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.
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
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.
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.