The Rage-Train About The 1% Rolls On… But Do The Facts Really Fit The Narratives?
As the national conversation about the wealthy continues, the future of our society may rest in the nature of what we all contribute to it.
Dean Brooke

Dean Brooke

Dean Brooke's economics & financial column brings you news, in-depth analysis, research, occasional gossip, and more. You can email him at dbrooke@rogueeconomics.net.
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Introduction

A persistent narrative of the post-financial crisis era is that of the so-called “1%”.

That is, the elite wealth classes as defined by various media outlets who constitute the top 1% of earners and/or wealth-owners.

For example, current United States President-elect Joe Biden went on-record during a speech in 2017 at the annual DAVOS meeting suggesting that “the 1% are not carrying their weight” [1].

This might be a slightly strange idea in itself to present to DAVOS of all places but this is something we’ll look at in another future article.

By way of a second example, ex-Labour party leader in the UK, Jeremy Corbyn published this tweet [2] in 2019 suggesting that “the elites” (we’ll take that definition apart shortly) are terrified above all else of the prospect of paying their taxes.

Similarly, in 2017 the UK’s Shadow Chancellor John McDonnell also stated:

"The burden in terms of the tax take is falling on middle and low earners."

- John McDonnell, BBC News, 2017 [2]

Indeed, the popular notion of the 1% as some sort of parasitic spider-class within society is very much alive and I consider these ideas need some serious fact-checking.

As someone who has been doing my own accounts on-and-off since basically 2004 for one reason or another  I have a few fairly strong opinions on the matter of what people pay into the system. Even more so when we discuss this rather abstract concept of “the elites” and what their overall contribution to the UK’s tax revenue actually is.

As such, we’ll look at what people actually get out of the system in the UK vs. what people actually pay back into the system.

An Important Note…

This article was originally published 3rd November 2019 and figures in this article date from before The COVID-19 interventions which began in March 2020. 

Futhermore, I decided not to update it.

The reason for this is that government spending now represents an almost unprecedented share of national activity in many nations and factoring this in would give a very unfair of what people “get back” out of the system and what the state spends upon people.

Ultimately most of the measures we have seen over the past year will be rolled back in the coming years and as such they do not represent the normal state-of-affairs of the United Kingdom or, for that matter, anywhere else.

Who Are "The Elites"?

As per usual with lots of mainstream political definitions, they are unfortunately often rather obtuse and vague and of course we shouldn’t let the rhetoric of any of our national leaders pass unexamined.

So let’s look at what you actually have to do to qualify to be “the elites” first of all.

Wealth and Equity?

When we discuss “the rich”, we have to remember it’s very important to distinguish between “wealth” and “income” as they are not the same thing. As such, we are going to examine them separately here.

For the purpose of this article, we will define them thusly:

  • “Wealth” is defined as the total net worth of all an individual’s possessions and assets

  • “Income” of course refers to an individual’s total combined pre-tax earnings per annum.

Elite Wealth Stratification

Presuming that “the elites” and “the 1%” are basically interchangeable, if we look at wealth stratification in the UK as described by figures put out by the IFS, the threshold for being part of the 1% is actually rather low.

All you need to qualify for the “Elite wealth club” of the 1%, is to possess is about £700,000 in total equity. [3]

That sounds like a lot, however remember… I said “equity” and as such we’re talking wealth and not gross income here for now, which is an important distinction to make because this includes, for instance, the value stored in people’s homes and other assets. 

Of course, in the south-east of the UK, an average homeowner in a simple terraced house can easily have £700,000 of equity in their homes purely as a result of very high house prices.

This can be confirmed by looking at data from the online estate agent Zoopla, which shows that terraced houses in London are selling for nearly £700,000 as of 2019 (with the average being £644,215).  [4]

As such, to be part of the de facto 1%, all you really have to do is be an average homeowner in London or other areas in the nation where property prices are high.

Moreover, the ONS recently published figures showing that a majority of the wealth of this elite class is actually comprised of pensions and property [5], e.g. illiquid capital which is mostly tied up in strategic investments or homes which exist for the purposes of long-term security.

And no, when I say “strategic investments or homes which exist for the purposes of long-term security”, I do not mean speedboats, sports cars, mansions in the Maldives, FTSE 100 companies and so forth. Don’t get over-imaginative here, please.

Now of course, most people don’t have anything near this level of personal wealth, however that does not justify the Left’s hysteria about the 1% either.

I consider this to be a fairly low bar for being a member of the national ruling elite as far as wealth goes, and ultimately this shows why looking at some of these figures which might sound outrageous at face value as a guide to how wealth is stratified isn’t particularly useful, and certainly not as the basis for economic policy.

