For some time now, I have observed an interesting debate about wealth inequality in the UK and other developed nations on various social media platforms. Very briefly, the chief protagonists argue that growing wealth inequality is the cause of slow growth in developed economies and, in turn, argue that wealth must be taxed more heavily to create a fairer society and higher growth rates.

As is so often the case, the arguments are full of passion but more often than not, devoid of facts that objectively demonstrate a causal link between wealth or income inequality and slow growth or even a relationship between relative levels of inequality and relative growth rates across different economies. Some famous economists and political theorists have written many interesting pieces on this subject, from Marx to Stiglitz and, more recently, Thomas Piketty.

Piketty’s widely read work was the subject of an IMF paper written in 2016, which looked for evidence to support his claims. It looked at 19 advanced economies over 30 years. It found no empirical evidence to support his conclusions that more unequal capital distribution in an economy would inevitably lead to even greater future inequality and the eventual breakdown of democracy. Indeed, the IMF paper shows that in 75% of the countries it looked at, the long-run evidence directly contradicted the foundational relationship between the return on capital and the output growth rate that Piketty based his theory on.

In my view, this debate on equality is unsurprisingly the product of pre-determined political opinions rather than the objective analysis of economic reality. Maybe the fact that Piketty is the son of militant Trotskyite parents may have had more influence on his conclusions than the observed facts, which contradicted them.

For those of you who have got this far into what may appear to be a somewhat dry subject, I should come clean and outline where I stand on this debate. Later in this blog, I will also seek to support what I say with some easily accessible data. But first, as promised, I should say a few words about where I stand on this highly political issue.

Instinctively, I am much more in the Milton Friedman camp on this issue, rather than, for example, in the Keynes school of thought. Unlike many modern protagonists in this debate, Friedman supported his conclusions with extensive research and empirical analysis of the long-run history of the US economy, including moments of crisis and their causes. In summary, Friedman, a Nobel laureate economist, believed in the power of free markets and minimal government intervention in the economy. He concluded that there is a harmonious order where individuals' natural instinctive urges and desires are channelled into the interests of society and that this channelling is best done through competitive private markets rather than through laws and government edict. The central theme of his writing is that the market economy is much more effective in promoting freedom, prosperity and equality than centrally controlled mechanisms delivered by governments. He also went on to warn that a society that puts equality ahead of freedom will end up with neither.

These themes — how economic freedom, policy choices and capital flows shape growth — are central to how I invest. If you’re interested in seeing how this analysis informs real strategies, W4.0 gives you full access to the portfolios I’ve built and the logic behind them.

Having strayed maybe a little too far into an intellectual debate, I should now focus on some facts and interesting data, specifically on the distribution of wealth and income and who pays tax here in the UK. Although the data will not address all of the issues around this intensely political debate, it should at least highlight the flaws in many of the opinions that social media platforms are full of.

Some initial observations

Those who claim that there is a relationship between income and wealth inequality and economic growth tend to be long on opinions and very short on data and facts to support their arguments. Not surprisingly, this is because there is absolutely no clear evidence to support this claim either over the long-run recorded economic history of the UK economy or more recently or internationally.

Indeed, as a preliminary observation, the most unequal developed economy in the G7 is the US economy; it is also the most unequal economy in the OECD (38 countries), along with Mexico and South Africa. (As measured by the OECD) Despite this, it has since 2000 been the fastest-growing G7 economy, especially since just before the pandemic. India is the fastest-growing large developing economy (not in the OECD). However, according to Oxfam and the World Inequality Database, it is considered to have among the world’s highest wealth and income inequality.

Returning to the UK, I have tried and failed to find any data or academic study that supports the contention that wealth inequality is correlated with economic growth here. Indeed, surprisingly, I found some evidence to the contrary.

An AI-generated search for evidence yielded the following searing insight, which says it all.

“There is some evidence of a relationship between UK economic growth and wealth inequality, though the nature of that relationship is complex and not always straightforward. While some studies suggest a positive correlation (higher growth leading to greater inequality – note the way the correlation is presented), others find that lower growth rates can be associated with declining inequality”

The “research” goes on to name a number of studies that appear to conclude diametrically different things. For example, an LSE study found evidence that economic inequality is good for growth and evidence that inequality can be detrimental to growth. A Centre for the Understanding of Sustainable Prosperity study also observed that lower growth rates are as likely to be associated with declining inequality in recent UK history.

