This blog is based on an article in Social Policy and Society. Click here to access the article.
The long and persisting neglect of tax reliefs and their distribution means that their contribution to reinforcing and even enlarging social and economic inequalities is almost entirely overlooked. At present many of us, particularly if we are amongst the better-off, are advantaged by these reliefs. They are a major part of what can be described as ‘tax spending’ which is not included in public spending accounts and is barely visible, let alone accountable.
The costs of only some of these are released by HMRC, buried away in obscure places, and their distributional impact is very rarely published, and then not by HMRC. Even the Office for Budget Responsibility has expressed concern at the cost of those ‘policy motivated tax expenditures that HMRC has identified’. This ‘is large in absolute terms – approaching 8 per cent of GDP – and also by international standards’.
Among these are many tax reliefs and related subsidies that provide benefits comparable to those available through the welfare state. These were identified as ‘fiscal welfare’ by Richard Titmuss in his essay, ‘The Social Division of Welfare’. ‘Social tax expenditures’ is another term used and some see them as part of the welfare state. But it is important to recognise that their redistributive impact tends to be very different from that of the welfare state. They are mostly means-enhancing rather than means-tested, as public spending on social security increasingly is. By this I mean that, with few exceptions, the value of income tax reliefs is generally greater the higher the taxpayers’ income because they are set against their marginal rate of tax. In contrast more welfare state benefits for working-age individuals have become subject to means-tests that are pushing full entitlement to further below Minimum Income Standards, thus reducing their effectiveness in preventing and tackling poverty. Yet the costs of fiscal welfare are little examined, their distributional impact even less so – an indicator of where power lies in our society.
My paper considers what is needed to provide a fairer and generally better basis for developing robust and flexible policies to establish, manage and evaluate fiscal welfare so that it can contribute to building a more open and fairer society instead of undermining it as at present. Particular attention is given to increasing accountability and assessing public and tax spending activities together when they benefit the same target group. For example, state pension and other benefit spending related to retirement in 2016-17 was reported at just over £100bn. But including the value of income tax and national insurance reliefs for those building up private pensions brings the total up by another two-fifths to some £150 billion. Half of the tax reliefs went to the top tenth of taxpayers while only a tenth went to the bottom half. Public debate and, subsequently, policy making might be very different if such patterns of government decision-making were clearly visible.
Accessible publication of fuller and better tax data is therefore essential to allow regular comparisons of public spending (eg, social security, NHS and social services) and tax spending (eg tax reliefs on non-state pensions and child care). This is needed to promote better-informed discussion of how to bring about a fairer distribution of resources across society. This will not only reveal the great extent of government social policy activity outside the public welfare state but also make more evident the ways that so much of this operates to stimulate the market and to maintain and reinforce inequalities. It will also make clearer the differences in treatment between services supported by fiscal and public welfare in terms, for example, of the extent of help, methods of updating, conditions for eligibility and how long it may be backdated which can differ considerably. It will challenge the different discourses of tax and spend and their reinforcement of status and stigma.
Rigorous and systematic examination comparing the relative means-enhancing effect of fiscal welfare alongside public welfare, increasingly means-tested and residual, is urgently needed. This will reveal the extent of personal, familial and wider impacts resulting from forms of fiscal welfare that succeed in nurturing privilege and naturalising inequality to the disadvantage of those more dependent on public welfare. Regular scrutiny by select committees, for example, can provide a stimulus to more determined policymaking to contain inequalities and prevent poverty very much more effectively.
Accountability needs to be established and the lack of transparency overcome if a fairer tax system is to be established and poverty and inequality significantly reduced. Since my article was written, HMRC has released more data but in a way that I do not believe increases transparency. Their bulletin ‘provides’ four tables but they are not contained within it but have to be found elsewhere.
‘How are we going to pay for it all?’ is becoming more frequently asked about public spending on the pandemic as if it is all a matter of more taxes or cuts in public spending. The scale of the problems that need to be tackled makes it all the more necessary to take clear account of all resources available for maintaining and developing a society and its economy, and to do so fairly in contrast to present practice. This must include the barely visible world of fiscal welfare that widens inequalities.
About the author
Adrian Sinfield is Emeritus Professor of Social Policy, University of Edinburgh
The Social Policy Blog 