Income and Wealth Inequality in England

I’ve just returned from a trip to England and spent a little time looking at the society as Thomas Piketty might (see my review of Capital in the Twenty-First Century).

England’s economic performance has been mediocre during many of the post-World War II decades, leaving it with a per-capita GDP of $37,300 compared to $52,800 in the U.S. and $62,400 in England’s former trading post of Singapore (source: CIA Factbook, purchasing power adjusted). Mancur Olson used Britain as an example of how a rich stable society can stagnate due to politically powerful groups steadily skimming off wealth (see my March 2009 posting on Mancur Olson):

“Great Britain, the major nation with the longest immunity from dictatorship, invasion, and revolution, has had in this century a lower rate of growth than other large, developed democracies. … Britain has [a] powerful network of special-interest organizations.  The number and power of its trade unions need no description. [Olson wrote this book just as Margaret Thatcher was coming to power.]  The venerability and power of its professional associations is also striking.  … Britain also has a strong farmer’s organization and a great many trade associations.”

“[Britain's interest groups] are narrow rather than encompassing.  For example, in a single factory there are often many different trade unions, each with a monopoly over a different craft or category of workers…”

Olson notes that slow growth can’t be due to something inherent in the British character, because the country was the world’s fastest growing from 1750 until 1850.

The United Kingdom’s Gini coefficient is lower than that of the U.S.’s, so in theory it should be closer to Piketty’s ideal society. How does it feel on the ground, though?

First of all, there are some advantages to living in the U.K. that people at all income levels share. One can be outside in the summer time without getting eaten alive by mosquitoes (but bring an umbrella!). Restrictions on architecture and building mean that a lot of towns are beautiful and/or charming. Consider the value of a stroll around Paris compared to a stroll around a typical U.S. city. Due to a more or less free market in air travel and short distances, flights to interesting locations in Europe are affordable to everyone.

On the other hand, the restrictions on architecture and building mean that a single-family house with windows on four sides and a little yard is out of reach for most Britons. In a lot of places, if you can’t afford to build a beautiful house out of stone then you can’t build a house. Slapping up a McMansion for $300,000 and luxuriating in 4000 square feet is certainly out of the question. The bottom half of the income distribution seems to live mostly in apartments or attached houses (townhouses; sharing walls with neighbors so that there might be windows only in the front and back). This is advantageous because the higher density means it is more likely that a person can walk or use public transport, also a good thing because non-rich Britons seem to have pretty basic automobiles or don’t own a car at all. The road network is absurdly brittle and clogged with traffic. A “highway” between two cities might have no shoulder and lanes that are just barely wide enough for two trucks to pass. If a car breaks down or any repairs are needed, the “yummy mummy” in her $100,000 Range Rover will be stuck in a one-hour traffic jam. Internet for the home and mobile voice and data services are cheaper than here in the U.S. However, mobile data rates are absurdly slow, coverage is poor, and 4G is a theoretical concept outside of London. It hurts me to admit this, but my friend Mark might right when he says “Verizon is like democracy: the worst cellular service, except for all the others that have been tried from time to time.” Hotels, restaurants, and shops try to compensate by offering free WiFi but upload speeds are too slow (e.g., 100 kbps) to make it practical to, for example, email a photo to someone.

London is like a separate country in terms of wealth but it is hard to know whether it is fair to roll that into British wealth/income inequality. England taxes foreign residents on their English income, not on their worldwide income, so a lot of high-income/high-wealth people, e.g., from Russia or the Arab world, establish residency in London for convenience and stability. This puts tremendous demand on London real estate but if the Four Seasons built a resort in your town and a lot of rich foreigners came there to stay would you then say that your town had become less equal?

Even if we exclude the foreign billionaires, the lifestyle gap between rich and poor in England seems pretty stark. The rich Briton will have a London flat, a beautiful country house in the Cotswolds (see these photos), a couple of fancy new cars, and maybe a vacation house in France, Spain, or Italy. The lower middle class Briton will live in a dark attached house or apartment, commute via bus or train (without air conditioning!), and go on packaged holidays.