In other words, there is no correlation between income and wealth inequality and growth in the UK or the rest of the world.

My observation is that the determinants of growth are complex and multidimensional, and include many other more important things than income and wealth inequality. For example, population growth, immigration levels, the stability and nature of governments and economic policy, central bank independence, entrepreneurialism, technology development, capital flows, regulation, interest rates, tax, inflation, wars, pandemics, etc. The list goes on, but you get the picture. I believe the attempt to isolate wealth and income inequality as a determinant of growth outcomes is entirely politically motivated and not rooted in independent, evidence-based analysis.

However, whether greater wealth and income equality should be a wider societal goal is a different question, as indeed are the choices those in power make to achieve it. My observations are that even if we all agree that a well-functioning and happy society will likely exhibit greater equality rather than less in many things, as with everything in economics, policy choices to achieve that goal will have costs and benefits.

In the process of putting this note together, I found some really interesting data on income, wealth, and taxation here in the UK that I thought would both interest and possibly surprise you. So, the next section looks at these issues and puts some recent historical context around the data.

UK Income distribution and taxation

Before drawing any conclusions about the fairness or otherwise of the distribution of income and taxation in the UK, I first wanted to present the data. There is quite a lot of it in this next section, but the salient points are, I think, very clear.

The first table below shows the income tax liabilities of the three different taxpayer groups in the UK, namely, the basic, higher rate, and additional rate bands, and how they have changed over the last eleven years. The data is fascinating, especially in relation to issues of equality and fairness and how they have evolved since 2014/15.

The key issues that emerge from this data are as follows:

1. In 2014/15, 25.1 million basic rate taxpayers paid £56.4bn in income tax out of a total of £167bn in income tax paid by all taxpayers. That equates to 33.8% of total income tax receipts. By 2024/25, that same group of taxpayers, which had grown to 29.5 million, paid £82.8bn out of a total income tax take of £301bn. Consequently, this group's share of total income tax fell over this period to 27.5%.
2. In 2014/15, 4.3 million higher-rate taxpayers shouldered 37.5% of the total income tax liability. By 2024/25, that same group numbered 6.31 million taxpayers (out of 37.4 million), paying 31.1% of the total income tax liability.
3. In 2014/15, additional rate taxpayers numbered just 328,000. (1.1% of total taxpayers) That year, they paid £46.7bn in income tax, 28% of the total income tax liability. By 2024/25, there were just over 1.1 million additional rate taxpayers. (3% of the total number) They paid £124bn that year, 41.2% of the total income tax liability.

The chart below summarises some of this data graphically.

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Some observations from this data.

1. Over the last eleven years, the share of the nation’s total income tax liability borne by additional rate taxpayers has increased from 28% to 41.2%, a nearly 50% increase. The share borne by basic rate payers has fallen from 33.8% to 27.5%, a 19% decrease.
2. Only 3% of taxpayers shoulder 41.2% of the total income tax bill.
3. Nearly 80% of taxpayers (basic rate payers) pay only 27.5% of the total bill.
4. Over a slightly different but longer period (2009/10 to 2023), IFS data shows that high-income households in the UK saw significantly weaker income growth than people on average or lower incomes.

This may not be the socialist utopia many bloggers appear to crave, but I think it is getting close. Furthermore, from an income and tax perspective, the data shows that far from becoming less equal, the UK has moved decisively towards greater income equality over the last eleven years.

Another proxy for lower income inequality is the near doubling in real terms of the national minimum wage, now the national living wage, since it was introduced in 1999. This growth has massively outstripped average income growth over the same period.

One final point on low incomes. The OECD has estimated that the UK’s NLW is the eighth highest amongst OECD members, considering the cost of living differences in the 38 member countries.

UK wealth distribution and tax

This is a big subject with lots of data available to look at. As usual, how the ONS collects and analyses data has changed over time, making comparisons difficult. It is also the case that the Land Registry has recently changed how it calculates average house prices by apparently better reflecting the types of properties sold and their regional locations in its calculations. This means that its estimated average UK house price has been reduced by about 8% and now stands at £268,000. (As at the end of 2024) This reduction has not resulted in any changes to house price inflation data because the data has been “re-referenced”.

