UK General Election 2019

The £80,000 question: Why do the rich believe they are anything but?

18th June 2020

Viewers of BBC's Question Time were shocked when an audience member earning over £80,000 a year claimed to be in the bottom 50% of income earners. But the tendency for the higher paid to underestimate the incomes of others is more common than you might expect.

Photo Credit: UK Parliament

By Andrew Hillman

Who did Labour’s income tax plans affect?

It is a strange feature of the BBC’s Question Time that the audience also act as the interviewers, and on occasion, as the stars of the show. This was the case during an episode broadcast shortly before the 2019 general election, when an audience member accused the Labour Party of being “liars” for claiming that their proposed changes to income tax rates for earnings above £80,000 would only affect the richest 5%.

Earlier that day, the Institute for Fiscal Studies (IFS) shared their ‘initial reaction’ to the Labour Party's manifesto. They described Labour's plans as “a very substantial increase in the role of the state” and argued that the party needed to “be clear that the tax increases required to do that will need to be widely shared rather than pretending that everything can be paid for by companies and the rich.”

This criticism primarily related to two issues. Firstly, the IFS believed it was unlikely that Labour's tax plans would raise an additional £80 billion by 2023-24 as the party claimed. Secondly, that the proposed increases to corporation tax were being marketed as a tax on the rich, when in reality the burden would fall on workers, customers and shareholders throughout the population.

Nevertheless, when the issue was raised on Question Time the subject quickly shifted to Labour's intention to raise income tax – in monetary terms, a pretty small part of the party's revenue raising plans. At this point, an audience member (who I will call Mr Jones, not his real name) said:

“I'd like to call out Labour as liars. I am one of them people that he will tax more, and I am nowhere near in the top 5%, so I am calling you a liar right now.”

Currently, the top two marginal income tax bands start at £50,000, where earners begin to pay 40% of additional income; and at £150,000, where they begin to pay 45%. Labour were proposing lowering the 45% tax band to begin at £80,000 and adding a new 50% rate at £125,000.

Data Source:
Gov.uk, Institute of Fiscal Studies

Notes:
Income and national insurance rates for employee income in England, Wales and Northern Ireland during the 20/21 financial year. Excludes government transfers.

So people earning £81,000 would only pay an additional £50 under Labour's income tax plan, with someone earning £150,000 paying an extra £5,375. For people earning £80,000 or less, income tax would not change.

How much do you need to earn to belong to the top 5%?

Evidently, Mr Jones believes that these tax plans would affect more than the richest 5% – that is, more than 5% of the UK population earn over £80,000. In fact, as the discussion continued, we observed this exchange between Mr Jones and former Shadow Justice Secretary, Richard Burgon:

Richard Burgon:

That’s just not um…I’m afraid, on that, you’re mistaken. We’re not going to raise income tax for anybody apart from the top 5% of earners.

Mr Jones:

We’re not in the top 5% of earners!

Richard Burgon:

So we’re not going to increase your income tax.

Mr Jones:

But you are, because I’ve read your policy. It’s above £80,000, and I am nowhere near in the top 5% let me tell you. I’m not even in the top 50%.

So who is right? How many people earn over £80,000?

Data Source:
HMRC, World Inequality Database

Notes:
HMRC data shows pre-tax employee income only. World Inequality Database data shows pre-tax income (but including government transfers) equally split between adults within a single household.

The Labour Party might be one percentage point off, earning £80,000 puts a person in the top 6% (but not quite the top 5%). However, their main argument – that increasing tax rates on income over £80,000 would only affect a small share of the population – is true. In fact, the narrow focus of Labour's income tax changes was a key source of criticism. Because the party was unwilling to ask middle-income earners to pay more, as they do in countries with greater government spending like Finland and Denmark, it necessitated putting a heavy burden on corporation tax to raise revenue.

