Wednesday, 25 June 2008

Highest paid receive ₤1,700 in cash benefits

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?


Mark Wadsworth said...

Knee jerk, Alice, knee jerk!

There's nothing wrong with universal cash benefits, they are the least-worst form of benefit. Means testing is a particularly spiteful form of taxation.

That £1,700 probably relates to Child Benefit - and there is an important equal-pay angle to this!

aSteve said...

It took me a long time to establish that you were talking about state aid when you referred to cash-handouts. I initially thought you were talking about 'cash in hand work' - which, I expect, would yield a similar graph... if you could find reliable statistics...

I don't see the sense in means testing by income... mainly because the cost of managing such a means-tested system would inevitably incur a substantial overhead. Whenever I think about this, however, I am a little annoyed... I ask: on what moral authority can government choose who deserves support and who does not? Do benefits find their way to the most grasping rather than the most deserving? Do means tested benefits actually amount to a strategy to repress the disadvantaged (by subsiding others who compete with them in the labour market)? I think they do.

Anonymous said...

2 very good articles on income distribution:

Alice Cook said...


No, not knee jerk. I am a firm believer in targeted benefits. Get help where it is needed. Keep the tax and benefits system simple and don't have potentially distortionary benefits affecting labour supply decisions.

Yes, the rich are receiving child benefits. I don't agree with it.


Alice Cook said...

BTW, I have loads of interesting data on this subject. If there is an interest, I'll post it.

Anonymous said...


First of all, are these quintiles total family income, total personal income, or either of the above but salary only (for the purple bar)?

On a judgement point, I take issue with the following which are either implicit or explicit in your post:
- undeserving rich. £73k is not "rich". Doing very nicely yes, rich no. And no hint of deservingness;
- I thought benefits were supposed to be a safety net to provide a guaranteed minimum level of sustenance. They are not meant to reduce inequalities in some grotesque social engineering project;
- Punishing high earners is not a long term solution and leads only to brain drain and economic stagnation. It's certainly not a moral high ground

If anything this table seems to say that over a third of the income for the bottom 40% is stolen right out of the pockets of the other 60%. That's the story, not that the top 20% get a tiny slice of their money back.

Like the old saying, the government breaks your legs then hands you crutches saying "see, you couldn't walk if not for me"


Alice Cook said...


If you didn't like that chart, I have another that will drive you mad - post-tax disposible income by quintile.

BTW, the data is household income. Just to clarify the obvious, households can have one, two or more adults, (though typically 1 or 2). The data also includes retired and non-retired households.


Anonymous said...

eat the rich!

aSteve said...

Even better, you seem to be encouraging the breakup of families by fiscal incentive. ;)

I'd certainly be interested in the graph of disposable income... but, I wonder, does it consider shelter to be a cost arising before or after income becomes disposable?

Mark Wadsworth said...

Alice, having thought about this long and hard, I am all in favour of a Citizen's Income style tax and welfare system.

You can't get much simpler than that - it alleviates poverty without discouraging work, study, savings or cohabitation. Sure, we can quibble over the precise amount of the CI and the flat tax rate needed to fund it, that's just details.

Alice Cook said...

asteve, nope. It is just tax, benefits and income.

Fiscal policy breaking up familes, better not go there!

aSteve said...

Erm, Alice, "Nope" to what?

Fiscal policy is defined (with the help of Wikipedia):

"Fiscal policy, taking the scope of budgetary policy, refers to government policy that attempts to influence the direction of the economy through changes in government taxes, or through some spending (fiscal allowances)."

Where the government legislates different rates of tax for different people, it is remarkably difficult to credibly argue that they are not aiming to influence people's choices. If they aren't aiming to do this, yet enact such policies, maybe we are duty bound to invoke civil war to remove imbeciles from positions of responsibility?

Greater subsidy where parents live alone is clearly an incentive for them to do just that. Similarly, a benefit for someone who is poorly paid in a low-value role results in reduced incentive to improve their situation - which is an advantage only to those who exploit employees.

Mark Wadsworth said...

asteve, that's another of my favourite topics ...

"why single mums become single mums"

aSteve said...

It is something of a sensitive subject - since everyone's personal experiences and intentions are different... but I can definitely understand your position, Mark.