Elite Income Stratification

The IFS also recently published a breakdown of income stratification in the UK, and their findings were not as incendiary as some people hoped.

For example, according to the report from the IFS entitled “The Characteristics And Incomes Of The Top 1%”, to be part of the top 1% of earners in the UK, you need a gross income of £160,000 per annum. [3]

This translates to a monthly pre-tax earning of around £13,000. Assuming a 40 hour week, that’s a salary of about £80 per hour.

Now this, of course, is far beyond the earnings of those on the minimum wage, however it is not exactly million-earner territory either, which of course the rhetoric of the Left might have you believe.

For instance, who really earns £80 per hour? Sound outrageous?

Actually, as someone who has often been paid salaries of up to £25 per hour (depending on what I was doing) and is by no means part of society’s master class, let me drill down into this to clarify a few things.

Careerbuilder.co.uk recently posted a breakdown of jobs which would put you into the de facto 1%, with a short summary of some roles which pay £40 per hour or more. [5]

The roles which can provide incomes of £100,000 per annum includes:

  • Senior Software Developers
  • Doctors
  • Compliance Officers
  • Certain nursing practitioners.
  • Marketing managers

You’ll note that hedge fund managers, corporate CEOs, media moguls and so forth are conspicuously absent from this list. So the truth is, in reality, all you really need to break into the top 1% of earners in the UK is a degree, some training, some suitable private sector experience and a suitable private sector job

Again, hardly out of the reach of average working-class people for the most part (especially considering that universities have massively widened the demographic catchment of their freshers).

This is especially true when you consider that the average gross salary in the UK is around £35,000 per annum according to data from jobs engine Adzuna [6], while the median (or middle) gross salary (which attempts to account for the fact that national averages are distorted by the top 1%) salary is £29,400 according to the ONS.

In short, “elite earnings” of £100,000 per annum are still only about 4x – 5x the UK’s average earnings and all you need to do in order to land one is have some university level qualifications and a certain level of private sector experience. 

Hardly James Dyson material for the most part, is it?

What People Actually Give To Society Vs. What Society Takes Back

We also cannot make value statements for whether wealth and income is justified without looking at what earning groups actually give back to society in the form of taxation.

As such we need to break down what people get back out of the system and demonstrate net taxation figures, once tax contributions per income & wealth group are taken into account.

Parliamentary Research Briefings state that public spending per capita stood at an average of £9,350 for the entire UK in 2018. [7]

This figure is actually higher for Scotland (where public spending per capita stands at £10,881), Wales (£10,397 per capita) Northern Ireland (£11,190 per capita) and a good 3% lower (£9,080) for England.

The relevance of this is that if the state is spending an average figure of £9,350 per person per annum for the entire UK, then to balance the books, it realistically needs to take back at least this much on average per capita in taxation.

There are two points we can derive from this, which I shall now explore:

1. Working people earning the minimum wage earn nowhere near enough to pay enough tax towards covering what the state actually spends on them.

Given that public spending per capita in the UK averages £9,350 per capita, then as you can probably imagine, you have to be earning a substantial amount of money per year to actually reach the point where the tax you pay is equivalent to what the state spends on you each year.

If you think about it, the income tax threshold currently stands at £11,850, so it’s very difficult to pay substantial amounts of tax while being on a low income. Similarly with National Insurance and Council Tax.

Let’s break these figures down to demonstrate the point.

  • The minimum wage for a full-time worker brings in £16,224 for a 40-hour week over 52 weeks. 

 

  • This leaves just £4,374 eligible for the 20% rate of income tax, which yields an £874 income tax liability.

  • According to moneysavingexpert.com, the average council tax bill in the UK is £1,671 per annum. [10]

 

  • If we add in National Insurance, then for a 16,224 per annum income this adds another £911 of taxation liabilities. [11]

 

  • For VAT, we can presume that if a person earns £16,224 per annum and largely manages to spend all their money without saving any, then they would pay a maximum of £3,244 per annum because VAT is currently set at 20%.

So far, using some very conservative figures, this adds up to a tax liability of £6,700 per annum

With public spending per capita being an average of £9,350 for the entire UK, it’s pretty easy to demonstrate that the average tax take of around £6,700 per capita for minimum wage full-time workers does not cover this. In fact, it is a near 25% deficit.

In fact, the “break even” point here, according to accountancy firm Smith & Williamson in a Telegraph interview a few years back, exists at a salary of about £35,000 as the combined “tapering off” of state spending and benefits combined with the “tapering on” of higher taxation reaches an equilibrium point  here. [8]

So, a question we can derive from this statistic is:  how many people earn below the “break-even” threshold?

