To ask the Chancellor of the Exchequer if he will estimate (a) direct and (b) indirect taxes as a percentage of gross income for households with an income (i) lower and (ii) higher than (A) 95 per cent., (B) 99 per cent., (C) 75 per cent. and (D) 25 per cent. of all households; and if he will make a statement. (152707)

The information requested falls within the responsibility of the National Statistician, who has been asked to reply.

Letter from Karen Dunnell, dated 5 September 2007:

As National Statistician, I have been asked to reply to your recent question asking Mr Chancellor of the Exchequer, if he will estimate (a) direct and (b) indirect taxes as a percentage of gross income for households with an income (i) lower and (ii) higher than (A) 95 percent of all households, (B) 99 percent of all households, (C) 75 percent of all households and (D) 25 per cent, of all households. (152707).

Estimates of household income and related taxes are provided in the ONS analysis ‘The effects of taxes and benefits on household income’. The latest analysis for 2005/06 was published on the National Statistics website on 17th May 2007 at http://www.statistics.gov.uk/taxesbenefits. The analysis is based on data from the Expenditure and Food Survey, which is a sample survey covering approximately 7,000 households in the UK.

Gross income includes income from wages, occupational pensions, self-employment income, investment income, and income from state benefits, all before tax. Direct taxes include income tax, national insurance contributions and council tax. The indirect taxes include VAT, duties, and a number of smaller items such as television licences. Indirect taxes also include intermediate taxes—these are indirect taxes paid by companies which are deemed to be passed onto households through the prices they pay for goods and services. A more detailed breakdown showing each of the different taxes appears in the annual article.

Indirect taxes, when expressed as a proportion of gross income, appear particularly high for those on lower income, although this result needs to be interpreted carefully. Estimates of indirect taxes are estimated based on household expenditure. It should be remembered that measured expenditure will not necessarily balance with measured income for the year. This is especially true for low income households where average measured income is significantly lower than average expenditure. For these households, indirect taxes (which reflect expenditure) are not being met solely from current income, and so indirect taxes are very high when expressed as a proportion of gross income.

There are a number of plausible reasons why for some households, expenditure might exceed income. Households with low incomes may draw on their savings or borrow in order to finance their expenditure. In addition, the lower income households in particular include some groups, who have, or report, very little income (for example, self-employed people starting a business or someone who has just been made redundant). In these cases, expenditure is not being met from current income. Some types of receipts are not included as income in the EPS e.g. inheritance and severance payments. In some cases, the information given on expenditure is not consistent with that on income received because of timing differences.

It is usually accepted that surveys have problems picking up data from extremely high income households. With the EPS having a sample of approximately 7,000 households, interpreting data for this high income group should be done with caution.