racing away? income inequality and the evolution of high incomes

IFS

Racing Away?

Income Inequality and the evolution of high incomes

Luke Sibieta, January 17th 2008

© Institute for Fiscal Studies, 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?– 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


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?


Income Inequality: 1979 – 2005/06

0.2

0.3

0.4

Gin

i C

oef

fici

ent

Thatcher Major Blair

Source: Households Below Average Income


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

-2

-1

0

1

2

3

4

5

10 20 30 40 50 60 70 80 90

Ave

rag

e an

nu

al in

com

e g

ain

(%

)

Percentile point



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

-2

-1

0

1

2

3

4

5

10 20 30 40 50 60 70 80 90

Ave

rag

e an

nu

al in

com

e g

ain

(%

)

Percentile point

1979-1996/7



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


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


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


The richest 10% of adults

Richer

Richest 10% of Adults4.7 million

Richest 10-1% of Adults4.2 million“The Rich”

Richest 1-0.1% of Adults420,000 Adults“The Very Rich”

Richest 0.1% of Adults47,000 Adults

“The Very, Very Rich”


Just how rich are they?

£5,000 £25,000

£0

£200,000

£400,000

£600,000

£800,000

£1,000,000

All TaxPayers

Top 10-1% Top 1-0.1% Top 0.1%

Bef

ore

Tax

An

nu

al I

nco

me

2004

/05

Min Value Mean Value

Notes: Data relates to 2004/05, but is presented in 2007/08 pricesBefore Tax Annual Income excludes income not subject to income tax



£5,000£35,000£25,000 £50,000

£0

£200,000

£400,000

£600,000

£800,000

£1,000,000

All TaxPayers

Top 10-1% Top 1-0.1% Top 0.1%

Bef

ore

Tax

An

nu

al I

nco

me

2004

/05





£5,000£35,000

£100,000£25,000 £50,000

£155,000

£0

£200,000

£400,000

£600,000

£800,000

£1,000,000

All TaxPayers

Top 10-1% Top 1-0.1% Top 0.1%

Bef

ore

Tax

An

nu

al I

nco

me

2004

/05





£5,000£35,000

£100,000

£350,000

£25,000 £50,000

£155,000

£780,000

£0

£200,000

£400,000

£600,000

£800,000

£1,000,000

All TaxPayers

Top 10-1% Top 1-0.1% Top 0.1%

Bef

ore

Tax

An

nu

al I

nco

me

2004

/05




What share of total income in the SPI do they receive?

Top 10-1% of adults, 27.6%

Top 1-0.1% of adults, 8.6%

Top 0.1% of adults, 4.3%

All Other Adults in SPI, 59.5%

Note: Data relates to 2004/05, but is presented in 2007/08 prices

Total Income in the SPI in 2004/05 = £826 bn


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%


How much tax do they pay?

All Tax Payers

Top 10-1%

of adults

Top 1-0.1%

of adults

Top 0.1%

of adults

Number 29.5 million 4.2 million 0.4 million 47,000

Average Income Tax Bill

Income tax as a proportion of total income



How much tax do they pay?

All Tax Payers

Top 10-1%

of adults

Top 1-0.1%

of adults

Top 0.1%

of adults

Number 29.5 million 4.2 million 0.4 million 47,000

Average Income Tax Bill £4,415 £10,550 £49,477 £274,482

Income tax as a proportion of total income

17.8% 21.1% 31.8% 35.2%



Age and Sex0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Males

Under 25

25-34

35-44

45-54

55-64

65-74

75-plus

All Tax Payers

Top 10-1%

Top 1-0.1%

Top 0.1%

Note: Data relates to 2004/05


Where do they live?0% 10% 20% 30% 40%

North East

North West

Yorkshire and the Humber

East Midlands

West Midlands

East of England

London

South East

South West

Wales

Scotland

All Tax PayersTop 10-1%

Top 1-0.1%Top 0.1%



Where do they work?0% 10% 20% 30% 40%

Manufacturing

Construction

Wholesale and Retail Trade

Hotels and Restaurants

Transport, Storage, Comms.

Financial Intermediation

Real Estate, Renting and Other Business Activities

Public Admin and Defence

Education

Health and Social Work

Other Services

Other

All Tax PayersTop 10-1%

Top 1-0.1%Top 0.1%



Sources of Before Tax Income

0%

20%

40%

60%

80%

100%

AllTaxpayers

Top 10-1% Top 1-0.1% Top 0.1%

Sh

are

of

Bef

ore

Tax

In

com

e

Employment Self-EmploymentInvestment Pension and Other



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


More like an average Saturday afternoon at Stamford Bridge?


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)


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

-2

-1

0

1

2

3

4

5

10 20 30 40 50 60 70 80 90

Ave

rag

e an

nu

al in

com

e g

ain

(%

)

Percentile point


HBAI vs SPI, 96/97-04/05

0

1

2

3

4

5

6

90 91 92 93 94 95 96 97 98 99 90 91 92 93 94 95 96 97 98 99

Percentile

Av

era

ge

an

nu

al i

nco

me

ga

in (

%)

HBAI SPI


Looking deeper into the top 1% (1)

0

1

2

3

4

5

6

90 91 92 93 94 95 96 97 98 99 99 99.1 99.2 99.3 99.4 99.5 99.6 99.7 99.8 99.9

Percentile

Av

era

ge

an

nu

al i

nco

me

ga

in (

%)

SPI


Looking deeper into top 1% (2)

-1

0

1

2

3

4

5

6

7

8

9

10

90 91 92 93 94 95 96 97 98 99 99 99.1 99.2 99.3 99.4 99.5 99.6 99.7 99.8 99.9

Percentile

Av

era

ge

an

nu

al i

nc

om

e g

ain

(%

) Labour 1 (96/97-00/01) Labour 2 (00/01-04/05)


Growth in real incomes after income tax

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

Rea

l In

com

e R

elat

ive

to 1

996/

97 L

evel

90th 99th 99.9th


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


Compared with level of FTSE 100

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Rea

l In

com

e R

elat

ive

to 1

996/

97 L

evel

90th 99th 99.9th FTSE 100


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

racing away? income inequality and the evolution of high incomes

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