Forex

Income distribution interests me enormously. The interest partly stems from the relationship between stated income and mortgage applications. However, it is also interesting because it often says much about the relationship between the state and the individual. The government today taxes and distributes huge amounts of money between individuals. Sometimes, it is hard to see what the government is trying to achieve with these redistribution policies.

The recent gross income data from the ONS, which covers 2007, amply illustrates this point. As we will see, the undeserving rich end up receiving sizable cash benefits. The above chart breaks gross income down by into five groups, starting with the lowest 20 percent of earners and moving up to the highest 20 percent. It also shows what proportion of pre-tax income comes from cash benefits and what comes from earned income.

The relative importance of cash benefiits for the lowest income families is understandable. After all, that is what benefits are supposed to do - partially equalize income so that overall income inequality is reduced. However, it is very surprising how important cash benefits are for other, higher earning groups. For example, the average earner in the highest 20 percent group receives about ₤73,000 and also receives an additional about ₤1700 in benefits.

Of course, the highest 20 percent will pay a significant amount of their income in taxes, reducing post tax income inequality significantly. Nevertheless, you have to wonder why the highest income earners receive any cash benefits at all.

Would it not be better to stop paying high earners cash benefits and reduce their tax burden? Or is that one of those sensible ideas that simply could not work in the UK?