What does it mean to be rich? Who are the rich? And how rich are they? Do they make a lot of money or do they have a lot of money? Dividing the population up in income deciles, a common approach, does little to answer the question. Does a high income at a particular point in time mean that you are rich? Could not all 10 deciles be poor? Are not all deciles rich compared to standards of earlier generations? Many people seem sure about one thing only: the rich are richer than they are themselves.
A 2017 YouGov survey produces predictably muddled results. 10% thought that those in the 7th quintile of incomes were rich – that’s an income of around £25,000 a year. But only 4% of those making £20-30,000 a year thought of themselves as rich. To find 10% who identified as rich, you would have to go to the £50,000+ bracket, which is the top 20% of earners. In their 2017 General election manifesto, the Labour party seemed to suggest that an income of £80,000 a year was the right level; that was the suggested threshold for a new tax bracket for ‘the rich’.
In the UK, the top 1% of earners earn more than £162,000 a year. Most would probably consider that rich, but obviously a high income one year doesn’t necessarily mean a high income the year before or the year after. Annual income is a crude indicator of wealth. Looking at households, not individuals, the top and bottom quintile accounts for 48% and 4% of all income before taxes and transfers. Taxes and transfers of course alters the picture dramatically. More than half of UK households are net recipients from the state. Income taxes are overwhelmingly paid by the very top of earners. The top 1% pay a staggering 28% of the total. More than 90% of all income taxes are paid by the top 50%.
After taxes and transfers, the proportion of income collected by the top and bottom quintile falls from 48% and 4% before to 40% and 8% after. Income is redistributed from high earners to low earners with the net effect of doubling the poorest fifths share of the total.
But in the end money doesn’t really matter; consumption does. Here the picture is somewhat different. ONS figures show that the top quintile accounts for 31% of total consumption and the bottom quintile for 13%. The poorest fifth of the population proportionally consumes more than 3 times as much as their proportion of gross income before taxes and transfers. They spend much more money than they make. The rich, on the other hand, make more money than they spend. The rest, they save. And savings, or net worth, may be a better yardstick for whether someone is rich or not. As we alluded to before, income is a poor gauge of wealth, as it can fluctuate over time. In the UK, the top 1% has a net worth of approximately £690,000 and a fortune of £177,000 puts you in the top 10%. The top 10% owns 53% of the total private wealth, the bottom 50% only 7%.
It is often these statistics for wealth distribution which cause egalitarians to cry foul. But while some wealth is obviously tied up in housing, and therefore actually forms part of consumption, by far the largest part of private wealth is invested in physical capital or financial assets. In other words, the deferred consumption of those who can afford to consume less than they produce forms the basis for the growth in physical capital and is therefore fundamental to economic progress. It is exactly because ‘the rich’ consume less than they make that the economy has the potential to grow, capital to accumulate and wages to rise.
The rich are of course not the amoral parasites of left-wing mythology. And savings are not the mythological drag on the economy of Keynesian lore, but the fundamental basis for economic growth. Those who command high incomes not only fund the vast majority of public spending, they provide the savings the economy relies on to grow. The flipside is that the statistics for income inequality exaggerates inequality in spending and therefore in lifestyle. Remember, the richest 5th makes almost half of the money but accounts for less than a third of what is spent on consumption.
This, then, may be a good way of defining the rich: they are the ones who produce more than they consume. The rich are the ones who are able to allocate resources to other uses than personal consumption. They are the ones building factories, funding research and innovation, paying taxes and giving to charity. The rich may for most of us be someone else, but we should be glad they are there at all.