How did the rich get their money? Did they get it the honest Piketty-approved way (i.e., by getting PhDs and then working at a university)? Via marriage as Piketty describes? Or via inheritance as Piketty decries?

British Airways was kind enough to give me a free copy of the June 30, 2014 Daily Mail newspaper. The 76 pages contain the following stories that are explicitly about how people got money:

  • one story about a woman who started life in public housing (“a council semi”) and after a series of divorces from wealthy men, now has at least $100 million in assets.
  • a story, “Benefit grabbing extremist who hates Britain”, about a 35-year-old man who lives in public housing and collects unemployment and disability.
  • a story about a mother who looted her son’s $85,000 trust fund to buy “luxury clothes” and to redecorate her home
  • a story about the salary to be earned by the incoming president of the European Union

Other stories hint at the value of inheritances, e.g., an article on the Duke and Duchess of Cambridge ripping out a new $85,000 kitchen to install one with a different design. But most of the stories concern people who have risen to prominence and/or wealth via hard work. Dolly Parton is on the front page for “dazzling” the Glastonbury Festival‘s crowd at age 68 (I was part of the crowd and would agree with the Daily Mail’s editors); as Parton is childless she will not be offending Piketty by creating a dynasty with her wealth. The interior pages are studded with pictures of tennis stars at Wimbledon and soccer stars in Brazil. It doesn’t seem as though these people were born wealthy, e.g., Andy Murray attended a government-run school, the Wikipedia page on James Rodriguez doesn’t say anything about his parents being rich.

Prior to going to Glastonbury I went on a four-day cycling trip around Oxfordshire and the Cotswolds. The guides pointed out some fancy houses that were owned by people who had been successful in business or entertainment. Piketty’s theories about people resorting to what the Victorians called “fortune hunting” (a term that may have originated in the 17th century) were not directly confirmed by the guides, who did not talk about anyone having gotten rich by marrying and staying married (though they did point out some spectacular houses that had been won in litigation by divorce plaintiffs).

After the bike tour, I stayed in a luxury camp adjacent to the Glastonbury festival proper. A restaurant owner in his 50s explained how his ex-wife had made her fortune. “We were married for about 18 months. She insisted that I get her a new BMW, the most luxurious vacations possible, designer clothes. I did it to keep her happy, but then after she sued me my solicitor explained that this established a baseline lifestyle that I would have to keep her in for at least 10 years.” He chose to pay his plaintiff a lump sum rather than monthly alimony. What does a Briton stuffed full of enough cash never to work again do? “She moved to Spain and took our young daughter with her. So I bought a house in Spain to make it convenient to visit the child. Then she moved to France and I was left with this house. I tried using lawyers to stop her from moving about but wasn’t successful.” What about child support? “Roughly the first 100,000 pounds [$170,000] that I earn every year goes to pay my ex-wife and for my costs in traveling to see my daughter.” What’s the interaction with the now-15-year-old like? “She is busy with her friends and her life so sometimes when I visit there is only about 15 minutes per day of real interaction. If she wants me to buy her something, like a replacement mobile [phone], then she pays attention.”

[There was apparently an emotional toll to be paid by the defendant and child in addition to the wealth extracted by the plaintiff. "I probably have spent at least 30 percent of my energy being angry with the woman who sued me, about 25 percent of my energy working to pay all of her expenses, and another 20 percent of my energy traveling to visit my daughter. There isn't a lot left for giving to [his current partner]” How about forgiving and forgetting? “She is always pulling some new stunt to make it difficult for me to see our daughter, which makes me angry all over again, not to mention the monthly payments to someone with whom I was barely acquainted.” He was there with a long-term girlfriend, blessed with a kind disposition. Perhaps she would be a moderating influence? “We can never get married,” she explained, “because then [the daughter's mom] would be able to collect half of my income. Sod her.”]