Although a little outdated, the ONS data on wealth is useful in some respects. What it shows is that net property wealth, unsurprisingly, makes up the largest proportion of total household wealth (40%), followed by private pension wealth (35%), net financial wealth (14%) and physical wealth (cars, paintings, etc), making up the remaining 10%. The data shows significant regional differences in median household wealth, for example, between the South East and the North East, and unsurprisingly, between different age cohorts, with the richest households in the 65-74 age group. (Age of household “head”)

In the latest ONS report on wealth distribution in the UK, as usual, the comments are prefaced with the customary rhetoric about inequality. For the two years between April 2020 and March 2022, the report states that the wealthiest 1% of households held 10% of all household wealth in the UK, the same proportion held by the least wealthy 50% of households. (Let’s not forget that the richest 3% of income taxpayers pay nearly 42% of all income tax) In concluding that this is unequal, the ONS clearly states the obvious, but a more useful judgement, and one not viewed through a utopian lens, would be to compare this distribution with wealth distribution in other economies. (See below)

To summarise the position in the UK for this period, the ONS provides a handy chart on the distribution of wealth by decile across the four different categories of wealth as shown below.

As I’ve already said, the ONS report doesn’t show how the UK’s wealth distribution compares with other countries, both developing and developed, worldwide. For that data, I found a 2022 Global Finance report which ranked world inequality by country using data compiled by the Paris School of Economics.

This data is very interesting. It ranks countries (inequality ranking) based on the sum of all incomes received by individuals across 169 countries in 2022. The sum of all incomes includes income from employment and wealth, so the measure is a proxy for a blend of income and wealth inequality.

I won’t reproduce the data here but will just highlight some of the most interesting results. (The ranking is by reference to the proportion of all income earned by the bottom 50%, the top 10% and the top 1%)

The most unequal countries are all developing economies in Africa, the Middle East and South America. The first G7 country on the list is the US, at 71, sandwiched between Iran and Senegal. Interestingly, China is 82, Canada is 99, Korea is 105, Australia is 107, Japan is 119, Germany is 137, New Zealand is 142, and the UK is 146 (out of 169), between Azerbaijan and Belgium. The three most equal countries are Norway, Iceland and the Czech Republic in that order.

The first and most obvious point from the data is that, yet again, it shows higher inequality is not at all correlated with slower growth. If anything, the league table shows a trend towards an inverse correlation between inequality and growth. What it also shows is that the UK is considerably less unequal than many of its developed economy peers and is considerably less unequal than four of its G7 partners (Italy and France do better than the UK on this front, but also have a very poor growth record).

The report concludes by saying that Europe remains the most equal of all regions, with the top 10% receiving 36% of national income (the UK’s top 10% receives just under 36%), a position it says is achieved through redistribution mechanisms in the tax system. (See above!)

Conclusions

Yet again, this note has turned out somewhat longer than I had expected. It was always going to be a bit wordy because this is a big and technical subject. However, I hope I have covered enough of the important bases in enough detail to give you a rounded perspective on this emotive subject. Here are my broad conclusions:

1. Many well-known podcasters, social media commentators and politicians drone on about inequality in the UK. The consensus message from these individuals is consistent. We live in a society with growing wealth and income inequality, and most suggest that this is handicapping the UK’s ability to grow and prosper.

2. Put simply, these are overt political opinions that are not supported by any objective analysis of data and facts. To be very clear, inequality in the UK is decreasing, not increasing. The UK is a relatively equal society from a wealth and income perspective compared to both developed and developing economy peers.

3. There is absolutely no observable relationship over history or internationally between wealth and income inequality and economic growth. On the contrary, the world’s highest-growth economies typically have the lowest scores on wealth and income inequality.

4. A multitude of important variables determine economic growth, but inequality is not one of them.

5. If politicians fail to recognise the limits to redistributive policies designed to create fairer, more equal societies, they will inevitably bump into the Laffer Curve, tax revenues will fall, risk-taking will be stifled, and an exodus of capital and entrepreneurial talent will eventually kill the economy. My guess is that this is one of the most important problems confronting Western European economies right now and may well be one of the most important causes of Europe's recent poor growth record.