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Racing Away? Income Inequality and the evolution of high incomes

Racing Away? Income Inequality and the evolution of high incomes. Luke Sibieta, January 17 th 2008. Key Points (1). Trends at the top and bottom of income distribution key to understanding why inequality hasn’t declined under Labour What are the characteristics of the rich?

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Racing Away? Income Inequality and the evolution of high incomes

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  1. Racing Away?Income Inequality and the evolution of high incomes Luke Sibieta, January 17th 2008

  2. Key Points (1) • Trends at the top and bottom of income distribution key to understanding why inequality hasn’t declined under Labour • What are the characteristics of the rich? • Nearly half a million adults with incomes above £100k • They are more likely to be male and middle aged • More likely to work in finance, real estate, law • More likely to live in London and the south-east • Get more of their income from investment and self-employment • Though earnings is still largest component

  3. Key Points (2) • Trends over time in incomes of very rich • Experienced strong income growth in late 1990s • Negative income growth between 2001 and 2003 • Recovery in 2004 • Stock market connection? Racing away since 2004?

  4. Income Inequality:1979–2005/06 Source: Households Below Average Income

  5. Income changes by percentile group: 1996/97 – 2005/06 Source: Households Below Average Income

  6. Income changes by percentile group: 1996/97 – 2005/06 Source: Households Below Average Income

  7. Income changes by percentile group: 1996/97 – 2005/06 Source: Households Below Average Income

  8. Income changes by percentile group: 1996/97 – 2005/06 1979-1996/7 Source: Households Below Average Income

  9. What is going on? • Between 15th and 90th percentile • Poor experienced higher income growth • Below 15th percentile • Relatively weak income growth • Above 90th percentile • Relatively fast income growth • Trends at extremes cancel out trends in main part of distribution • Important to understand more about the trends at the extremes • Concerns over measurement • We look at the top in more detail

  10. Top Incomes: the data problem • Previously difficult to get reliable information • Survey of Personal Incomes • Constructed from income tax records by HMRC • Over-samples high-income individuals • Measures total annual income and total income tax paid • BUT … misses non-taxpayers, misses UK or foreign income not subject to income tax and income not declared • Individual rather household level • Similar to work done by Tony Atkinson, but a greater focus on last ten years

  11. High Income Individuals compared • Latest data for 2004/05 • We only look at Great Britain • Ideally compare all adults (46.8m) with richest 10% (4.7m) in GB • But only taxpayers in SPI (29.5m adult in GB, 63% of all adults) • Compare all taxpayers with richest 10% of adults in GB • Assume richest 10% of all adults are represented in SPI • So they are the richest 4.7 million adults represented in the SPI • Compare with all taxpayers, 29.5m adults • Finer Definitions of richest 10% in GB

  12. The richest 10% of adults Richest 10-1% of Adults 4.2 million “The Rich” Richest 1-0.1% of Adults 420,000 Adults “The Very Rich” Richest 10% of Adults 4.7 million Richest 0.1% of Adults 47,000 Adults “The Very, Very Rich” Richer

  13. Just how rich are they? Notes: Data relates to 2004/05, but is presented in 2007/08 prices Before Tax Annual Income excludes income not subject to income tax

  14. Just how rich are they? Notes: Data relates to 2004/05, but is presented in 2007/08 prices Before Tax Annual Income excludes income not subject to income tax

  15. Just how rich are they? Notes: Data relates to 2004/05, but is presented in 2007/08 prices Before Tax Annual Income excludes income not subject to income tax

  16. Just how rich are they? Notes: Data relates to 2004/05, but is presented in 2007/08 prices Before Tax Annual Income excludes income not subject to income tax

  17. What share of total income in the SPI do they receive? Total Income in the SPI in 2004/05 = £826 bn Note: Data relates to 2004/05, but is presented in 2007/08 prices

  18. What share of total income in the SPI do they receive? • Richest 10% of adults received over 40% of total personal income measured in the SPI • Atkinson assumes all other personal income in the economy accrues to the other 90% of adults • This would give the richest 10% of all adults about 37% of total personal income, and the richest 1% over 11%

  19. How much tax do they pay? Note: Data relates to 2004/05, but is presented in 2007/08 prices

  20. How much tax do they pay? Note: Data relates to 2004/05, but is presented in 2007/08 prices

  21. Age and Sex Note: Data relates to 2004/05

  22. Where do they live? Note: Data relates to 2004/05

  23. Where do they work? Note: Data relates to 2004/05

  24. Sources of Before Tax Income Note: Data relates to 2004/05

  25. Where could we fit the richest 47,000 adults? Average incomes of £780,000 in 2004/05 Totalling about £37 billion Just over 4% of total personal income in the SPI Paid average income tax of £275,000 35.2 % of their total income Just over £12 billion in total More likely to be male, middle-aged, from London or the South-East More likely to work in finance, real estate, law or other business activities

  26. More like an average Saturday afternoon at Stamford Bridge?

  27. Income Changes Over Time • Have high-income individuals accelerated away over the past ten years? • Comparability with HBAI • Look at incomes after income tax deducted • BUT … Household versus individual level • Equivalised vs unequivalised • Other differences in income (NICs, council tax)

  28. Real Income changes by percentile group: 1996/97 – 2005/06

  29. HBAI vs SPI, 96/97-04/05

  30. Looking deeper into the top 1% (1)

  31. Looking deeper into the top 1% (1)

  32. Looking deeper into top 1% (2)

  33. Growth in real incomes after income tax

  34. Income Changes Over Time • Strong Growth over late 1990s • Fell between 2001 and 2003 • Recovery in 2004/05 • Is this connected to the stock market performance? • Large amount of their income in investments • Work in Finance

  35. Compared with level of FTSE 100

  36. Compared with level of FTSE 100

  37. Conclusions and Summary • There are some very, very rich people • Nearly half a million adults had incomes over £100,000 in 04/05 • 47,000 adults had incomes above £350k in 04/05 • Richest 10% received about 40% of personal income in 04/05 • Compared with all taxpayers, they tend to be: • Male, middle-aged, live in the south-east • Work in real estate, law, finance • Get more of their income through investments or self employment • “Working rich” rather than “Idle rich” • Raced away during late 1990s • Negative income growth between 2001 and 2003 • Recovered in 2004 • If this is connected to trends in the stock market, they may have raced away since then

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