Anecdotally, my local pub a couple of years ago was rather mismanaged and, hence, very quiet - the bar staff frequently out-numbering the customers. Among the typically early 20s female barmaids (paid in cash - I suspect undeclared) discussed life. Two had children and were proud that they'd chosen a father who could be expected (forced) to pay for the child's every need - but would not be a partner - hence their rent was currently paid - and they expected to be given a house soon... which was far, far better than any plausible father could manage. They were quite brazen and open about how each of them was able to play the system - and how the worst possible situation would be to have a partner. One admitted that it was the reason she chose to become pregnant.

I think it has become something of a lifestyle choice... and I'm sure that an expectation of support (irrespective of what support actually transpires) is at least subconsciously influential and relevant.

It is a difficult problem - because it is amoral to punish a child whose parents are retarded... conversely it is amoral to encourage such people to start families they can't support - since this forms the basis for enduring depravity... similarly it is amoral to use finance as a tool of eugenics.

Curiously, this idea of being paid to procreate is the main problem I have with a "Citizen's income" - especially if the income is constant... as babies need to spend less than teenagers... which, in turn, promotes the idea of having more children to subsidise the elder children... as well as starting a family to increase assured income.

Another issue I see with a citizen's income is that the reason I'm willing to fund the welfare state is that I don't want there to be a valid excuse to be a complete failure around me: to be driven to crime or left to die on the streets. Purely self-interest, you understand. With a citizen's income I'm given no such benefit as a person who pays taxes. Basic accommodation can easily rise to prices above the citizen's income - and we're back to square one. I suspect this is another intractable problem with the scheme.

I rather like the idea that every city has free basic accommodation - maybe something like university campus halls... and free basic food - served in canteens where anyone and everyone is free to attend. This could all be paid for by taxes. With such a safety net, a purely free-market capitalist economic approach could be adopted for the rest of the economy while a social safety net still existed. There would be no incentive to "game" the system - and no way to exploit the desperate. I've a funny feeling that it would lead to a far more sociable and environment... maybe even removing the incentive for conspicuous consumption.

Mark Wadsworth said...

asteve, as I was saying, if you want to argue for a Citizen's Income of nil, that is fine. I can see arguments for any amount between nil and £100 a week. The point is that EVERYBODY gets the same!!!

Bearing in mind that the cost of welfare and State pension is roughly equal to income tax, if you scrapped welfare and State pension, you could scrap income tax. And get loads of pensioners voting for you, obviously.

Housing benefit is a different topic. What people don't realise is that for The Underclass, the value of free housing (below market rents in social sector, housing benefit plus council tax benefit) is probably more than what they get in cash benefits! It is the free housing for The Underclass that really fouls things up! Not a flat universal cash benefit of £60 or whatever it says in the CI booklet.

And as to the risk of 'baby farming', there are two ways round this. Firstly the amount has to be set correctly, enough to compensate for loss of mother's earnings potential (not too high, not too low) and secondly you could cap it at two or three children per mother.

Anonymous said...

Basic rule in all this is simple: if you subsidise something, you get more of it.

In this case, subsidising underclass kids leads to more underclass kids.

Personally I think one of the world's biggest problems is that the poor won't limit their breeding to the number of kids they can support. It is deeply immoral to have a child you know you can't feed and clothe.


aSteve said...

It is of course, also, deeply immoral to manipulate the credit markets such that parents who can afford to feed and clothe their children can't also afford shelter.

Most of this stuff isn't single-step...

Anonymous said...


Who is manipulating the credit markets? Also, rents are linked to income not credit, so its not a case of lacking shelter, its a case of not satisfying a sense of entitlement to own.


aSteve said...

Who has manipulated the credit markets? Are you new around here?

The credit markets have been manipulated by credit rating agencies; embraced by mortgage lenders (especially banks) who acted irresponsibly; by dishonest borrowers; facilitated by the FSA and aided and abetted by the Treasury with a complicit government.

Rents are directly less affected than purchase prices by credit... but easy credit shifts the balance of power from the renter to the landlord, since void periods pose reduced risk of insolvency. Where landlords buy large portfolios of property that would otherwise have been owner occupied, this exacerbates the situation - making it more likely that more affluent people will be forced to rent rather than own.

Finally, while I hadn't previously intended to be drawn into the debate about owning a family home to start a family... shelter is more than a room for a night... it is about security of tenure and freedom to establish a life in a community free from fear of eviction at the whim of a landlord.

electro-kevin said...
This comment has been removed by the author.
electro-kevin said...

