenditure might exceed income. Households with low incomes may draw on their savings or borrow in order to finance their expenditure. In addition, the lower income households in particular include some groups who have, or report, very little income, for example, self-employed people starting a business or someone who has just been made redundant. Some types of receipts are not included as income in the EFS e,g. inheritance and severance payments are regarded as lump sums and therefore are not considered to be current income. In some cases, the information given on expenditure is not consistent with that on income because of timing differences.
The annual effects of taxes and benefits article is focused primarily on the differential effect of taxes and benefits on different parts of the income distribution, rather than on changes over time. There have been some changes to the way in which the figures are compiled. Up until 2001/02, charges for water, environmental and sewage services were treated as local taxes, whereas from 2002/03 onwards they were excluded. The local tax category now just includes council tax and Northern Ireland rates.
There was also a change to the way that tax credits were treated. Up until 2002/03 tax credits were treated as cash benefits. From 2003/04, they are classified as negative income tax, but only to the extent that income tax less tax credits remains greater than or equal to zero for each family. So for households paying relatively little or no income tax, tax credit payments are still regarded either partially or wholly, as cash benefits. The effect of these changes would be a small reduction in the calculated tax burden in the years following these changes.
Figures for the top 1% of households in particular should be treated with some caution, as they are based on a small sub-sample of the survey. These estimates will be more affected by sampling variability.
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