Thursday, May 21, 2020

UK Income Inequality

The highest paid 1% of British earners received nearly 17% of all the country’s income, according to a study making allowance for the concentration of taxable capital gains among the better off.

Analysis by Warwick University, the London School of Economics and the Resolution Foundation of previously confidential HMRC data showed that the top 1% had a growing and much bigger slice of income than previously thought. The study said that some taxable capital gains were really sources of income and were heavily concentrated among the well off.

Official data showed that in 2017-18 there were £55bn of taxable capital gains recorded – a more than doubling of the figure five years earlier once inflation was taken into account. The majority of the taxable capital gains (£34bn) were received by 9,000 individuals, who each made gains of £1m or more. Once adjustment was made for taxable capital gains, the income share of the top 1% in 2017-18 was 16.8% rather than the 13.8% previously thought. 

The top 0.1% received 8.1% rather than 5.6%.

Taxable capital gains often related to people’s work, and were more akin to earnings from employment than passive investment returns. They include the £24bn of gains eligible for entrepreneurs’ relief and £2bn of ‘carried interest’ – performance bonuses – for fund managers.

Dr Andrew Summers, assistant professor at the LSE, said: “Capital gains are taxed at much lower rates than regular income, but the legal line between these is very blurred. This means business managers have a big tax incentive to take their rewards as gains instead of salary or dividends. When we look at the types of gain going to people at the very top, that’s exactly what we find. A lot of capital gains are, in fact, just repackaged income going to the already-rich.”

Arun Advani, assistant professor at Warwick University said, “While the share of all income going to the top 1% has remained around 13% since 1997, once gains are included it rises to 17%, with the largest growth towards the very top,”
The report questioned whether capital gains should be taxed at a much lower rate than income given that the benefits went mainly to the rich and there was a pressing need for the government to raise revenue.

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