"that is what benefits are supposed to do - partially equalize income so that overall income inequality is reduced"

I disagree. Benefits were meant to help people through sticky periods of unemployment, not to subsidise poor wages and exploitative employers.

The welfare system itself is an inflationary factor.

Anonymous said...


My point was that the manipulators of credit markets should be defined, rather than just a knee-jerk blaming of "the system" or "the rich" (not saying you did, mind).

I think you make quite a jump from "security of tenure and freedom to establish a life" to "parents who can afford to feed and clothe their children can't also afford shelter"

There is almost zero absolute poverty in the UK. Just meaningless "relative" poverty and then a ton of neglect and squalor inflicted by the poor themselves (or more often, a small portion of the predators who live amongst the poor)

Anonymous said...


forgot to sign it.


powerman said...

I'd rather a modest citizens income be paid out than to have people housed in local-government owned poverty camps. It can always be adjusted in line with your favourite inflation measure.

You could also scrap seperate benefits like housing benefit and throw the money into the pot.

Don't bother with any means testing. Make the CI part of your taxable income so extremely wealthy people in effect had it taken back from them.

You might get be able to get quite a decent citizens income if you also threw the following cost savings into the pot:-

1) Sacking all the staff the DSS (or whatever it's called these days) employ in means testing.
Sell off the buildings and furniture.

2) Sacking all the nonessential makework positions created to bolster employment. I'd rather pay somebody £8k a year to read books and throw barbecues with their neighbours than £15k a year feeling miserable in an office generating and processing paperwork to annoy me with.

And the beautiful part is, it's tax neutral! I'm not proposing any increase in public spending whatsoever. Simply ripping up all the means testing paperwork and sacking the staff and sharing the money out equally amongst every UK citizen.

Slum landlords in the south east would be very annoyed, because instead of the housing benefit payment being pegged at the local 'market rent', the local market rent would be forced down to meet with the nationally set CI.

I'm really not to worried about that part.

aSteve said...


I don't think I made that large a jump...

I accept that in absolute terms, there is little or no poverty (i.e. starvation etc.) in the UK - certainly nothing to compare with African famine - or even the plight of Russia's poor. This, however, utterly misses the point. Just because "things could be even worse" is no reason to accept a deterioration. It is only by striving to improve that we rise from poverty in the first place. I also disagree with your idea that relative poverty is nonsense. I think that relative affluence is all that matters... I feel this is a fundamental human trait - one that is discussed at great length in Stephen Pinker's excellent books.

Everything depends upon your horizon. Maybe mine is limited as someone who has only briefly left the UK and then only to mainland Europe for a matter of hours. In finding my horizons limited in this way I avoid consideration of both the hardships and the opportunities of less developed economies. To some extent, I feel that these cancel each other out.

I think you have to ask some fundamental questions about what is right and wrong; what is important about life - and if the trajectory in which humanity is heading (subject to your personal horizon and direct experience) is positive or negative.

I argue that poor/corrupt/inept regulation of financial services has proved massively damaging both to the UK economy and society. I think that the large foreign portfolio investment in UK consumer debt and the large outflow in direct investment abroad - particularly where this exploits emerging markets - is not only detrimental to the UK, but also to our foreign investors and to those in whom we invest.

Deceit, dishonesty and corruption is always detrimental to humanity... and all three are rife in financial services.

Anonymous said...


Sure the rogues in financial services are looking to take people for a ride, but there's nothing new there. A hundred years ago it was the carnies and mentalists doing the same things. The dependency culture is giving people this idea that they don't need to look out for themselves and make decisions carefully, because "the social" will sort them out.

If you sign yourself up to debt you can't repay then you deserve everything you get. Bankruptcy is a bail out. There ought to be debtors prisons.

What the West really needs to accept is that our tremendously high standard of living (and even scroats live like kings in a global or historical context) is an ABERATION. It was due to an unusally positive co-incedence of events that post-war governments have since undone through gross mismangement.

Relative poverty can't be solved any more than we can get over half of the population about a 100 IQ. What we really need to accept is if you don't work for a living you should consider yourself lucky not to be literally starving in the street. In almost any other country at any other point in history that's exactly where you would have been.

And it wouldn't have been a bad thing.