This appears to have been a calculated move on the part of the Labour Party. Both Owen Jones at The Guardian and Stephen Bush at the New Statesman reported that the £80,000 figure was chosen, instead of a lower figure of £50,000, because internal polling indicated that while few people earn £50,000 (just 10% of taxpayers), many saw it as a realistic future income.

This thinking also motivated Labour's decision not to propose a reversal of the Conservatives 2019 changes that pushed the 40% tax rate up from £46,350 to £50,000. The party did not want to be seen as going after aspirational middle-income earners. But the Question Time episode shows how difficult it is for a political party to fully control the narrative. Despite the Labour Party's determination to be seen as only taxing the rich, many people (like Mr Jones) did not see it that way.

Who counts as ‘rich’?

In April 2017, Shadow Chancellor John McDonnell announced that the rich, by which he meant individuals earning over £70,000 to £80,000 a year, would be expected to pay more under a future Labour government. Two months later, YouGov published data showing what the public thinks constitutes ‘rich.’ They showed members of the public a series of annual pre-tax incomes (£14,040 - the national living wage; £27,600 – the average income in 2015; £45,000 – the 40% tax threshold at the time etc.) and asked them if they would consider an individual earning each figure to be rich, poor or neither.

The general consensus was that individuals became rich when they started earning somewhere between £39,800 (35% felt this income made a person rich) and £60,500 (68% felt this income made a person rich). This suggests that, on average, people think 10-15% of UK income earners are rich.

Data Source:
Office of National Statistics, DWP

Notes:
Annual incomes by region refer to full-time employee jobs.
Net wealth is the sum value of all assets minus the value of all liabilites.

The results of YouGov's poll also revealed an intriguing relationship between our income and our perceptions of richness. While 58% of people earning under £30,000 felt an individual earning £45,000 would be rich, only 14% of people with pre-tax salaries above £50,000 agreed.

YouGov repeated the survey in America in 2018, finding the same results. 67% of those earning below $60,000 considered a person earning $100,000 to be rich, whereas just 27% of people with incomes above $90,000 agreed.

Richard Reeves, a senior fellow at the Brookings Institution, has described this link between income levels and perceptions of richness as the ‘“Me? I'm not rich!” problem.’ He has argued that the relationship makes implementing progressive tax reform more difficult. For example, in 2015, former US president Barack Obama abandoned his plans to reduce tax breaks on college saving plans. The beneficiaries of the tax were mainly rich: the White House estimated that households with incomes over $200,000 received 70% of the tax breaks. But, according to Reeves, Democrats representing wealthy districts feared that many of their affluent constituents would resent the policy, seeing themselves as not rich enough to justify the extra taxes.

Data Source:
YouGov

Notes:
UK study based on 2040 interviews, US based on 1163 interviews. Both study's had a considerable number of respondents answer "don't know" (7-9% for UK, 9-11% for US).

So what causes the ‘“Me? I'm not rich!” problem’? Think about Mr Jones: since he believed the median income in the UK was over £80,000, he surely would have contested the figure (or any figure close to it) as a reasonable threshold for richness.

Why do we systematically misjudge our income relative to others?

Mr Jones may be an extreme example, but in general, people's perceptions of the income distribution are off in an interesting way: we have a tendency to think we are closer to the middle than we actually are.

In 2009, Guillermo Cruces, Martin Tetaz (both from the National University of La Plata in Argentina) and Ricardo Perez-Truglia (from the University of College, Los Angeles) conducted face-to-face interviews with 1,100 households in Buenos Aires. They asked participants, “Of [the ten million households in Argentina], how many do you think have an income lower than yours?”

The researchers found that both poor and rich people were inclined to think that they were closer to the middle of the distribution. On average, the poorest 20% estimated their income to be around the 46th percentile (the actual answer is the 10th and 11th percentiles) and the richest 20% thought they were at the 65th percentile (rather than the 90th and 91st). In other words, the richest 20% believed that only six or seven out of every ten households had a lower income than their own.

