Just who are the rich anyway?

Apparently, John Rentoul’s piece, arguing that the level of inequality in Britain has not changed significantly in the last twenty years, has been making waves. This is slightly surprising as it’s not the first time he has said it. Or even the second.

He’s right, though – at least in one sense. The Gini Coeffiecient, the most widely accepted measure of inequality, saw a sharp rise in the 1980s and early 1990s and has stabilised since. According to OECD figures, it dropped slightly in the 2000s and is still not back to its 2000 peak, suggesting that, perhaps, New Labour were actually more Labour than they liked to admit.

Screen Shot 2012-12-31 at 16.39.57

The figures on this chart show the Gini coefficient after taxes and transfers – that is, after the redistributing effects of taxation and public spending.

Digging into the OECD dataset, the figures before taxes and transfers tell an interesting story too.

UK Gini coefficient before and after taxes and transfers 1975 – 2010

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Source: OECD

The two decades between 1975 and 1995 saw a significant increase in the disparities between market incomes which were, to some extent, offset by taxes and public spending. This suggests that a significant proportion of the increased income of the rich was clawed back. There may have been some high-profile tax dodgers but taxation and public spending has mitigated the impact of the more unequal income distribution. Since the mid-1990s, taxes and transfers have reduced the Gini coefficient of market incomes by around 25 percent, so most of the newly rich must be coughing up at least some of their new found wealth.

These figures also suggest that there hasn’t been much of a change in the difference between market incomes since 2000 – in other words, income disparities didn’t change much during the Blair years.

But hang on, weren’t the 2000s the decade in which the banks let rip and a few people became exceedingly rich, while trashing the world economy? How come the UK’s Gini coefficient didn’t shoot through the roof?

This, says Tom Freeman, is one of the weaknesses of the Gini coefficient. It can’t tell you what is going on at the extremes. He has very cleverly, using data from the Institute for Fiscal Studies, calculated the Gini coefficient for each income quintile.

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This shows that the disparities in income are much higher at each end of the income scale, especially at the top. What seems to have happened during the 2000s is that a small group of high earners pulled away from everyone else but there were not enough of them to affect the overall Gini coefficient.

As Chris points out, the share of the post-transfer income of the top 20 percent is about the same now as it was 20 years ago – around 45 percent. The share of the top 1 percent has increased from 9.8 percent to 13.9 percent. If you play around with the World Top Incomes Database you find that the top 0.5 percent have added almost four percentage points to their share of wealth over the last twenty years, going from 6.72 percent to 10.23 percent. The very rich have become extremely rich.

When people talk about ‘the rich’ they almost always mean ‘the people richer than me’. Few people actually admit to being rich. A couple with an after-tax income of £120,000 will find themselves in the top 1 percent of earners yet most of these people will not describe themselves as rich. I often have conversations with left-leaning friends in this income bracket who insist that the best way to solve the UK’s fiscal problems is to tax the rich. When I try to explain to them that, relative to 99 percent of the population they are the rich, they usually protest. The reason they protest is that they are comparing themselves to the super-rich.

Over the last ten years, the gap between the well-off, the rich and the stinking rich has widened. But the publicity given to stratospheric bonuses and fat-cat payoffs has created the impression that such wealth is more commonplace than it really is. The Gini coefficient has barely moved since 2000 because only a few people earn these huge amounts. There is also some evidence, as John Rentoul says, that those at the very top have seen reductions in their incomes since the recession. The Gini coefficient has fallen slightly and the top 1 percent’s income share has dropped slightly since 2007.

Rich people and their enormous earnings make good headlines and give an impression of an ever widening gulf in society but their numbers are relatively small. If governments are going to tax the rich more heavily, by whatever means, some of us might be shocked to find that ‘the rich’ includes us.

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13 Responses to Just who are the rich anyway?

  1. Some care is needed in using terms like “the top 1 percent” and “the top 0.5 percent”. This gives the impression that they are a closed group. But, of course, they’re not. 20 years is a good quarter of a lifetime and perhaps a third of a working lifetime. People aren’t, in the main, born into “the top 0.5 percent”; they earn their way into it, at the expense of somebody else who either is pushed out… or dies.

    This may seem like sophistry. But the policy responses you’d enact to respond to the existence of a closed cabal of super-rich people are probably very different than the ones you’d enact to address an increase in concentration of wealth at the top (in the absence of a cabal).

    That said (and I’m not sure in the context of your article it needed to be said), your conclusions are bang-on.

    • TickyW says:

      I may be slightly off topic here but I feel Christie’s comment is worthy of a response.

      I am not sure it is correct to assert that people in the top 0.5% earn their way into it. I believe analyses show that individuals born into a particular income grouping are most likely to die in the same income grouping. So, at least in the UK, there is very little social mobility and the idea that the super rich deserve their income and wealth is eminently contestable..

