Institute for Fiscal Studies says that in-work benefits help close the gap between rich and poor over a worker’s lifetime

A leading thinktank has warned the government it risks worsening inequality during workers’ lifetimes by cutting tax credits and reducing income tax rates for the richest.

The Institute for Fiscal Studies said the long-term positives of higher in-work benefit payments were clear, citing a study of workers’ finances over the past 70 years. In the absence of higher income tax rates, top-up payments from tax credits and other in-work benefits were the main reason the income gap closed over a worker’s lifetime.

The study will add to the pressure on George Osborne to explain how the mix of tax and benefit changes in recent budgets will avoid widening the income gap between rich and poor.

The chancellor was criticised after the July budget when he said that a higher minimum wage – which he called the “national living wage” – would offset the effect of widespread tax credit cuts. At the time, the IFS warned that the £4bn extra income resulting from the rise in the minimum wage would fail to balance £12bn in welfare cuts.

In its latest report, the tax and spending thinktank said policymakers needed to be aware that the impact of the cuts would be felt over a worker’s lifetime, entrenching the wedge between the rich and lower-income workers.

It said that perceptions of an underclass of families out of work for most of their lives was misplaced and that almost all workers were in employment for a majority of their working lives.



This finding meant that tax credits for people in work had the biggest effect on closing income inequality. The report said tax credits also avoided creating a bigger poverty trap, which deters jobseekers from finding work when their out-of-work benefit incomes rose above wage levels.

Barra Roantree, one of the report’s authors, said: “The sharp distinction often made in policy debates between working and non-working families is not especially useful: in reality very few individuals are permanently out of work, the poor are not always poor and, albeit to a lesser extent, the rich are not always rich.”



He said income taxes on the richest earners were effective at generating income for the government and reducing inequality, in sharp contrast to the government’s view that higher tax rates on the better off fail to produce higher receipts.



The figures include most personal taxes and benefits, but do not take into account business taxes or the benefits from public service spending.

The report pointed out that while existing studies showed almost two-thirds of individuals paid more in taxes than they received in social security in a single year, more than nine in 10 individuals paid more over their lifetime.

Part of the reason for the reduction in tax burden related to the way the tax and benefit system takes from an individual at one age and gives back to them at another. It said large numbers of people were in and out of work or in receipt of social security benefits for particular problems such as sickness or bereavement.

“In a single year, 64% of individuals in the UK pay more in taxes than they receive in social security. But most individuals experience considerable change over their lifetimes: for example those not in paid work in one year are often in work in another year,” the IFS said.

“Extending the period of analysis from a single year to an entire lifetime increases the percentage who pay more in taxes than they receive in social security to 93%.”