IFS
Racing Away?
Income Inequality and the evolution of
high incomes
Luke Sibieta, January 17th 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
Gini Coefficient
0.4
0.3
Thatcher
Major
Blair
© Institute for Fiscal Studies, 2008
-0
5
20
04
-0
3
20
02
-0
1
20
00
-9
9
19
98
-9
7
96
19
19
93
-9
4
91
19
89
19
87
19
85
19
83
19
81
19
19
79
0.2
Source: Households Below Average Income
Income changes by percentile
group: 1996/97 – 2005/06
Average annual income gain (%)
5
4
3
2
1
0
10
20
30
40
50
60
70
80
90
-1
Percentile point
-2
© Institute for Fiscal Studies, 2008
Source: Households Below Average Income
Income changes by percentile
group: 1996/97 – 2005/06
Average annual income gain (%)
5
4
3
2
1
0
10
20
30
40
50
60
70
80
90
-1
Percentile point
-2
© Institute for Fiscal Studies, 2008
Source: Households Below Average Income
Income changes by percentile
group: 1996/97 – 2005/06
Average annual income gain (%)
5
4
3
2
1
0
10
20
30
40
50
60
70
80
90
-1
Percentile point
-2
© Institute for Fiscal Studies, 2008
Source: Households Below Average Income
Income changes by percentile
group: 1996/97 – 2005/06
Average annual income gain (%)
5
1979-1996/7
4
3
2
1
0
10
20
30
40
50
60
70
80
90
-1
Percentile point
-2
© Institute for Fiscal Studies, 2008
Source: Households Below Average Income
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
Richest 10-1% of Adults
4.2Richest
million 10% of Adults
“The Rich”
4.7 million
Richest 1-0.1% of Adults
420,000 Adults
“The Very Rich”
Richest 0.1% of Adults
47,000 Adults
“The Very, Very Rich”
© Institute for Fiscal Studies, 2008
Richer
Before Tax Annual Income 2004/05
Just how rich are they?
£1,000,000
£800,000
£600,000
£400,000
£200,000
£5,000 £25,000
£0
All Tax
Payers
© Institute for Fiscal Studies, 2008
Top 10-1%
Min Value
Top 1-0.1%
Top 0.1%
Mean Value
Notes: Data relates to 2004/05, but is presented in 2007/08 prices
Before Tax Annual Income excludes income not subject to income tax
Before Tax Annual Income 2004/05
Just how rich are they?
£1,000,000
£800,000
£600,000
£400,000
£200,000
£5,000 £25,000
£35,000 £50,000
All Tax
Payers
Top 10-1%
£0
© Institute for Fiscal Studies, 2008
Min Value
Top 1-0.1%
Top 0.1%
Mean Value
Notes: Data relates to 2004/05, but is presented in 2007/08 prices
Before Tax Annual Income excludes income not subject to income tax
Before Tax Annual Income 2004/05
Just how rich are they?
£1,000,000
£800,000
£600,000
£400,000
£155,000
£100,000
£200,000
£5,000 £25,000
£35,000 £50,000
All Tax
Payers
Top 10-1%
£0
© Institute for Fiscal Studies, 2008
Min Value
Top 1-0.1%
Top 0.1%
Mean Value
Notes: Data relates to 2004/05, but is presented in 2007/08 prices
Before Tax Annual Income excludes income not subject to income tax
Before Tax Annual Income 2004/05
Just how rich are they?
£1,000,000
£780,000
£800,000
£600,000
£350,000
£400,000
£155,000
£100,000
£200,000
£5,000 £25,000
£35,000 £50,000
All Tax
Payers
Top 10-1%
£0
© Institute for Fiscal Studies, 2008
Min Value
Top 1-0.1%
Top 0.1%
Mean Value
Notes: Data relates to 2004/05, but is presented in 2007/08 prices
Before Tax Annual Income excludes income not subject to income tax
What share of total income in the
SPI do they receive?
Total Income in the SPI in
2004/05 = £826 bn
All Other Adults
in SPI, 59.5%
Top 10-1% of
adults, 27.6%
Top 1-0.1% of
adults, 8.6%
Top 0.1% of
adults, 4.3%
Note: Data relates to 2004/05, but is presented in 2007/08 prices
© 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?
Number
All Tax Payers
Top 10-1%
of adults
Top 1-0.1%
of adults
Top 0.1%
of adults
29.5 million
4.2 million
0.4 million
47,000
Average Income Tax Bill
Income tax as a proportion of
total income
© Institute for Fiscal Studies, 2008
Note: Data relates to 2004/05, but is presented in 2007/08 prices
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%
© Institute for Fiscal Studies, 2008
Note: Data relates to 2004/05, but is presented in 2007/08 prices
Age and Sex
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Males
All Tax Payers
Under 25
25-34
Top 10-1%
Top 1-0.1%
Top 0.1%
35-44
45-54
55-64
65-74
75-plus
© Institute for Fiscal Studies, 2008
Note: Data relates to 2004/05
Where do they live?
0%
North East
North West
Yorkshire and the Humber
10%
20%
30%
40%
All Tax Payers
Top 10-1%
Top 1-0.1%
Top 0.1%
East Midlands
West Midlands
East of England
London
South East
South West
Wales
Scotland
© Institute for Fiscal Studies, 2008
Note: Data relates to 2004/05
Where do they work?
0%
Manufacturing
Construction
Wholesale and Retail Trade
10%
20%
30%
40%
All Tax Payers
Top 10-1%
Top 1-0.1%
Top 0.1%
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
© Institute for Fiscal Studies, 2008
Note: Data relates to 2004/05
Share of Before Tax Income
Sources of Before Tax Income
100%
80%
60%
40%
20%
0%
All
Taxpayers
Employment
Investment
© Institute for Fiscal Studies, 2008
Top 10-1%
Top 1-0.1%
Top 0.1%
Self-Employment
Pension and Other
Note: Data relates to 2004/05
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
Average annual income gain (%)
5
4
3
2
1
0
10
20
30
40
-1
Percentile point
-2
© Institute for Fiscal Studies, 2008
50
60
70
80
90
Average annual income gain (%)
HBAI vs SPI, 96/97-04/05
6
5
4
3
2
1
0
90 91 92 93 94 95 96 97 98 99
HBAI
© Institute for Fiscal Studies, 2008
SPI
90 91 92 93 94 95 96 97 98 99
Percentile
Average annual income gain (%)
Looking deeper into the top 1% (1)
6
5
4
3
2
1
0
90
91
92
SPI
© Institute for Fiscal Studies, 2008
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
Average annual income gain (%)
Looking deeper into the top 1% (1)
6
5
4
3
2
1
0
90
91
92
SPI
© Institute for Fiscal Studies, 2008
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
Looking deeper into top 1% (2)
Average annual income gain (%)
10
Labour 1 (96/97-00/01)
Labour 2 (00/01-04/05)
9
8
7
6
5
4
3
2
1
0
-1
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
© Institute for Fiscal Studies, 2008
Real Income Relative to 1996/97 Level
Growth in real incomes after income tax
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1
1996-97
1997-98
1998-99
90th
© Institute for Fiscal Studies, 2008
1999-00
2000-01
99th
2001-02
2002-03
99.9th
2003-04
2004-05
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
Real Income Relative to 1996/97 Level
Compared with level of FTSE 100
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
90th
© Institute for Fiscal Studies, 2008
99th
99.9th
FTSE 100
Real Income Relative to 1996/97 Level
Compared with level of FTSE 100
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
90th
© Institute for Fiscal Studies, 2008
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
© Institute for Fiscal Studies, 2008