Before we soak the rich, we need to figure out who they are

This week an audience participant on Question Time, a British politics show, made the mistake of suggesting his salary of £80,000 plus does not make him rich.

Social media outrage followed. That salary puts the man in the top 5 per cent of UK earners and, in the eyes of the other 95 per cent, he is rich. Why then doesn’t he feel it?

In fact, his take home earnings are not as much higher than the average as a first glance suggests. The top quintile of earners in the UK are on an average of about £88,000. The bottom quintile are on more like £7,900. Add in tax and benefits, and those numbers fall to about £65,500 and rise to £19,000. That means the top fifth take home, on average, 3.4 times as much as the bottom fifth. That’s significant, but much less significant than the 11-fold difference in pre-tax pay.

It’s also worth noting that many of those in the bottom quintile are working part time (35 hours a week on the minimum wage in the UK would bring in over £12,000), while many of those at the top are salaried and work much longer hours. That makes the hourly income differential even smaller. There is a similar dynamic at work in the US: there, 40-year-olds in the top quintile would see every dollar earned over their lifetimes taxed at about 34 per cent and those in the bottom fifth would see it subsidised by 47 per cent.

But several other things are going on as well. The first has to do with the way income changes during a career. No one is born earning £80,000, earns it for 40 years and then dies. Our income starts low, rises with experience and seniority and often falls again toward retirement.

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Statistics regularly show that about 13-14 per cent of the British working population pays the higher 40 per cent rate of UK income tax, which kicks in at £50,001. But this is a just a snapshot. Many more people move in and out of that band at some point in their working lifetime. That is clear if we look at the mean income before tax numbers for the UK by age. For people aged between 25 and 29 the mean income is £26,000 but, for those aged 45-49, it is £42,400. It could easily be that about 25-30 per cent of UK earners pay the higher rate at some point in their lifetimes.

You can see the same dynamic at work in the US. A recent American academic paper makes the point that while those in the top and bottom income quintiles tend to stay where they are, there is huge movement in the middle. Only 56 per cent of those in the third and fourth income quintiles at any one time remain in them over a lifetime of earning. Another 2015 paper suggests that even more Americans qualify as rich, at least temporarily. It found that between the ages of 25 and 60, some 11 per cent of the US population will qualify as a member of the top 1 per cent by income for at least one year. An awful lot of us are constantly on the move — “rich” one year, not-rich the next.

One of the very few careers, by the way, in which you do earn pretty much the same amount every year regardless of your experience or your success, is politics. All UK MPs earn £79,468 a year regardless of skill or time served. Members of the US Congress are paid $174,000.

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This could go some way to explaining why it is that ideologically driven politicians with little experience of working in the private sector are so often surprised by the failure of the “poor” to vote for more taxes on the “rich”.

The other reason why those on highish incomes may not feel rich is lack of wealth. Egged on by an oversupply of left-leaning academics, there has been much talk (but less evidence) of rising wealth inequality in the US and Europe.

But there has been very little discussion about the fact that some of it is the inevitable result of two modern demographic trends: rising education and older people living longer. The later you start work, the later you amass wealth; the longer your parents live, the later their wealth trickles down.

But it is worth remembering that most people who end up rich start out asset poor. As they earn and save, that changes. And the young will, as usual, inherit the earth in the end. The millennial generation is expected to inherit $68tn from their baby boomer parents in the US by 2030 — the transfer is taking longer than in prior generations, but is still happening.

Look at the numbers and you can see how much age matters when it comes to wealth. The top 1 per cent within the 20 to 29-year-old cohort holds 76.8 per cent of that group’s wealth. Yet the top 1 per cent accounts for only 34 per cent of the wealth of those aged 70-79. In other words, as people age, more of them accumulate chunky nest eggs and wealth is distributed much more evenly. So wealth statistics are just as much a snap shot as those for income.

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Although today’s older generations benefited from favourable conditions, notably the run-up in housing prices, we must be very careful about introducing policies that treat income and wealth as static. In fact, the picture is constantly shifting.

Equality — or the lack of it — should be judged over a lifetime. Young people on low incomes with low levels of wealth may think now that anyone richer should be taxed more. But they should be careful what they wish for. Age is a huge driver of wealth and income. And it comes to us all.

The writer is editor-in-chief of MoneyWeek



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