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Wiley InterScience | |||||||
  Fiscal StudiesVolume 25 Issue 2, Pages 129 - 158 Published Online: 2 Feb 2005 © Institute for Fiscal Studies, 2009 Published on behalf of the Institute for Fiscal Studies
Abstract | References | Full Text: PDF (Size: 329K) | Related Articles | Citation Tracking  Inequality and two decades of British tax and benefit reforms The authors would like to thank the Nuffield Foundation (which provided funds through the project 'An Analysis of Trends in Inequality over the 1990s', grant number OPD/00111/G) for funding. They are also grateful to Andrew Dilnot, Julian McCrae, Howard Reed, Graham Stark and two anonymous referees for useful discussion and advice, and to participants at the 27 th General Conference of the International Association Research in Income and Wealth (www.iariw.org) in Djurhamn, Sweden, August 2002. All errors remain their own. Copyright Institute for Fiscal Studies, 2004 KEYWORDS C81 • D31 • H24 • H55 • tax and benefit system • inequality • microsimulation Abstract
Microsimulation methods are used to identify the contribution of tax and benefit reforms to the significant growth in UK income inequality since 1979. The total effect turns out to depend crucially on the counterfactual against which the reforms are assessed: compared with the alternative of pure price-indexation, the total effect of reform is small; by contrast, compared with a counterfactual in which benefits rose in line with national income (historically the case before 1979), the effect is substantial – approximately half the total rise in income inequality is explained. The impact of reforms on inequality has varied significantly over time: income tax cuts in the late 1970s and late 1980s increased inequality; direct tax rises in the early 1980s and 1990s, together with increases in means-tested benefits in the late 1990s, reduced it. The robustness of the results to sampling variation and to the measure of inequality used is also investigated. | 
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