Wage stratification in the UK is divided up very unevenly. The IFS have a very useful data reference tool on this, which I have summarised to present annual rather than weekly income figures.

Referencing the IFS’ data on wage distribution, we can see that the vast majority of people are earning far less than the £35,000 per annum break-even point (and in fact there is a very interesting spike at the zero income boundary, which shows how widespread zero-earners are). In fact, the largest group within the salary spectrum are those who earn between £10,000 and £16,000 per year.

This means that the largest income groups in the country by population are not earning enough from their full-time occupations to actually be liable for enough tax per annum to cover what the state spends on them every year, because although they can still often pay between 20-25% of their income in tax, the actual cash figures of their tax burdens do not cover what the state spends on them.

This data shows that John McDonnells’ assertion that “the burden in terms of the tax take is falling on middle and low earners” is simply incorrect.

2.  The so-called 1% pay 25% of all taxes and the top 50% pay 75% of all taxes while the state tends to spend less on these groups overall.

Total Income Share By Bottom and Top 50% Of UK Tapayers

(Indexed Against 2015-2016)

As disclosed by HMRC in their publication entitled “UK Income Tax Liabilities Statistics”:

  • The top 50% of earners are already paying an astonishing 90.6% of all income tax revenue in the UK.

  • The fabled 1% themselves pay 50% of the income tax revenue which is levied from the top 50% of earners.

  • The bottom 50% of taxpayers pay only 9.4% of income taxes.

  • The top 50% of taxpayers contributed £160.2 billion towards the  £178 billion of overall tax revenue in 2015/16 (around 90% of tax revenues), and state spending per capita was roughly on par with present figures during this period (standing at £9,380 per capita according to Parliamentary Research Briefings). [7]

This means that contrary to popular rhetoric (much of it fulled by the misinformation spread by the left & the likes of Jeremy Corbyn and John McDonnell), the middle-classes and de-facto wealthy have been paying pretty much all of the taxes we rely upon to keep the country running smoothly and to support public services and government expenditures.

3.  The gap between what people pay in taxes and what the state spends upon people is largest at the lower-end.

Moreover, the top 50% of taxpayers tend to rely less upon the state in terms of provisions, as they are more likely to have private healthcare and suchlike and of course do not claim in-work benefits such as working tax credits because, of course, welfare eligibility tapers off as gross income rises.

As such the average figure of state-spending per capita is tilted away from this group of taxpayers. Indeed, the IFS’ data shows that the bottom end of earners are actually doing well out of working subsidies for low-earners.

Low earners on a fairly modest annual wage are being subsidised by up to 90% of the total value of their gross take-home pay.

To contrast this, those earning even relatively high incomes are taking serious losses as a result of their high tax liabilities, because they get so little from the state while paying so much back into it.

Effective Public Spending Subsidy Vs. Income Group

As the IFS’ figures presented in the graph aboves shows, those earning relatively high salaries of around £100,000 per annum are making an annual loss of around £28,410 (~28%) on their “investment” in the state, due to the way state spending tapers off as overall taxation rises in line with income.

Meanwhile, those on relatively low incomes of around 10,000 per annum are receiving an extra working subsidy of £9,450 (over 90%), due to the way that the combination of in-work benefits and state spending (in terms of the use of public services and provisions, and other relevant factors) tapers on as income drops.

Conclusions

Naturally I realise defending the well-off and criticising the poor isn’t likely to be popular from the perspective of public policy options.

However… we have to have a frank and honest discussion about this and ask ourselves if it’s necessarily right and proper that a very limited set of very-high income people pay for virtually all of society’s bills, and effectively subsidise those who are basically working part-time and being supplemented by welfare.

Just to be clear, I am in no way suggesting that taxes ought to be “jacked up” for the working poor or anything of that nature, because this  question is not limited to what people pay in. It’s also a question of what the government spends per capita. As such, I feel the real question here is about the role and scope of the state, the benefits system and of course peoples’ reliance upon it.

In short, the solution to this problem is to create policies which assist & encourage the poor to become more successful, ambitious, independent and to rely less upon state subsidies.

The bottom line is that we need both workers & UK businesses to be more productive and to contribute more to the health of the economy, however… popular outrage about the 1% is completely unfounded, and as such the laughable envy policies of mainstream politics should be ignored, derided and debunked wherever possible.

The middle classes and the de facto wealthy already pay virtually all of society’s bills. Let’s not be ungrateful for that fact.

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