Trends in earnings have transformed government’s relationship with people on low to middle incomes. The group’s share of national income has declined - households between the bottom and middle (10th and 50th percentiles of income) accounted for 30 percent of national original income in 1977; in 2009, the group’s share dropped to 22 percent. The group’s share of wages has fallen more quickly. In 1977, the tax-benefit system ‘topped up’ this group’s share of national income by one percentage point; by 2008-09 the system was lifting their share almost four times as much, by 3.7 percentage points. A system of tax-credits has been created to boost incomes, particularly targeted at low to middle income people in work and with children. This has raised living standards, but has also meant higher marginal tax rates, with many people on low to middle incomes now taking home less of every additional pound they earn.
Source: RF analysis of ONS, The effects of taxes and benefits on household income, 2008/0
Read more about these issues in the reports to the Commission on Living Standards