Feeling poor? That's because you are a bit dim

Feeling poor? If you are, it is just because you are a bit dim. Or so says the Institute of Fiscal Studies.

Apparently, thanks to our poor understanding of income distribution, we simply don't understand how well off we are. So obsessed are we with the mega rich that we end up comparing ourselves with them rather than realising how few of them there really are.

Take a couple earning £50,000 between them. They might not feel like members of the yacht-owning classes, being, says the FT, a classic example of what is "often loosely described as 'middle England.'" But, assuming they have no children, their £25,000 each puts them in the 87th percentile in the UK in income terms a mere 13% of the population is richer than them.

Start your trial of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Sign up

Indeed, according to further IFS data, a mere 470,000 people in the UK earn over £100,000 and only 47,000 make £350,000. Take these numbers at face value and it looks like the UK isn't home to very many high earners at all.

But I'm not sure we can take them at face value. Here's an interesting number for you. In 2007 (the most recent numbers we can get) 82,000 brand new Mercedes Benz cars were registered in the UK. You might think that doesn't sound like many after all they are all over our roads. But think again.

If a new Merc sets you back £30,000 plus, and under half a million people earn £100,000 plus (or £60,000 odd post tax), who is doing all the buying? Sure, there are retired people on lowish incomes happy to splash out. And sure, lots of silly people take out loans they can't really afford. But given that other luxury car brands presumably sell pretty well too, it all seems like a lot of expensive cars for not that many rich people.

I think the answer to all these little conundrums might be that the average UK earner isn't particularly dim at all. We know perfectly well where we stand in the richness stakes. And quite often it is well below the vast number of people whose incomes don't really appear in official income data or in the income distribution we apparently don't understand.

Remember the tax-gap numbers from the end of last year? According to the official numbers, around 8% of tax is never collected. And around £15bn worth of income tax, NICs and capital gains tax is lost thanks to people not declaring income on their self-assessment forms, or not bothering to fill in self-assessment forms at all. That's a huge amount of unpaid tax.

But odds are these estimates are still pretty conservative: as HMRC points out itself "tax gap estimates are very difficult to produce and are necessarily subject to large margins of error, itself difficult to calculate."

There are all the people we pay in cash and all the people we tip in cash, for starters. A not-very-hard-working builder making a non-taxed cash income can make a higher net income in six months than our £50,000 couple all year. One study of the UK black economy suggests that the average household headed by someone in a blue-collar occupation reports only 46% of their income.

Then there are all the eBay traders who think they don't have to pay tax on a "hobby" even when it brings in £50k a year. And those who rent out houses and never declare the income. Those who don't declare capital gains on trades and those who manage to make their income look like capital gains so they don't pay much tax on it - think the property developers of the last few decades and the private equity partners still going now.

There are lots of all these people and once you take our massive tax payments into account too many of them are making more than most of the rest of us.