One of the biggest influences on the distribution of income is the tax system. Tax affects household income and redistribution through three main ways
- direct taxation - income tax, national insurance, and council tax
- cash benefits
- indirect taxation on goods bought.
The tax system matters because of its impact on
- household incomes
- the money available to fund public services
- decisions people make about what to purchase.
Changing the tax system is one way of reducing income inequality and therefore reducing health inequalities.
Taxes and benefits have an impact on income being shared more equally between households. Both cash benefits and income tax lead to an overall reduction in income inequality.
Although richer households pay more in indirect taxes than poorer ones, they pay less as a proportion of their income. This means that indirect taxes can increase income inequality.
The extent to which taxation is targeted at reducing inequality is known as progressivity. Indirect taxes are regressive - they increase inequality. Over time both direct and indirect taxation have become less progressive.
You can find out more about the effect of taxes and benefits on UK household income on the Office for National Statistics (ONS) website.
Informing investment on inequalities
The Scottish Public Health Observatory created a tool allowing modelling that shows the likely impact of economic changes on health and health inequalities. It can be used at national or local level to look at the changes in mortality rates and hospital admissions.
Taxation of unhealthy products
Individual decisions are often heavily influenced by cost. This means that the tax system can be used to discourage unhealthy behaviours and decisions, and to encourage healthy ones. For example, increasing tobacco or alcohol taxes is an effective way of reducing their consumption.
Regulatory, legislative and tax policies to change behaviours are more effective at reducing inequalities because they do not rely on individuals to choose the healthier option. This evidence base is summarised in our Health Inequalities Policy Review.
You can find out more about how tax affects health inequalities in our Income, wealth and tax inequalities briefing.