Top to Bottom: Understanding Fairer Pay

Results from the research project

Howard Reed Landman Economics

High Pay Centre

18th March 2013

Background

• Huge rise in earnings and income inequality over the last 35 years

• Wage increases for those on middle incomes have barely outpaced rising prices over last 10 years

• Tax credits that have increasingly been used to top up low wages since 1999 are now being cut

Research question

• What impact would a 10% cut in gross pay for top earners have on net incomes for low earners if the 10% cut were redistributed to low earners?

• This is a “numbers exercise” rather than something which could actually happen overnight – would require a change to business priorities and a rebalancing of workplace power

Defining “top earners” using HMRC statistics

Cut-off point (£/year)

Taxpayers above cut-off

(100s)

As % of all taxpayers

Average earnings

above cut-off (£)

150,000 219 0.91% 271,000200,000 124 0.52% 375,000300,000 61 0.25% 564,000500,000 26 0.11% 906,0001,000,000 8 0.03% 1,710,000

Defining “low earners” using the Family Resources Survey

Group Average weekly wage, 2010-11 FRS

Whole sample £475Lowest paid 25% by hourly wage £155Lowest paid 25% by weekly wage £120Lowest paid 10% by hourly wage £97Lowest paid 10% by weekly wage £55

Impact of a 10% cut in wages for high earners over £200,000:

Group Extra wage

Lowest paid 25% by hourly wage 43p per hourLowest paid 25% by weekly wage £13.65 per weekLowest paid 10% by hourly wage £1.09 per hourLowest paid 10% by weekly wage £34.08 per week

How big an increase in wages for low earners could be financed?

Impact on inequality and public finances: example

Statistic Outcome

Total gross redistribution, high paid to low paid £4.69 bnIncrease in net incomes for low paid £3.01 bnAverage “marginal deduction rate” for low paid 35.8%Increased tax/reduced benefits for low paid £2.19 bnReduced taxes on high paid £3.09 bnOverall fiscal impact -£0.90 bn

Redistribution from those earning over £200,000 per year to lowest 25% of weekly earners

Impact of redistribution on inequality

• Gini coefficient is a measure of inequality:0 = all household incomes the same1= one household gets all the income, the rest get nothing

• Current Gini coefficient on disposable income in UK = about 0.34

• Redistribution from top earners (via a 10% pay cut) to low earners would reduce Gini by about 0.004

• Not a big effect – but then, not a huge redistribution (total wage bill is around £640 bn)

Impact of redistribution on public finances

• Redistribution leaves a slight hole in the govt budget because the tax and NICs lost from reducing the gross pay of high earners is lower (on average) than the extra tax/NICs paid and lower benefit spend from increasing gross pay of low earners.

• The size of this “hole” ranges from £200m to £2bn depending on particular parameters used

• Could be at least partly offset by: – Increased VAT receipts from low earners spending more– Increased labour market participation among people on low

incomes

Conclusions

• Redistribution from the very high paid to low earners can make a substantial difference to gross and net incomes for low earners

• Not a complete solution to rising inequality itself

• But useful as part of a wider package of measures