Gaping chasms

The excellent Institute for Fiscal Studies has just released some exemplary work on those in the top 1% of incomes. This provides more evidence to reinforce the themes of my last blog, Gaping holes in fairness. It sparks further thought.

The IFS notes the tax advantage enjoyed by many of those with the highest incomes. Of those enjoying the top 1% of incomes, 18% of income is from partnerships, 11% from dividends and nearly 4% from self-employment. All these are taxed at lower levels than employment income. Most of these proportions are still more extreme for those in the top 0.1% of income category: 23% of their income is from partnerships, and 13% from dividends. It seems nothing other than fair that we should seek to equalise the taxation on the various forms of income, not least to dissuade structuring and avoidance (including delays in paying taxation by holding income in personal service companies and subsequently releasing it in dividends), as touched on in Simplifying tax is fairness.

But the most striking element of the IFS work is the evidence of the chasms that there now are, and the perceptive framing that we face because of it. This chart is telling:

IFS chasm 1

As the IFS says, this highlights “just how different the top 1% are from even the merely quite well-off”. The median income of all taxpayers is £22,000. Those at the 90th percentile enjoy more than double that, £59,000. But the 99th percentile kicks in at £162,000, nearly three times the level of those at the 90th percentile, and more than 7 times those at median, and therefore:

“If you are at the 90th percentile, you may well feel more like the person at the median (21.6 million adults below you in the distribution) than the person at the 99th percentile (just 4.9 million people above you).”

As the study notes, the disparities above the 99th percentile are even more extreme (the bar charts in Panel B). Remember always that these are disparities based on income tax returns, and that wealth disparities are likely to be still greater.

If anything, the regional disparities are even more striking. Half of those in the top 1% of income taxpayers now live in just 65 parliamentary constituencies, down from 78 in 2000. 30 constituencies have more than 2% of their adult population in the top 1% of income taxpayers; 17 of these 30 are in London and all but two, the IFS reports, are in the South East. Eyeballing their map suggests one of these constituencies is Aberdeen (the data is all 2014-5 tax year so predates the latest oil downturn), and the other is St Albans — which most would, I think, classify as being in the South East, though for these purposes it is placed in the East of England. In total, around 58% of all the top income taxpayers live in London and the South East, and a further 10% are in the East of England.

The skewing of the highest of incomes towards London is so extreme that the IFS points out that a London-based man aged 45-54 would be in the top 1% of income taxpayers nationally with an income of £162,000, but would need a further £560,000 in income to be among the top 1% of those of the same age, gender and location.

No wonder people’s perceptions are skewed, in just the same way as top executives’ pay expectations are framed by those of their peers. People’s thoughts are anchored by what they see around them and struggle to understand what they do not see, especially when the disparities are so great. I vividly remember the regular occasions when Justin King, then Sainsbury CEO, explained to investment analysts that they live in ‘an absolute bubble’ and that sharper pricing of everyday shopping was necessary for it to be affordable by the general population. The pricing of more expensive competitors was, he said often, ‘la-la land’ (this was long before the film of that name so did not conjure images of people dancing on top of cars).

The chasms are gaping. And our bridges aren’t working. The BBC’s recent documentary How to Break into the Elite served to demonstrate how tough that challenge is, even using the most frequently commended route of education. The programme quotes research by the London School of Economics that found a working class graduate with a first class degree was less likely to land an elite job than a middle class graduate with a 2:2, and even if they succeeded in doing so, they would earn 16% less than a middle class equivalent.

We need to shrink the chasms, we need to improve the bridges. That is only fair.


The characteristics and incomes of the top 1%, Robert Joyce, Thomas Pope, Barra Roantree, IFS Briefing Note BN254, Institute for Fiscal Studies