|Authors:||Barra Roantree and Jonathan Shaw|
|Date:||01 April 2015|
Almost three times as many people interact with the benefit system over an 18 year period than in a single year on average. As most analyses of benefit reforms are based on measures of individuals’ circumstances at a particular point in time, often a week or a month, they will understate the number of people affected by such reforms in the longer run. Policymakers should also consider that adopting a longer time horizon can lead to a very different impression of inequality and the role of the tax and benefit system, the researchers suggest.
These are among the main findings of a paper by researchers at the Institute for Fiscal Studies – funded by the Nuffield Foundation – to be presented at the 2015 Royal Economic Society conference in Manchester this week.
Using data from the British Household Panel Survey, which follows the same individuals each year between 1991 and 2008, the research shows that while around 17 per cent of individuals report being in a family that receive one of the UK’s main means-tested benefits at a particular point in time on average, receipt of benefits rises to almost half of individuals (48%) over the full 18 year horizon the data cover.
These estimates are likely to understate the true proportion of people affected for two reasons. First, as with any survey-based data, there is under-reporting of benefit receipt compared to official statistics. Second, the long-run measure used is based on 18 annual snapshots and will miss some benefit claims occurring between the dates the survey is carried out. All this suggests that over the long run, a far greater proportion of individuals interact with the benefit system than a snapshot measure would suggest.
The research also finds that income inequality is considerably lower over longer horizons. This is because some of the variation in income across individuals is only temporary and will tend to average out when considering multiple years together. A common measure of inequality – the Gini coefficient1 –falls steadily as longer horizons are considered. Income inequality, both before and after taxes and benefits, is about a fifth lower when measured across 18 years than if measured at a single point in time.
Finally, as longer time periods are considered, the research shows that the impression of the amount of redistribution done by the tax and benefit system falls significantly. A commonly used measure of the extent to which the tax and benefit system redistributes income in a way that reduces income inequality – known as the Reyolds-Smolensky index – also falls by about a fifth as the horizon under consideration increases from 1 to 18 years. This shows that the tax and benefit system is achieving less redistribution across individuals over longer periods. The reason is that, as the horizon is extended, part of what the tax and benefit system does is effectively to redistribute across periods of life rather than across individuals. For example individuals might pay more in tax than they receive in benefits early in their working lives, but this situation might reverse once they have children.
Barra Roantree, a Research Economist at the IFS and a co-author of the report, said: “These findings demonstrate that a longer-run perspective can substantially change our impression of the tax and benefit system in terms of its reach, its effect on inequality, and the amount of redistribution done. While in a single year about around 17% of individuals report being in a family receiving one of the UK’s main means-tested benefits, this rises to 48% of people when the time horizon is extended to 18 years. This highlights the importance for policymakers of considering not only the immediate effect of tax and benefit reforms, but their impact right across individuals’ lifetimes.”