Capital gains reveal extent of top one per cent income

A lot of capital gains are, in fact, just repackaged income going to the already-rich.
- Dr Andy Summers, LSE
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The top one cent received a far greater, and faster growing, share of the nation’s income pre-crisis than previously thought, if capital gains are included in official statistics, according to new research.

The research – a collaboration between the Resolution Foundation, LSE and CAGE Research Centre at the University of Warwick – uses confidential tax return data to build a fuller picture of incomes across the UK, specifically by including taxable capital gains. 

The report Who gains? notes that taxable capital gains are a major source of income in the UK, but are excluded from official income statistics. In 2017-18, £55 billion of taxable capital gains were recorded – more than double the amount recorded just five years earlier (£24bn in 2012-13).

The value of capital gains are not only large, but also concentrated among the very richest individuals. The majority of the UK’s taxable capital gains (£34bn) in 2017-18 were accrued by just 9,000 individuals, who each made gains of £1 million or more.

The report notes that despite being ignored in official income measures, these gains are often related to people’s work, and so have more in common with employment earnings than passive investment returns. They include the £24 billion of gains eligible for Entrepreneurs’ Relief and £2 billion of ‘carried interest’ for fund managers.

Adding these taxable capital gains to official income statistics significantly changes the distribution of income across the country, says the report, and deepens our knowledge of how rich the ‘super rich’ really are.

It finds that the income share of the top one per cent in 2017-18 was 16.8 per cent once taxable capital gains are accounted for, rather than 13.8 per cent as previously thought – meaning a sixth of all taxable income is accrued by just one per cent of adults. The income share of the top 0.1 per cent is also revised, up by 50 per cent to 8.1 per cent, from 5.4 per cent.

The inclusion of capital gains also changes the picture on how these income shares have changed over time, says the report. It finds that the income share of the top one per cent has grown by 3.1 percentage points since comparable data began in 1996-97 –twice as fast as previously thought.

The report notes however that just as the value of capital gains fell sharply during the last recession, it is likely to have fallen sharply during the current crisis.

The report authors say that getting a more complete picture of the scale and distribution of income across the UK is vital if policy makers are to make informed decisions about living standards and tax policy. Official income data should therefore start to include taxable capital gains, as well as other major sources of incomes, such as the £25bn a year pension lump sums, that are also excluded.

And as the Government starts to think about Britain’s post-pandemic future, the report raises questions about whether the lower tax rates for capital gains over other income – which overwhelmingly benefit super rich households – can continue to be justified in a country that will need to raise more revenue.

Dr Andy Summers, Assistant Professor at LSE, said:

“Capital gains are taxed at much lower rates than regular income, but the legal line between these is very blurred. This means business managers have a big tax incentive to take their rewards as gains instead of salary or dividends. When we look at the types of gain going to people at the very top, that’s exactly what we find. A lot of capital gains are, in fact, just repackaged income going to the already-rich.”

Adam Corlett, Senior Economist at the Resolution Foundation, said:

“Capital gains are now a major source of income in Britain, particularly for a small number of high-income individuals. But until now they have been excluded from official statistics, distorting our understanding of how income is distributed across society, and how this has changed.

“We now know that the top one per cent are even richer than we previously thought – and account for £1 of every £6 of taxable income received, while the income share of the top 0.1 per cent has actually grown 50 per cent faster than official figures suggest. That scale of inequality should be addressed in post-pandemic Britain.”

Dr Arun Advani, Assistant Professor at the University of Warwick, said:

“Official statistics on the impact of austerity suggest that everyone was ‘in the same boat.’ But our report reveals this is simply not the case. When you take into account income from capital gains – the profits received on the sale of assets, including business shares – the top one per cent has in fact been doing rather well and inequality has been rising.

“While the share of all income going to the top one per cent has remained around 13 per cent since 1997, once gains are included it rises to 17 per cent, with the largest growth towards the very top.”

Read the report: