Why cash transfers will never fix child poverty

The approaching deadline for child poverty targets (in four years) prompts commentary in today's media. The Joseph Rowntree Foundation argues that it is now too late for anything other than immediate, large-scale action if there is to be any chance of meeting the targets.

The problem is that again there is insufficient explanation of what that means. The issue is treated as if there is a problem at the bottom of the income scale and that is a mistake. In fact there is a problem right across the income scale. The issue isn't 'not enough money' but its distribution.

Yet politicians appear to be very much more comfortable offering platitudes about the poor (which challenges no-one) than they are with explaining what is the economic dynamic which makes them poor in the first place – because that challenges the interests of wealthier and more politically powerful voters.

To illustrate why the political approach to poverty is so ineffective it helps to do a little thought experiment. In Britain just now the poorest fifth of households have an annual gross income of about £15,000 while the wealthiest fifth of households average a gross annual income of about £120,000.

So what rate of tax would need to be paid if these two incomes were to be equalised through economic redistribution? How much of the top fifth's income would need to be taxed and given to the poorest fifth so that they would end up with the same in their bank accounts? Note that this is only to equalise income and would not raise any tax for public services which would have to be added on top.

The average income of a group of people made up of equal numbers from the top and bottom fifth of earners (i.e. the average of £15,000 and £120,000) is £67,000. Which is to say that if the top and bottom fifths of earners shared their income equally, everyone would bring in £67,000 a year.

But to tax and redistribute the income of the wealthiest to achieve this, the rate of tax needed would be about 43 per cent. Meanwhile to bring the poorest fifth up to median UK income (just under £40,000) you would need to tax the wealthiest 21 per cent. And to get the poorest fifth to the UK poverty line (£24,000) you would need to tax the wealthiest at 7.5 per cent.

So you would need to tax the wealthiest at 7.5 per cent over and above existing tax if they were to pay for taking everyone out of poverty. The problem occurs if you then ask what you'd need to tax the second wealthiest fifth to achieve the same.

The average income of the second wealthiest fifth of society is £55,000 a year. As you will note, that total is lower than the average of the top and bottom fifths – the richest fifth and poorest fifth combined actually average more income than the second richest fifth.

And it is mathematically impossible to tax the second richest fifth enough to redistribute it to the poorest fifth and end up with both groups on median salary – between them they only average £35,000 a year.

To ask the second richest fifth to pay to bring the poorest fifth up to the poverty line would require a tax rate of over 16 per cent more than is currently being paid in tax.

This shows the problem with how the political debate in Britain and Scotland frames tackling poverty. It takes the starting level of inequality as a fundamental feature of the economy and then seeks to mitigate its effects from there via various forms of cash transfer in benefits and through acute public services.

But it can't. The tax rates necessary to tackle poverty are impossibly high exactly because the problem is the underlying inequality. If politicians are unwilling to address the fundamental starting point – rampant income inequality – then they will never be able adequately to tackle the symptoms.

The only way to do this is to pursue economic reform, and the most effective ways to do to that is to implement an industrial strategy with the explicit goal of flattening the income spectrum by shifting employment out of low-pay sectors into more productive employment, create a fairer distribution of wages via industrial democracy and more powerful collective bargaining and through stronger regulation to prevent profiteering.

Cash transfers will not end poverty, they only disguise it. Unless politicians have the courage to be honest about the problem, we will continue to fail to tackle it.