Racing Away? Income Inequality and the evolution of high incomes
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Transcript of 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
© Institute for Fiscal Studies, 2008
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?
© Institute for Fiscal Studies, 2008
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
© Institute for Fiscal Studies, 2008
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
Source: Households Below Average Income
© Institute for Fiscal Studies, 2008
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
Source: Households Below Average Income
© Institute for Fiscal Studies, 2008
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
Source: Households Below Average Income
© Institute for Fiscal Studies, 2008
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
Source: Households Below Average Income
© Institute for Fiscal Studies, 2008
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
© Institute for Fiscal Studies, 2008
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
© Institute for Fiscal Studies, 2008
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
© Institute for Fiscal Studies, 2008
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”
© Institute for Fiscal Studies, 2008
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
© Institute for Fiscal Studies, 2008
Just how rich are they?
£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
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
© Institute for Fiscal Studies, 2008
Just how rich are they?
£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
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
© Institute for Fiscal Studies, 2008
Just how rich are they?
£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
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
© Institute for Fiscal Studies, 2008
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
© Institute for Fiscal Studies, 2008
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%
© Institute for Fiscal Studies, 2008
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
Note: Data relates to 2004/05, but is presented in 2007/08 prices
© Institute for Fiscal Studies, 2008
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%
Note: Data relates to 2004/05, but is presented in 2007/08 prices
© Institute for Fiscal Studies, 2008
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
© Institute for Fiscal Studies, 2008
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%
Note: Data relates to 2004/05
© Institute for Fiscal Studies, 2008
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%
Note: Data relates to 2004/05
© Institute for Fiscal Studies, 2008
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
Note: Data relates to 2004/05
© Institute for Fiscal Studies, 2008
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
© Institute for Fiscal Studies, 2008
More like an average Saturday afternoon at Stamford Bridge?
© Institute for Fiscal Studies, 2008
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)
© Institute for Fiscal Studies, 2008
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
© Institute for Fiscal Studies, 2008
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
© Institute for Fiscal Studies, 2008
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
© Institute for Fiscal Studies, 2008
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
© Institute for Fiscal Studies, 2008
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)
© Institute for Fiscal Studies, 2008
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
© Institute for Fiscal Studies, 2008
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
© Institute for Fiscal Studies, 2008
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
© Institute for Fiscal Studies, 2008
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
© Institute for Fiscal Studies, 2008
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