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Finance & Innovation

Top 1% Earns 17% of Britain’s Income, New Research of Income Inequality Shows

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The UK is the fifth largest economy in the world, but its levels of poverty and income inequality show that not everyone is experiencing the benefits. The UN’s Global Goals are calling on countries everywhere to work to end inequality and poverty in all its forms by 2030. Join the movement by taking action here to help put an end to extreme poverty.

New research into previously unreleased tax data from Her Majesty's Revenue and Customs (HMRC) has revealed that the share of the UK’s income going to the top 1% of earners is higher than previously thought. 

It accounts for “capital gains” — the profit you earn if you sell an asset for more than it was worth when you first acquired it — meaning that the wealthiest in society are acquiring an even larger share than previously thought. 

Capital gains are not normally not included in official definitions of income – such as the household income data regularly published by the Office of National Statistics. But Arun Advani, an assistant professor at Warwick University and one of the authors of the research, explained that including  “capital gains” was important in understanding how income was distributed.  

“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,” he told the Guardian.

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Advani produced the report along with Andy Summers of the London School of Economics, and the Resolution Foundation, a think tank dedicated to issues affecting the low-paid in Britain. 

Money can be earned from capital gains with investments like buying and selling property, but it can also refer to shares being awarded to you by your company as part of remuneration. 

The report recommends that information about this form of earning should now be included in official statistics in order to better understand pay and inequality. 

“Capital gains matter for a number of reasons,” the Resolution Foundation report states. “They’re big. They’re concentrated among a relatively small number of people.”

“They have varied significantly over time in response to both economic and tax policy changes,” it continues. “And they are often interchangeable with other forms of income that are included in existing income statistics.”

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It also relates to tax, Summers told the Guardian: “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.” 

Ed Conway, the economics editor at Sky News, wrote in a thread on Twitter that access to documents revealing the data concerning taxable capital gains helps “solve an economic puzzle: why were official inequality measures narrowing when anecdotal evidence suggested the gap between rich and poor was widening?” 

He added that this research has helped explain why the UK’s data measuring inequality is imperfect, among other factors at play too. 

Understanding the root causes of income inequality in Britian is key to mitigating the impact of inequality in society. It's particularly relevant with the COVID-19 pandemic ongoing, and disproportionately affecting poorer communities. 

Across England, Wales, and Scotland, recent data has shown that people living in the nations' poorest communities are twice as likely to die from COVID-19 than those in wealthier communities, for example. 

A key recommendation made in the report is that “taxable capital gains should be counted as income” and that “ignoring capital gains means we underestimate the rise in the top’s income share.”

The report also points out that the amount people are earning through investments is growing. “Capital gains have grown swiftly: taxable capital gains more than doubled between 2012-13 to 2017-18, from £24 billion to £55 billion,” the report says. 

Such extreme wealth inequality is indicitive of a far bigger picture too: analysis from Oxfam in January 2020 found that 2,153 billionaires have more wealth than the world's poorest 4.6 billion people, who make up 60% of the global population.