Friday, 15 April 2016

Inequality — wealth

Inequality of income and wealth are often blurred in popular discussion. For example, when you hear someone refer to "the 1%", are they meaning in wealth, or in income? Does it even matter? I'd argue yes for two reasons. The first is demonstrated in the graph below, and I'll explain the other reason at the end.

The Wealth and Assets Survey in Scotland was published in March 2015 and provided data on wealth of households between 2006 and 2012. This data is drawn from the GB-wide Wealth and Asset survey analysed by the Office for National Statistics (ONS).

The data is split into three two-year periods: July 2006 to June 2008; July 2008 to June 2010; and July 2010 to June 2012. The figures I'll present are adjusted for inflation to be in 2012 prices.

Total household wealth in Scotland has fallen by 6% in real terms between 2006-08 and 2010-12. Most of the fall is caused by wealth held in the form of property which fell by 12%.

The total wealth for Great Britain (UK except Northern Ireland) in 2010-12 was estimated at £9500 billion, of which £714 billion is in Scotland. This is 7.5% of the GB total, and is lower than Scotland's 8.6% population share.

The graph below shows the household wealth owned by the ten deciles for each two-year period. Each decile represents 10% of the population (about 530,000 people).

The inequality in wealth is clear: the first decile owns near zero wealth whereas the tenth decile owns just under half of all wealth and two to three times that owned by decile 9. Wealth inequality for the whole of GB shows a similar pattern.

Household wealth shows much greater inequality than household income. For income in 2011-12, shown in a graph in an earlier post, the top 30% received 51% of the total, and the bottom 30% received 14%. For wealth shown in the above graph for 2010-12, the top 30% (deciles 8 to 10) own 75% of the wealth, and the bottom 30% (deciles 1 to 3) about 2%.

It's important to realise that the deciles for wealth and income are distinct. For example, it is not the case that the 10% of the population in the top decile for income are also in the top decile for wealth. A pensioner living in a home for which the mortgage is paid off may be in a high decile for wealth, but a lower decile for income.

The only decile to experience a significant drop in wealth — a 19% fall — over the six years is decile 10. This is plausible because the richest in society hold much of their wealth as assets such as shares and property and these saw significant falls because of the financial crisis.

Income vs wealth inequality

The first reason why it is important to distinguish between income and wealth inequality should be clear: inequality is much larger for wealth. And the second reason is involved in the first — tax.

Income, that is money paid in return for some form of work, is taxed progressively, in that the percentage paid as tax increases as income increases. Wealth on the other hand is hardly taxed at all. By my estimates, about 40% of Scotland's revenue comes from income tax and national insurance, whereas no more than 4% comes from taxes on wealth.

Ramping up income tax on the top 1% of high earners could reduce income inequality, but it'd have next to no impact on wealth inequality because the top 1% for wealth can, quite legally, benefit from returns on their wealth outside the income tax system. Part of the reason for this is because the very wealthy can optimise their tax across countries, but it's also because the wealthy do not receive most of their income from doing work, but as returns on existing wealth. For this reason Thomas Piketty and others have proposed a wealth tax at the EU or global level at seemingly modest rates of 1% to 3% per year.

A side effect of taxing wealth in this way is that we'd have much better data on it. Wealth data is much more uncertain than that for income, especially for the most wealthy,  and part of the reason for this is that countries need to monitor income to check taxes and decide who should receive benefits.

The implication of this lack of knowledge on wealth is that graphs like the one above underestimate wealth inequality. There's one way to confirm the problem: every debt is someone else's asset, and so at the global level the two must equal. If we add up all known debts in the world, it exceeds corresponding world-wide wealth; a conundrum that Piketty refers to as the Earth being in debt to Mars. These rich Martians are likely to have stashed their wealth in tax havens.

The next post will be the last in this week's series on inequality in Scotland, and it will look at debt which, if you squint carefully at the graph above, is just visible for the first decile.

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