Top to Bottom: Understanding Fairer Pay Results from the research project Howard Reed Landman Economics High Pay Centre 18 th March 2013

Background Huge rise in earnings and income inequality over the last 35 years Wage increases for those on middle incomes have barely outpaced rising prices over last 10 years Tax credits that have increasingly been used to top up low wages since 1999 are now being cut

Research question What impact would a 10% cut in gross pay for top earners have on net incomes for low earners if the 10% cut were redistributed to low earners? This is a “numbers exercise” rather than something which could actually happen overnight – would require a change to business priorities and a rebalancing of workplace power

Defining “top earners” using HMRC statistics Cut-off point (£/year) Taxpayers above cut-off (100s) As % of all taxpayers Average earnings above cut-off (£) 150, %271, , %375, , %564, , %906,000 1,000, %1,710,000

Defining “low earners” using the Family Resources Survey GroupAverage weekly wage, FRS Whole sample£475 Lowest paid 25% by hourly wage£155 Lowest paid 25% by weekly wage£120 Lowest paid 10% by hourly wage£97 Lowest paid 10% by weekly wage£55

Impact of a 10% cut in wages for high earners over £200,000: GroupExtra wage Lowest paid 25% by hourly wage43p per hour Lowest paid 25% by weekly wage£13.65 per week Lowest paid 10% by hourly wage£1.09 per hour Lowest paid 10% by weekly wage£34.08 per week How big an increase in wages for low earners could be financed?

Impact on inequality and public finances: example StatisticOutcome Total gross redistribution, high paid to low paid£4.69 bn Increase in net incomes for low paid£3.01 bn Average “marginal deduction rate” for low paid35.8% Increased tax/reduced benefits for low paid£2.19 bn Reduced taxes on high paid£3.09 bn Overall fiscal impact-£0.90 bn Redistribution from those earning over £200,000 per year to lowest 25% of weekly earners

Impact of redistribution on inequality Gini coefficient is a measure of inequality: 0 = all household incomes the same 1= one household gets all the income, the rest get nothing Current Gini coefficient on disposable income in UK = about 0.34 Redistribution from top earners (via a 10% pay cut) to low earners would reduce Gini by about Not a big effect – but then, not a huge redistribution (total wage bill is around £640 bn)

Impact of redistribution on public finances Redistribution leaves a slight hole in the govt budget because the tax and NICs lost from reducing the gross pay of high earners is lower (on average) than the extra tax/NICs paid and lower benefit spend from increasing gross pay of low earners. The size of this “hole” ranges from £200m to £2bn depending on particular parameters used Could be at least partly offset by: – Increased VAT receipts from low earners spending more – Increased labour market participation among people on low incomes

Conclusions Redistribution from the very high paid to low earners can make a substantial difference to gross and net incomes for low earners Not a complete solution to rising inequality itself But useful as part of a wider package of measures