The British Social Attitudes Survey asked a similar question in 2005. The survey found that only six in every 100 participants believed they were in the richest 20% of households (and just nine in every 100 believed they were in the bottom 20%).

There has been extensive research looking at the neurological and psychological effects of poverty. It has shown that people's perceptions of their socioeconomic status – whether they feel poor – have a significant impact on chronic stress levels, physical health, mental health and cognitive development. Therefore, for an individual towards the bottom of the income distribution, convincing themselves (and their family) that they are in fact closer to the middle could be a beneficial and (literally) healthy dose of denial.

The question of why rich individuals tend to underestimate their position in the economic hierarchy has received less attention. The Question Time exchange between Burgon and Mr Jones offers a clue to one explanation. Here is it how it continued:

Fiona Bruce:

Hang on, let’s just be clear. So you’re [Richard Burgon] suggesting you would raise income tax on those earning over £80,000? You’re [Mr Jones] saying that would affect you, because you earn over that sum?

Mr Jones:

Yes.

Richard Burgon:

So you earn over £80,000?

Mr Jones:

Yes, and I’m not in the top 5%.

(Shout from the audience – “Yes, you are.”)

Mr Jones:

No, I’m not. I’m not! Every doctor in this country earns more than that. Every doctor, every accountant, every solicitor earns more than that – that’s not 5%.

Richard Burgon:

I mean – it’s not true that every solicitor in the country earns more than £80,000. When I was a solicitor I earned just over £40,000 a year.

If many affluent people believe, as Mr Jones does, that all doctors, solicitors and accountants earn more than they do, this would serve as a reasonable justification for not seeing themselves as rich.

Data Source:
Office of National Statistics

Notes:
Annual incomes by occupation refer to full-time employee jobs.

Natalie Schmook, a wealth adviser from Atlanta in the US, believes that our impression of who a typical rich individual is – are they a doctor earning £50,000 a year or a footballer earning £50,000 a week – has been warped. In an interview with the American magazine Fast Company, Schmook said:

“In a world of Kardashians, Real Housewives, and $300 million baseball contracts, our perception of what upper class really means has become a little bit jaded. I think a lot of people look at what we see in the media and on TV and think that’s upper class–when that’s really the .000001%, not the 1%.”

The inclination to focus on the ultra-wealthy makes even very high-income earners feel relatively middling in comparison. For her book “Uneasy Street: The Anxieties of Affluence”, the sociologist Rachel Sherman interviewed fifty parents from forty-two wealthy New York households.

Sherman found that her subjects had a strong discomfort with their level of prosperity, which they often sought to reduce by framing their wealth relative to people even richer than themselves. Helen, whose household income exceeded $2 million, said:

“I feel like we're somewhat in the middle, in the sense that there are so many people with so much money. They have private planes. They have drivers. They have all these things... You know, money makes everything easier. It makes it easier for you to do much more, actually. And, you know, we don't have that luxury in that way.”

Maya also had a household income of over $2 million. She told Sherman:

“I don't think of us as really wealth or not really wealthy...I mean, there are all the bankers that are heads and heels, you know, way above us.”

Sherman observed that “those who openly recognized their privilege lived in more diverse worlds.” In other words, they came into contact with more people – colleagues, friends and family – of a lower socioeconomic status. One of Sherman's interviewees, Zoe, said:

“New York is a bubble. Everyone that can afford to live here is pretty well off. So you don't see the downside. Even the [parents of] kids that are going to the schools that we're sending our kids to. They're able to pay $40,000 a year to send their kid to school, which is crazy. So you don't see the underprivileged...It's sad, but it's kind of like the out-of-sight, out-of-mind thing, where you don't think about it...everyone's so busy that you don't think about it.”

This ‘bubble effect’ matches up with Cruces's findings in Buenos Aires. In his study, the people most likely to underestimate their position on the income distribution were those living in the most affluent neighbourhoods, and those who said that most of their friends and co-workers belonged to the upper class.