What did we see on the ground about Piketty’s main point of irritation, i.e., the establishment of family dynasties? During the bike tour we visited Blenheim Palace, a spectacular example of wealth via inheritance, though the property taxes and inheritance taxes have made it tough to hang onto. We saw a lot of farms that were probably inherited. Death/inheritance taxes on these farms are probably pretty painful but on the other hand the farmers didn’t look as though they were hurting and they are presumably benefiting from EU agricultural subsidies. The folks in the luxury camp at Glastonbury all seemed to have earned their money rather than inheriting it, though among the musicians themselves (list with video links) there seemed to be a tremendous value in inheriting fame and connections from one’s parents. For example, Seun Kuti appeared on stage with his father’s old band, and Toumani and Sidiki, a father-son team from Mali, appeared on the main stage and announced that they were the 72nd continuous generation of father-son musicians in their family.

In some ways England should be a cautionary example for fans of Piketty’s proposed tax policies. In the 1960s and 70s, the country experimented with very high tax rates on its most successful citizens. Facing up to 98% tax rates, the Rolling Stones for example, effectively emigrated for business purposes (see this 2007 New York Times article on the Stones and U2 and also Life by Keith Richards). It seems as though the country has never truly recovered from this experiment and the resulting lost growth.

Piketty is a fan of bigger government and heaps scorn on the U.S. health care system (admittedly the dumbest conceivable way to run anything). But the National Health Service in Britain may be beginning to fray. People are waiting a long time for visits with primary care docs (of whom there are fewer per capita than in France, for example) and Bad Pharma: How Drug Companies Mislead Doctors and Harm Patientsgives examples of at least $1 billion per year in wasteful drug spending (e.g., on brand name drugs instead of generics). Complaints about the NHS occupy a lot of space in newspapers (though the people I talked to seemed reasonably satisfied with the care they were receiving).

The British are very proud of their victories on World War I and World War II and there are constant reminders of these eras throughout the country. The country has the will to spend insane amounts of money to make a military point, e.g., buying a fleet of Lockheed L-1011 aerial tankers so that fighter planes could be ferried to the Falkland Islands in the event of another war with Argentina  (recently replaced with shiny new Airbus A330 tankers). But a Glastonbury attendee pointed out “Given the decline of our manufacturing I don’t think we’d want to go up against the Germans right now. Fortunately they seem to have lost their passion for war.”

Perhaps Piketty is right that a world government, a global tax on wealth, and a dramatic increase in government efficiency could result in improved growth and human happiness. But my take-away from England is that it doesn’t work if a country tries to do this on its own. Maybe inequality by the numbers will fall a little bit, but the overall level of prosperity will slip compared to successful countries such that essentially everyone is worse off than they would have been under a system that is less antagonistic towards the economically successful.

13 Comments

  1. Malders

    July 3, 2014 @ 12:01 am

    1

    Very strange article. I don’t know where you got the idea that the UK has slow mobile data. EE has LTE covering 80% of the population and the other networks are catching up fast too. There is also very dense DC-HSPA+ coverage outside that which often gives me 20mbit/sec down and 3mbit/sec up.

    If you were roaming internationally then your carrier may throttle your speed significantly. I know my results on at&t and t-mobile when I roam are very poor.

    The UK is on target to hit 95% coverage of ‘superfast’ broadband (which is usually 80/20mbit) next year.

    The rest of the article is equally as bizarre. The Daily Mail is renowned for posting absurd sensationalist articles like you read and anyone remotely intelligent would surely laugh at how ridiculous it is.

    Finally, the UK has in my eyes increasingly competitive taxation, like a flat 20% corporation tax level, which is dramatically less than the US. The top rate of income tax is 45% which applies at an income of £100,000 or above is probably high compared to the US but not ludicrously so after state income tax is taken into account.

  2. jay c

    July 3, 2014 @ 4:56 am

    2

    I have traveled to Cambridge many times for work. The things that strike me about the UK are how shabby and expensive everything is. I think that the high taxes are probably what caused under-investment in properties and plants. For the cause of the decline of the UK’s manufacturing, I think the labor unions and the attitude of plant owners didn’t help either. Which is sad, because except for engineering services, (ARM, Ricardo), niche manufacturing (Rolls Royce Engines), and industrial equipment (JCB) what else comes out of the UK these days besides Syrian freedom fighters and expatriate divorcees?

  3. philg

    July 3, 2014 @ 7:05 am

    3

    Malders: Maybe it was because we were roaming (me with a Samsung Note 3 from Verizon; my nephew with an iPhone 4S from AT&T) but we got very slow data rates from Vodaphone and EE. Even the voice coverage was feeble in the Cotswolds and down near Glastonbury, often just 1 or 2 bars.

    As for tax rates, there is no question that the UK has lowered them quite a bit. If the all-in top rate is 45% that’s actually lower than the U.S., where a Californian or New Yorker can pay income tax rates of roughly 50% (combining federal, state, and local/city). My point was that the UK has apparently not recovered from its experiment with tax rates through the 1970s. See http://en.wikipedia.org/wiki/Taxation_in_the_United_Kingdom for how these were as high as 98% for income over about $300,000 in today’s money. A 1% difference in annual economic growth is the difference between becoming the U.S. and becoming Argentina.

  4. thomasd

    July 3, 2014 @ 7:21 am

    4

    There Agricultural Relief scheme can make a pretty big dent in the inheritance tax on a farm.

  5. TH

    July 3, 2014 @ 7:45 am

    5

     http://www.pieria.co.uk/articles/pervert…] suggests that the tax might be pretty small “largely designed to gather information and promote transparency, which is why Piketty puts it as low as 0.1%”. Other news such as this BBC article  http://www.bbc.com/news/business-1894409…] do make me think that the uber wealthy have unfair systemic advantages. I never understood the conservative zeal behind repealing death taxes. David Lloyd George said it well “Death is the most convenient time to tax rich people”. Yes, inequality in wealth, talent, beauty and fame is a fact of life. Many are too obsessed with fairness at any cost (you have justifiably pointed to the costs of our legal framework in previous posts). The question here is whether something is out of “natural” balance, whereby some on the spectrum of wealth enjoy extra systemic advantages. Could be. For the record, I seriously doubt that a complex system such as an economy can be explained with a simple inequality r>g. We’re not dealing with a physical phenomenon like gravity, but rather with a social and cultural setup.

  6. philg

    July 3, 2014 @ 8:17 am

    6

    TH: Thanks for the links. I don’t think the BBC article on wealth in tax havens that you cite supports Piketty’s theory that the uber wealthy get higher returns than ordinary investors. It supports the theory that rich people are rich and that they don’t like to pay taxes (or that they made money in a country whose stability they question).

    (And in fact, tax havens sometimes offer lower returns on investment, e.g., http://www.zacks.com/stock/news/87942/Swiss-Banks-to-Charge-for-Deposits is an article about the potential to earn a negative interest rate while holding Swiss francs in Switzerland.)

  7. jseliger

    July 3, 2014 @ 12:13 pm

    7

    How does it feel on the ground, though?

    There was a discussion of this a couple years ago; I wrote Europe, the United States, living standards, GDP, and the University of East Anglia (UEA)” and linked to the various others. The UK felt appreciably poorer than the U.S., at least when I was there.

  8. rossm

    July 3, 2014 @ 1:19 pm

    8

    Be aware that income tax is not the only large tax you’ll pay in the UK. There’s national insurance (NI) which an employee has to pay at about 12% of gross income. The employer also pays about 11% NI on the employee’s gross – it doesn’t show up on the payslip but I’d argue it’s still a tax on income. Finally almost everything that isn’t food (i.e. bought in supermarkets, not in restuarants) will be subject to value-added tax at 20% of the purchase price.

    For what it’s worth I used to earn about 50kGBP gross and estimated that my total tax burden was somewhere between 60% and 80%. That included the big three (income, NI, VAT) and the myriad small ones e.g. fuel duty, road duty, insurance premium tax, local government taxes, “sin” taxes, etc.

  9. michiel

    July 3, 2014 @ 2:30 pm

    9

    A low gini coefficient relates pretty directly to your ability to spend on local labour.

    Simplifying, it means you will spend more money on skilled labour less scarce than your own (say, construction workers, cleaners, restaurant staff), and less money on skilled labour more scarce than your own (surgeons, good plumbers, etc.)

    House prices are based on a bidding war with people with a similar income, and are constructed using locally sourced labour. So housing is likely to be more expensive in countries with a low gini coefficient, unless your skills are less scarce than those of a construction worker.

    The markets for food, entertainment and electronics are international, so the Gini coefficient is likely to be irrelevant.

    I’ve found that this little simplification actually explains a good number of observations Americans tend to make about Europe, and vice versa.

  10. Izzie L.

    July 3, 2014 @ 3:24 pm

    10

    I’m amazed that so often (despite the 1.6/1 exchange rate), items will cost the same # of UK pounds as US$ (meaning that everything is really much more expensive over there). For example, I just randomly looked up a set of Logitech Z130 speakers on US and UK Amazon.

    US price: $17.99
    UK price: £19.87

    HP 12-C calculator

    US price: $51.00
    UK price: £49.99

    Microsoft Wireless Mouse 5000

    US price: $21.42
    UK price: £23.99

    These are all for identical items.

  11. Malders

    July 3, 2014 @ 3:48 pm

    11

    Rossm, yes that is true but only up to £800/week of income (£41k) when it then becomes 2%.

    The big ‘problem’ in the UK is that if you’re self employed, either from running a business or being a contractor/freelancer, and you have a semi-decent accountant, you can get your tax burden down to a fraction of what people who are employed pay. So much so that there was a small scandal that a lot of people working high up in the government were actually setting themselves up as limited liability corporations and contracting to the government.

    As such, I really don’t know that many people that earn over, say, £100k that still participate in the normal taxation system.

  12. BillG

    July 3, 2014 @ 5:23 pm

    12

    Impressions of the UK from spending a few months on business:
    – 50% of the tv adverts were from banks
    – everyone is obsessed with the “property ladder”, where home owners climb up to ever more expensive homes riding a wave a endless price inflation
    – people seem ok with paying £400k for a 900ft2 30yr old home with green shag carpets in the kitchen
    – high end property in London mostly acts as a money laundering service for oligarchs

  13. rossm

    July 5, 2014 @ 10:01 am

    13

    Izzie L: You’re right – it happens with everything and it infuriates me. But people keep paying those prices so I don’t see them changing any time soon. Grrr.

    Malders: Partially true – the employee’s contribution to NI does drop to 2% above 800GBP/week, but the employer’s continues at the full rate (which I looked up: 13.8% this year). You can argue it’s not really a tax on income, but it’s a 13.8% tax on something. On the other hand on up to 7.5kGBP/year the rate for both is zero.

    Perhaps you have a better accountant than I do, but the tax reduction I got from starting a company was not huge. It means I don’t have to pay NI, and instead of paying the lower end of the income tax scale on my personal income the company now pays 20% corporation tax on its income. If the company pays me a dividend above something like 30kGBP/year I pay income tax on the excess. The company and I both still pay VAT, and all the “little taxes that add up”.

    I’d guess that it reduced my total tax burden from around 70% to around 50%. It was worth doing but it’s not going to have me laughing all the way to the bank. At least not in my situation. Perhaps it works better if you’re richer? I know if you start bending the rules (e.g. hiring family members as “directors”, creative “depreciation”, etc.) you can screw the effective tax rate down a bit more. I doubt you could get it below 35% without outright lawbreaking.

    BillG: Yes, houses are tiny compared to the US, but the location matters here too. The 900ft**2 house that’s 400kGBP in South East England is 40kGBP in South Wales.

Log in