      Life is a lottery. The class, gender, disability, country, intelligence, talent, energy, etc that an individual is born into or born with is the result of chance. No one chooses their parents and nothing can be done to change natural i.nheritances

      However, as per Rawles , it is possible to design our institutions so as to dampen, as distinct from amplifying, the advantages and disadvantages that arise through birth, It stretches credibility that our institutions achieve or even to attempt to dampen the consequences of birth.

      Admittedly anecdotal, but telling nonetheless, is the composition of the current cabinet, which is disproportionately populated by toffs, former public school boys, who in several cases inherited their wealth (eg Cameron, Osborne) . Other surveys also indicate that our current institutions fail to create a level playing field and equal opportunities for all, irrespective of their birth.

      I am sorry to be a fly in the ointment by adding some context. and advancing what is to many a very unpopular viewpoint.

      • P Hearn says:

        The main reason for the preponderance of Public Schoolboys / Oxbridge types at the top of all the political parties is the collapse of State education.

        The education experiments of the 60s and 70s have run their course, and this is the result.

        • TickyW says:

          @P Hearn

          Toffs and public school types have always dominated the top of all the political parties.

          In any case, blaming the alleged collapse of state education, if it were true, rather supports my assertion that social institutions fail to create a level playing field.

      • Neil says:

        In 1940 George Orwell wrote – and I think nothing has changed since then – that public schools serve two main purposes. Firstly, they teach class prejudice and therefore perpetuate the importance of class in social hierarchies. Secondly, public schools collect the tax, imposed as fees and expenses, demanded by the upper class to enable to middle classes to enter the professions. When the political, commercial, media, legal and academic worlds are views from this perspective so much of the contradictions of life in modern Britain make sense. It also explains the swaggering confidence of the well-connected middle-class and the utter despair of the ‘lower orders’.

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  3. Jim says:

    ‘The rich’ can be defined as anyone earning roughly twice what the speaker earns. Given most people cannot consider an overnight doubling of their earning power (unless they win the lottery) they feel safe in demanding that those people earning double their income pay more tax, because its unlikely to affect them. Thus to the man on minimum wage the man on average earnings is ‘rich. The man on average earnings thinks the man just into the 40% tax bracket is ‘rich’ and that man think his local GP on £80-100K is ‘rich’ who in turn thinks the council CEO on £200-250K is rich, who in turn thinks the man running a FTSE 250 company is ‘rich’ on £500k-£1m. And so on an so forth, right to the top of the tree with Premier League footballers, and Hedge Fund bosses.

    • TickyW says:

      @Jim

      Does this work in reverse too so that anyone who earns half of what a speaker earns is poor?

      • Jim says:

        Not really. By definition, if people who earn half what you do are poor, that means you are at least well off, and if you are calling for higher taxes on ‘the rich’, that could end up meaning you. So defining people significantly below your income as poor only makes you a target for higher taxes. So people tend not to do it.

        • TickyW says:

          @Jim

          I don’t think most people have much to worry about from higher taxes on the “rich”. As the blogger himself says in his last paragraph,

          “Rich people and their enormous earnings make good headlines and give an impression of an ever widening gulf in society but their numbers are relatively small”

          So clearly the blogger has some notion of who falls into the rich group and the small numbers of individuals involved.

          When all is said and done, it should not be beyond the wit of society to agree an objective definition of what is meant by rich (or high income) and to tax it accordingly. It is best to avoid subjective definitions such as “he/she earns twice what I do and hence is rich”..

          • Jim says:

            “It is best to avoid subjective definitions such as “he/she earns twice what I do and hence is rich”..”

            I wasn’t trying to produce a definition of ‘who is objectively rich’, I was merely pointing out that who people regard as rich depends where you are viewing from. Very few people admit to being rich themselves, its always someone higher up the food chain. So lots of people might be in favour of higher taxes for ‘the rich’ because they assume they would not be affected. If you introduce an objective value for ‘the rich’ and say everyone above this line is rich and will be taxed more highly, you’ll find a lot of people are suddenly against higher taxes.

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  5. John D says:

    I agree with much that TickyW has to say – but would go further. If you read The Spirit Level, published by the Equality Trust, you get some idea as to the corrosive effects of extreme inequality within a range of societies. People today claim that high tax rate levels are counter-productive. Prior to 1975, income tax rates of 95 per cent were known – listen to the lyrics of The Beatles song “Taxman”. The problem in most modern societies today is that there has been a race to the bottom where income tax rates are concerned, and this has resulted in growing inequality and the undermining of social cohesion in many modern societies. Scandinavia is best….!!!!

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