If rich individuals misjudge their position on the income distribution because they fall out of touch with what most people earn, we would expect their definition of ‘poorness’ to be equally distorted. YouGov’s data shows exactly this. In the UK, 26% of individuals earning over £50,000 consider an income of £24,800 to be poor, in comparison to just 7% of individuals earning below £50,000. Would they be surprised to discover that nearly half the UK population earns below £24,800, and so would count as poor by their standards?

With the share of national income going to the top 10% rising in both the US and the UK, left-leaning politicians like Jeremy Corbyn and Bernie Sanders have been keen to emphasise just how good a time it is to be rich and wealthy. It is not, however, a good time to be seen as rich and wealthy.

“Being ashamed of your wealth has been a thing for a while,” according to Schmook (again, speaking to Fast Company). “But when Occupy Wall Street happened, I think they really changed the way people felt. There's a lot of anger over people who have money. So I think people sometimes identify as being middle class intentionally because they don't want to be a social pariah.”

How to make the case for more progressive taxation when so few people think of themselves as rich?

The way these issues are framed by media organisations and politicians reinforces the tendency for high earners to reject the ‘rich’ label and identify as middle income or middle class. For example, when Labour first announced their proposed tax increase on incomes over £80,000, the Telegraph described it as a “raid on the middle classes.”

Throughout the general election campaign, the Labour Party’s message on tax policy seemed designed to exploit this tendency for focusing our attention upwards at the more affluent. For example, on Question Time, Burgon had the opportunity to ask viewers to research their own position on the income distribution and then, if they were in favour of increased spending on education and the NHS (most people currently are), consider whether they could afford to pay a little more. Instead, he quickly shifted the debate from those earning around £80,000 to the real ‘enemy’:

“The richest of all people are the billionaires...We need to say the enemy of someone who's on £70,000-£80,000 a year isn't someone on £20,000-£25,000 a year. The problem is that a billionaire, for example, we are told these people are wealth creators - on the average wage in this country it would take 30,000 years to get £1 billion, and that would be if you didn't spend a single penny. The people that are getting away with murder in reality are the billionaires...People in this audience are paying their fair share of tax, people watching this program are paying their fair share of tax, the Amazons and the Googles and the billionaires aren't.”

For many people, this was an appealing message because it implied that their circumstances would not be adversely affected by tax reform and absolved them of blame for societal inequality: the problem is not how much tax you pay, it is that people richer than you (especially those at the very, very top) are not paying their fair share.

But this approach also had a significant drawback. By focusing attention on a small group of individuals (according to Forbes magazine, the UK had just forty-five billionaires in 2020) Labour surrendered the opportunity to persuade voters that a broader overhaul was required to make the tax system fairer and raise revenue for their ambitious spending plans. Ultimately, this hurt the party’s economic credibility: the electorate did not believe that Labour’s modest tax reform policies were sufficient to balance the books.

The party may already be learning a lesson from December’s election defeat. In February, leadership candidate Lisa Nandy (now shadow foreign secretary) was asked by the Evening Standard if she would be prepared to raise the basic income tax rate and replied:

“I do not believe that you can go to the country and argue for the level of investment in public services that we did at the last election without being honest and clear about where that money comes from. And that does mean raising money through tax revenue.”

If, at the next election, any political party campaigns for progressive tax reform that affects more than the richest 5%, they will need a strategy for convincing relatively prosperous citizens to vote for their own taxes to rise.

The best approach could be simply encouraging voters to compare their circumstances to those of others. Individuals feeling financial pressure while earning £40,000, £60,000 or £80,000 are unlikely to feel generous, until they discover that they are further along the income distribution than they expected, and until they consider how people on incomes of £5,000, £10,000 or £20,000 must be faring.

For references, notes on the research required for this feature and a detailed look at the data used for the visualisations, read the accompanying methodology article here.

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