Are the rich getting richer?

The timing is unfortunate: not only is Rishi Sunak considering a tax cut for the 5 million highest earners in next month’s autumn statement, but last week a Joseph Rowntree Foundation report suggested the number of people living in “destitution” has risen since 2017. Are Britain’s rich getting richer, and the poor poorer?

To work out whether Britain is getting more or less unequal, economists look at something called the Gini coefficient, a measure of how a society’s income is distributed. A score of 0 per cent means everyone is paid exactly the same; a score of 100 per cent means one person receives a fortune, and everyone else gets nothing.

Britain’s score is about 37 per cent. It means we are less equal than most other European countries, including Italy (35), Switzerland (33), Germany (30), France (29) and Norway (25) – but more equal than the US (39). South Africa, data suggests, is the most unequal country in the world, with a Gini coefficient of 63 per cent.

It will surprise few people that Britain became considerably less equal during the “loadsamoney” 1980s.

Lord David Willetts, who was one of Margaret Thatcher’s economic advisers, says wages had to be good to encourage workers to switch from low-paying sectors to higher-paying ones. “There was a tolerance of a big increase in income and wage inequality,” he says.

The weakening of union power also meant that many lower-paying jobs became less competitive, points out Tom Wernham, a research economist at the Institute for Fiscal Studies. At the same time, benefits and state pensions were falling: from 1980, the state pension was linked only to prices, meaning it quickly fell behind rising salaries. Yet the wages of the average worker grew more rapidly than in any other postwar decade. Most workers felt better off.

Britain was at its most unequal just before the financial crisis. Since then, however, the country appears to have become marginally fairer, at least according to the Gini. A major factor has been an improvement in low earnings.

In April 2015, the government announced a new National Living Wage for over-23s, set at £6.50 an hour. Had it merely kept up with inflation, it would have been £8.50 this year: in reality, it is £10.42.

Thanks to this generosity, Britain’s bottom 10 per cent of earners have seen their wages rise by 10 per cent since 2015, once adjusted for inflation; meanwhile, the top 1 per cent of salaries, according to what is declared to HMRC as income, have barely shifted at all.

Yet this is only half the story. In 2019, a payslip said to belong to the Premier League footballer Raheem Sterling was “leaked” to social media after he apparently left it in his car at a garage. It suggested the winger was paying £1.05 million in tax a month, nearly half of his £2.2 million gross salary.

Actually, Sterling — with most of his income taxed at 45 per cent — is in the minority: most wealthy people don’t pay anywhere near that much. Research by Dr Arun Advani of Warwick University showed that the average person with a total remuneration of £1 million paid an effective tax rate of 35 per cent. For workers making £10 million, it was 23 per cent — about the same deductions as those paid by a first-year junior doctor.

Wealthier people can have a different experience of tax rules from those in lower income brackets. Higher earners tend to get a larger share of their income from dividends, which are taxed at a lower rate of 39.35 per cent. Secondly, investment income, which is taxed at 45 per cent, requires no national insurance contributions.

But the biggest difference, says Advani, is that wealthy individuals get a significant chunk of their money through capital gains, which are taxed at between 10 and 28 per cent. This is why Rishi Sunak had an overall tax rate of about 21 per cent on income of £4.7 million.

Capital gains tax rates were lowered in 2016. “Since then, wealthy people have been switching away from declaring income to getting more as gains,” Advani says. If higher earners paid the headline rate, the Treasury would instantly recoup an extra £23 billion, he calculates. “But also, from an inequality standpoint, we are missing income data from those wealthiest individuals.”

In other words, because the actual remunerations of the country’s top earners are hidden, Britain is more unequal than the data suggests.

• Have the baby boomers spent all the cash?

As well as whether the rich are getting richer, it is also worth considering the question: if you are a rich person, how likely are you to stay rich?

Being wealthy naturally has a certain stickiness to it, but so does poverty. Take rising interest rates: they are great news for savers with large balances, but terrible news for those who are borrowing money.

In their book Poor Economics, the Nobel Prize-winning economists Abhijit Banerjee and Esther Duflo explore the “poverty traps” that keep people on low incomes. “The poor bear responsibility for too many aspects of their lives,” they write.

If you live in a country where there is no piped water, for example, you have to remember to add chlorine to your supply; this takes up time that could be spent being more productive and escaping poverty. “The richer you are, the more the ‘right’ decisions are made for you,” they explain.

As a director at Saltus wealth management, it is Mike Stimpson’s job to make these decisions for wealthy clients. It is at times of global uncertainty when his services are most highly valued. “The key to making long-term returns is to not lose your money when things get difficult,” he says.

George Osborne took his complaints to the European Court of Justice when the EU imposed a continent-wide cap on bankers’ bonuses in 2014

CHRIS RADBURN/PA

Banerjee and Duflo found that one-off payments of capital improved the conditions of poor people a decade later: a one-off gift of wealth offered a shortcut out of poverty for those who could not afford to save.

In modern Britain, says Willetts, wealth — which gives people a head start — is more unequally distributed than income. Wealth has risen from about three times national income in the 1980s, to seven times today. As house prices have soared, and it becomes harder to acquire property by saving up for it out of income, those who can get a jump start have a built-in advantage.

There is an old Lancastrian saying that people go from “clogs to clogs in three generations”; the Japanese have “from rice paddies to rice paddies”. Yet in reality, data shows that wealth typically stays in families for hundreds of years.

In 2015 two researchers, Gregory Clark, from University of California Davis, and Neil Cummins, from the London School of Economics, built a database of more than 21,000 people with rare surnames who had died between 1858 and 2012. Using probate records, they identified how wealthy they had been at the point of death, and began finding links between families.

They found a “significant” link between the wealth of families five generations apart. The great-grandchildren of people who died rich in the 1860s and 1870s (with surnames such as Buttanshaw, Penrhyn, Haselfoot and Strangways) were still much more likely to die wealthy in the 2000s than the descendants of poor Victorians (spare a thought for the Cripple, Horny and Sissey dynasties).

Furthermore, even though inheritance taxes soared in the mid-20th century, the amount passed on between generations did not change much at all. The British — particularly the rich — have a good track record of keeping it in the family, especially compared with other countries.

Inequality in Britain is not soaring like it did in the 1980s. Minimum wage laws have improved the plight of Britain’s lower earners. Yet at the top of the income spectrum, things are murky.

Just as bankers received a pay rise when their bonuses were capped, the very rich can defy expectation — and elude observation. But just like Victorian Britain, it also pays to have a head start from your family.