Tax changes 'have made the rich richer': Report says well-off benefited by pounds 30 a week while the poor lost out. Robert Chote and Patricia Wynn Davies report

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BY CUTTING taxes in the late 1980s and then increasing them again in last year's Budgets, the Government is making the rich much better off at the expense of the poor, according to a new report by the Institute for Fiscal Studies, the independent research group.

Tax changes announced since 1985 have made the richest 10th of the population better off by an average of pounds 30 a week, while the poorest 10th has lost nearly pounds 3 a week.

Gordon Brown, the shadow Chancellor, said the survey showed Britain had the most unfair tax system since the recession of the 1930s.

The report shows that unemployed people and single parents have been the main losers, while couples with one or both partners working have done best. The tax changes since 1985 have, in total, amounted to a cut in taxes of pounds 5.2bn a year at current prices. This would be enough to give every one of the more than 20 million households in the country an extra pounds 4 a week in disposable income.

Instead, the benefits have been skewed to the rich, while the poor are having to pay more.

The analysis compares the position in 1985, before the most important tax cuts took place, with the likely situation in 1995, when all the measures announced in last year's Budgets have taken effect. The tax changes over these 10 years will have added 6 per cent to the take- home income of the richest 10th of the population, while the poorest 10th will have lost nearly 3 per cent.

More than three-quarters of unemployed couples with children will have lost from the tax changes between 1985 and 1995, while more than two-thirds of lone-parent families will also have been hit. Among people in work, those with children have done worst because they are generally hit harder by value-added tax on fuel and cuts in mortgage interest tax relief.

Mr Brown said: 'Only the richest of all taxpayers have benefited from the Tory tax changes. The issue between the parties is now not between low and high tax but between fair tax under Labour and unfair tax under the Tories.'

The report says that pensioners have done relatively well because they are being compensated for VAT on domestic fuel and because they are less likely to buy alcohol, cigarettes and petrol on which excise duty is imposed.

The decade will have seen a general reduction in marginal income tax rates - the amount of income tax paid on every extra pound a person earns. But at the same time a higher proportion of most people's income will be subject to income tax because allowances and tax breaks have been narrowed.

Taxes on spending - VAT and excise duties, for example - have increased both in the rates charged and the range of goods on which they are levied.

The institute has calculated that tax increases, largely in the two Budgets last year, reversed just under pounds 20bn of about pounds 25bn of tax cuts in the late 1980s.

The most important revenue raisers are the rise in the VAT rate to 17.5 per cent, the extension of VAT to domestic fuel and the cuts in mortgage tax relief and the married couples' allowance.

Stephen Dorrell, Financial Secretary to the Treasury, said the lowest income groups had benefited from the spread of prosperity that tax changes had underpinned, promoting economic growth. Real net income for a married man with two children on average income had risen by more than 40 per cent since 1979. The last two Budgets had raised extra revenue 'fairly, from all income groups, and the most vulnerable have been well protected', he said.

Mr Brown challenged Kenneth Clarke, the Chancellor, to drop VAT on fuel - which was, he said, the biggest single factor in the increase in tax unfairness.