There is no 1%

I wrote in my previous blog post that a few important things about inequality are constantly missed.

The first, as I pointed out, is that the figures on it have been distorted by the super-wealth of a tiny number of people. But the second is that being a high-income earner is usually a transient state of affairs – so the 0.1%, the 1% and the 10% are constantly changing. This is the case among the super-rich.

As Derek Thompson notes in The Atlantic, “there is considerable churn at the tippy top.” The US IRS keeps an annual list of the 400 “richest tax returns in the country.” Between 1992 and 2008, 3,672 different taxpayers appeared on the ‘Fortunate 400‘ list. But just four households appeared on the list in all 17 years.

And it isn’t just the case among the super-rich. It’s the case among the rest of us too. Let’s look at the UK. Around five million people in the UK pay tax at a marginal rate of 40%. Given that about 30 million people pay income tax, that sounds like a smallish percentage of the whole: 40% taxpayers are the 16%.

But here’s the thing – just as 3,000 households have moved through the Fortunate 400 in the last decade, so people move in and out of the 40% over a working life.

Not many people are in the group in their first job. Many more move into it in their late 30s and 40s as they progress at work. Then they fall out of it as they retire (people in their 20s see their earnings rise nearly 100% by the time they hit 40 and then fall back 25% as they head for retirement).

I can’t find numbers on the actual percentage of workers who pay 40% tax at some point in life, but I’d put it a lot closer to 50% than 20% (any readers got these numbers or know where they might be found?).

Then it is worth remembering that people build wealth as they age – and can, therefore, hit retirement with a high level of wealth, but low level of income – in the 1% for wealth, but well out of it for income.

A study from Skipton Building Society made this clear recently with the conclusion that wealth and income inequality is almost entirely age-based: “people entering or starting retirement are in the best financial position of their lives,” even though their actual income is on average some £7,000 below that of people in the 35 – 44 (peak earning) age bracket.

So, the high income 1% might include a few young bankers with £100,000 worth of debt from their MBA (negative wealth), but not the 65-year-olds with two houses and a £1.5m pension they have on flexible drawdown.

This might all sound obvious, but given that the inequality discussion is going to run and run (quite rightly), it is worth us all getting in to it in the full knowledge that there is no such thing as a static 1%, 10% or even 16%. Everyone’s constantly on the wealth and income move.

• Some good news. While income and wealth inequality could be said to be going in the wrong direction, social mobility in Britain has been getting better.