Policy analysis from the Centre for Economic Performance
The UK's top 1% have between 12.5% and 15.5% of all income. This is mid-way between the United States (20%) and Continental Europe (8%). This share has been rising steadily since the late 1970s, mainly due to labour income (wages), but also with a role for capital income (dividends, capital gains, etc.). In the global financial crisis of 2008-09 inequality fell, but has been stable since then. It is too soon to tell whether inequality will resume its rising trend as the economy fully recovers. Overall, coalition policies have been mainly regressive. Tax credit and benefit cuts took more away in the bottom half of the income distribution than they gained from higher income tax allowances.
Looking forward, wealth will be increasingly important for inequality as it is rising faster than aggregate income, and the concentration of capital income is much greater than the concentration of labour income. To combat inequality, policy should be focused on wealth (in particular inheritance) taxation, closing loopholes for capital income (e.g., non-domiciled residents), and increasing skills, especially for the disadvantaged.
Friday 17th April 2015
Are we really 'all in this together'?
policy briefing from the Centre for Economic Performance
Inequality of pre- and post-tax income has risen remarkably in the UK since the late 1970s. And while inequality of net income fell in the aftermath of the financial crisis, there are signs that it is rising once again.
What's more, the tax and benefit changes since 2010 have been largely regressive, with people in the bottom half of the income distribution losing more than they have gained. The main cleavage is between pensioners who have done well compared with those of working age, especially the young and households with children.
These are among the conclusions of a new report from the Centre for Economic Performance (CEP) - the latest in a series of background briefings on key policy issues in the May 2015 UK general election. The CEP reports that:
Dr Gabriel Zucman,
- The UK's richest 1% have between 12.5% and 15.5% of all income. This is mid-way between the United States (with a top 1% share of 20%) and continental Europe (where in France and Spain, it is 8%).
- The income share of the UK's top 1% has been rising steadily since the late 1970s, mainly due to labour income (wages) but also with a role for capital income (dividends, capital gains, housing rents, etc.).
- Wage inequality has steadily escalated for the top half of the earnings distribution. In 1978, the top 10% earned 1.6 times those in the middle. By 2013, this had risen to a factor of three to one.
- For the bottom half of wage earners, inequality expanded rapidly in the 1980s before stabilising for men from the mid-1990s and actually falling for women.
- Changing wage inequality is partly due to increased demand for skilled workers because of new technologies. But institutions such as unions and minimum wages also matter.
- In the 2008-09 crisis, inequality fell but it has been stable since then. Average wages and incomes have fallen for just about every group since the crisis. It is too soon to tell whether inequality will resume its rising trend as the economy fully recovers.
- Net income (after tax and benefits) is more equally distributed than pre-tax and benefit income. The richest fifth have 15 times the pre-tax income of the poorest fifth, but only four times as much after taxes and benefits. Nevertheless, the increase in post-tax income inequality has followed the same trends as that of pre-tax inequality.
- Modelling changes to direct taxes, tax credits and benefits since the coalition government came to power shows that overall policies have been mainly regressive. The bottom half of the income distribution lost more from cuts to tax credit and benefits than they gained from higher income tax allowances. Pensioners have done especially well compared with the young.
- The top 1% enjoy about 40% of capital income flows. There is much uncertainty on the stock of wealth inequality. Wealth will be increasingly important for inequality as it is rising faster than aggregate income, and the concentration of capital income is much greater than the concentration of labour income.
author of the report, concludes:
"To combat wage inequality, increasing skills, especially for the disadvantaged, is vital.
"In terms of capital inequality, Labour's proposals to abolish non-domiciled residents' tax status will reduce inequality, whereas the Conservatives' policy of boosting inheritance tax allowances will increase inequality."
For further information, contact:
+44 (0)20 7955 7285