Monday, June 01, 2009

Britain's skewed middle

The Trades Union Congress (TUC) in Britain published a detailed pamphlet last week looking at the British middle classes, and find that the media has been living under something of an illusion - the middle classes appear to have been doing better than they actually have been.

"The post-war period up to the end of the 1970s was largely a time of progress for Middle Income Britain. They enjoyed rises in absolute living standards while these decades were also a time of reducing income and wealth inequality, with a shrinking gap between the middle and the top."

But since the end of the 1970s, this has changed. Things have improved in absolute terms, but not in relative terms:

"Middle Income Britain has fallen back in relation to the rich and the super-rich and has also slipped in important ways in relation to the wider middle class."

Wages, and less progressive taxation, are fingered as the main culprits. But who is Middle Income Britain? It is, by contrast with "the conservative, well-to-do citizen", defined as

"the group that straddles the middle person in the income hierarchy – the point which divides the population in two, with a half falling below and a half above this income level."

And this graph shows it most clearly (click to enlarge). The report is full of data and analysis. We would highlight another graph, looking at how people are taxed. As the report says:

The British tax system "moved from being broadly progressive to regressive in the late-1980s when it started to take a higher proportion of income from lower than higher income households."

And here is the graph to show it (click to enlarge).

We shouldn't take this graph at face value, however: the richer parts of the population have a higher degree of non-declaration of their income and gains - some of which, such as via the pernicious non-domicile rule, is not illegal. This means that the real graph - if we could somehow find out how much the richest earners really earned - including in capital gains - would be skewed much further in favour of the wealthy. Much of the tax the poor pays - especially consumption-based taxes like Value Added Tax can't be avoided.

Finally, the report makes some excellent conclusions on tax:
  • The Government should restate a commitment to the principle of progressive taxation – that tax should be related to ability to pay, with the rich paying a higher proportion of tax than the poor and the middle. This would mean reducing the share paid by the lowest earners, a war on tax havens and loopholes, ending higher-rate tax on pensions and a reform of council tax.

  • To reduce the excessive concentration of wealth, a higher proportion of tax revenue should come from capital taxation with a reform of inheritance tax and the realignment of income tax and capital gains tax rates.


Anonymous Anonymous said...

Dear Sirs,

The Isitfair campaign has been arguing for reform of the council tax system since 2004.

Theie web site is at

6:23 am  
Anonymous Adrian Wrigley said...

This pamphlet illustrates just how poorly those in the union movement understand the basic operation of the political economy. By basing their analysis on a deeply flawed model of the economic system, grossly erroneous conclusions and policy recommendations are drawn.

It's hard to know where to start in putting right such a broken analysis! I hope the blog owner will kindly accept this analysis in two separate comments. (thanks).

Perhaps the biggest conceptual flaw is their focus on money incomes. Most wealthy people get a major part of their income as non-money (imputed) incomes. This includes the hidden flow of income to owner-occupiers. It also includes the income flow of directly owned capital assets. And it includes the income from the erosion of debt values through monetary inflation. There is also the income from gifts af all sorts (especially intergenerational gifts such as low/no interest loans from parents, loan guarantees, business investments and the "safety net" of coming from a wealthy background).

The pamphlet also seems confused about incomes and wealth. They are concerned with dispersion of living standards which relate more closely to wealth than money income. Yet the groups of the "wealthy", "high earners" and "the rich" are used almost interchangeably.

Another way of looking at the issue is by asking the question "who is appropriating the economic rents in the economy?". The answer is that the wealthy appropriate the vast majority of the economic rents - usually without being recorded in any accounts and without being liable to tax. These economic rents are generated by government and community activity and by nature. They are not "earned" in any meaningful way by the wealthy but simply arrogated by them. In effect, the government is a giant "subsidy machine" for the wealthy invisibly feeding them economic value. The result is a constant and powerful "trickle up" current in the economic system. Attempts to nullify this automatic flow to the wealthy by taxing high earners has no basis in logic or economic theory. Why would taxing wealthy people and spending it on services whose value flows back to the wealthy do anything other than worsen the situation? The feedback loop actually returns more to the wealthy than is collected in tax, so the more tax you collect from high earners, the greater the economic rent arrogation is by the wealthy. We can see this is true from the track record of high and low spending governments in recent decades. High (income) tax Labour governments widen wealth disparities particularly rapidly.

These issues were well understood by the Classical Economists such as Adam Smith, David Ricardo, Henry George. Another explanation (very accessible) is here

In terms of conclusions, the prescription is exactly wrong. It mentions Council Tax, ability to pay and the effect on "the poor". Council Tax is incident almost entirely on the house owners. Council Tax Benefit and Housing Benefit are incident on house owners too. Except in the short term, tenants pass on these taxes and benefits straight to the landlords by the adjustment of rents. So Council Tax rarely hits the poor (even although it may be collected from them) - none of the poor people I know own their own homes. The Benefits mentioned are simply gifts for wealthy home owners and landlords - propping up land rents/house prices and comprising a significant contributor to the wealth gap.

The idea of tax "related to ability to pay" is so deeply ingrained in popular thought, but completely without foundation or application in practice. A much better principle is "Pay for what you take, not what you make". "Ability to pay" is a key "reason" that non-monetary incomes are generally outside the tax system - and that is how the wealthy intend it to stay.

5:43 am  
Anonymous Adrian Wrigley said...

On capital taxation, much of what is collected is little more than a reflection of the inflationary monetary system. In the decade from 1997, UK inflation (M4) has been 11.6% annually. So any asset which has appreciated by less than this has actually returned a loss to its owner against inflation (assuming no income to complicate matters). And yet people are expected to pay tax on this as if it had given an economic gain. Most notably, this applies to "capital gains" on housing. House prices have tracked (monetary) inflation surprising well in the past century. There is no justification for charging tax on capital assets (more properly land) which simply track true inflation. If the asset is yielding a return beyond the normal return on the economic capital (ie the building), failure to tax it would (and does) result in an iniquitous arrogation of unearned income to the wealthy and drive increases in wealth concentration.

Overall, I think the authors of the pamphlet are genuine and honest in their approach. But their naivety on key economic matters is astounding! It's as if they are being "played like a musical instrument" of the wealthy. By advancing the agenda of the wealthy against that of the workers, the TUC continues to entrench the present iniquities and diverge from its worthy goals.

5:46 am  

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