Budget 2013: Reducing inequality should be at the forefront of Osborne’s mind today

The defining societal trend in the UK over the past 30 years has been the growth in inequality, with an ever higher share of the national income captured by a wealthy elite, while the wages of ordinary working people stagnate. Redressing the balance need not come at a cost to enterprise.

Luke Hildyard is a researcher at the High Pay Centre

The defining societal trend in the UK over the past 30 years has been the growth in inequality, with an ever higher share of the national income captured by a wealthy elite, while the wages of ordinary working people stagnate.

In 1979 the richest 1 per cent of the population controlled about 6 per cent of the national income. By 2007, this figure had grown to 15 per cent.

Since 1998, the pay packages of FTSE 100 company chief executives have risen by nearly 500 per cent – for the average worker, the pay increase over the same period has been around 15 per cent.

The UK is also the 7th most unequal OECD country, with only Israel and the USA, plus the poorer economies of Mexico, Chile, Portugal and Turkey, worse off.

It is the reversal of these destructive, destabilising and unfair trends that ought to be the government’s number one priority, at the forefront of George Osborne’s mind when he stands up to deliver his budget today.

In this context, Osborne’s decision to reduce the top rate of tax from 50p to 45p on earnings over £150,000 seems perverse.

Research for the High Pay Centre suggests that if 10 per cent of the income of those who fall into this tax bracket (about 0.9 per cent of taxpayers) were redistributed (or predistributed) to the bottom 25 per cent of earners, it would boost their income by an average of 55 pence an hour.

This would bring the average hourly wage of those in those in the bottom quartile to £7.35 – just 10p short of the living wage outside London.

In other words, a very minor reduction in the incomes of a tiny proportion of the population – who would remain very wealthy indeed by most people’s standards – would go a long way towards eliminating the problem of people in gainful employment remaining unable to support themselves, if appropriately redistributed.

Measures to make this happen could include, for starters, a reversal on the 50p tax rate. The link between social security payments and inflation should also be maintained.

Further revenue could be raised by reviving the tax on bankers bonuses, briefly introduced by Labour, and extending it to so-called ‘long-term’ incentive plans and the wider corporate sector, where performance related pay has also grown to distasteful levels, despite the absence of any apparent improvement in performance.

Bringing Capital Gains Tax in line with income tax would help to counter the growing share of national income accounted for by profits in relation to wages.

This has greatly benefitted the rich, who receive a disproportionate amount of their income in profits, at the expense of low and middle income households, whose earnings are mainly in the form of wages.

Redressing the balance need not come at a cost to enterprise.

In her ‘Re-balancing What?’ pamphlet for Policy Network, Mariana Mazzucato shows that there is little evidence to suggest that lower Capital Gains Tax rates have enabled greater private sector innovation – instead, they have merely increased the returns from the typical, short-term venture capital investments in companies that are already at an advanced stage of development.

Osborne will know better than most that these kind of measures are important, not just as a means of tackling inequality, but also for symbolic reasons.

The Conservatives plummeted in the polls after the 50p tax cut rate in 2012, and Tory peer Lord Tugendhat warned last week that when the incomes of the very richest in society “so far outrun those of the people who work for them and the population at large, they lose moral authority, their words will be discounted and the business case on economic and social matters will go by default”.

This is sage advice – and it is hoped that Tugendhat’s party colleagues in the Treasury will heed it.

4 Responses to “Budget 2013: Reducing inequality should be at the forefront of Osborne’s mind today”

  1. Corrupt_B'stard

    The simple and inevitable answer is to pay an unconditional basic income to every citizen, regardless of their circumstances. This would not only irradicate poverty in one fell swoop, it would give everyone the time and freedom to follow their passions in life and the resultant plentiful benefits that would bring to society and our world as a whole.

  2. Ash

    Just to point out that you’re taking a very narrow view of inequality here by focusing on the incomes of the top 1%. Of course the share of income taken by those people is part of the problem, but it’s the very unequal spread of incomes between ordinary low-income, middle-income and high-income households that really does the damage.

    The authors of the Spirit Level often refer to a measure based on how many times richer the top 20% are than the bottom 20%. (Very roughly speaking, you’re talking there about the difference between people paying the 40p rate of income tax and people who don’t earn enough to pay income tax at all.) And inequality between the bottom and the middle matters too – if the middle 20% are *much* better off than the poorest 20%, you have an ‘underclass’ of people who can’t do many of the things ordinary people take for granted.

    So tackling inequality is not as simple or as politically palatable as just (p)redistributing income from the top 1% to people in low-paid work. We also have to guard against the incomes of mid-to-high earners pulling away from the incomes of people who rely wholly or mainly on benefits (including the state pension). This is something that has always worried me about things like the raising of the personal allowance, and a focus on ‘the squeezed middle’ in general – especially when combined with cuts to benefits and tax credits, the risk is that we end up increasing inequality between low-income households scraping by on £10,000 or £20,000, and households towards the top of the income distribution with incomes of £40,000 or £80,000.

  3. Newsbot9

    Why it pulls away isn’t salaries. It’s unearned income. Which is lower tax, and generates cash simply by BEING.

  4. 99

    The top rate taxpayers 2013_2014 are paying 52% (including 12% NI) on an income between £32,011_41,000 . Second place goes to those on incomes over £150,000 with a rate of 47% (including 2% NI). Third place goes to those on incomes between £42,000_149,999.

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