So you think the wealth gap is growing? Wrong

Not only are we all in it together, but the rich are bearing and will bear a greater share of the burden of taxes than the poor. Why won't the Coalition say this more loudly?
  • @johnrentoul

The most peculiar political event of the year was the cut in the top rate of income tax. That was in March, and we haven't heard the end of it yet, not least because it does not take effect until 5 April 2013. Plenty more “tax cut for millionaires” toff-taunting from Ed Miliband to come, then. As yet, there has been no audible reply from the Government. Which is, as I say, odd.

It is part of a bigger political puzzle, which is why the Coalition seems to want people to think that we are not all in it together when they have every right to claim that this is precisely where we all are. What were David Cameron, George Osborne and Nick Clegg thinking? For many people, that is an easy question to answer. Rich Tories look after their rich friends, supported by hypocritical and treacherous Liberal Democrats. After all, “everyone knows” that the rich are getting richer and the poor are getting poorer, don't they?

For richer, for poorer

Well, this is where it gets interesting, because what “everyone knows” is not what is happening. The gap between rich and poor has not changed significantly for about 20 years, not since the increase in inequality that occurred when Margaret Thatcher was Prime Minister in the 1980s. For most of the boom times since then, everyone got richer, at roughly the same rate, and the ratio between rich and poor remained unchanged. And even now, as we all get a bit poorer again as a result of the bust, the losses are spread pretty equally with, if anything, the rich bearing the greater share of the burden.

Two important sets of statistics were published this year which bring the picture up to date. Their findings on equality were unreported for the simple reason that they did not show what everyone expected them to show. In June, the Institute for Fiscal Studies (IFS) published an analysis of official data that found that, although all after-tax incomes fell in the first year of the Coalition (2010-11), higher incomes fell more than lower incomes, resulting in a more equal distribution.

Then in July, the first official estimates of the distribution of wealth were published for some time. The new figures, from the Wealth and Assets Survey carried out by the Office for National Statistics, covered the period from 2006 to 2010. In other words, roughly the period of the Gordon Brown government. The figures do not tell us about what is happening under the Coalition, but they were a missing part of the puzzle, because although there are a lot of statistics about incomes, there have been no reliable figures for the inequality of wealth in the UK for many years. What the survey showed was that the degree of inequality of wealth hardly changed from 2006 to 2010, becoming slightly more equal. Unless something dramatic has changed in the past two years, we would expect that trend to continue.

Some more in it than others

This is so at variance with the accepted story of food banks and greedy bankers that it makes no sense to most people. Not only are we all in it together, but the rich are bearing and will bear a greater share of the burden of taxes than the poor.

The Prime Minister and Chancellor have put the mess into message in trying to get this across. They claimed in their party conference speeches that the rich would pay a greater share of tax in “every year of this Parliament” than they did under Labour. Bizarrely, the Treasury was able to produce figures to substantiate the claim only by claiming that they were talking about income tax alone and that the tax year 2010-11 was not a “year of this Parliament” because Labour were in power for 37 days of it.

I call this bizarre because, as the IFS figures suggest, the claim is almost certainly true for all taxes over the whole Parliament.

If this seems counter-intuitive, remember that – in addition to other new taxes on the rich – the 45p top tax rate will still be higher than the 40p rate that was the highest rate of income tax throughout the New Labour years (apart from those last 37 days). Cameron and Osborne keep saying it, but it does not compute because they confused their message by cutting a rate that affects only those earning more than £150,000 a year. And for what? For an ancient piece of trickle-down mumbo-jumbo economics that says a 5p difference in the tax rate will unleash the animal spirits of the risk-taking wealth-creators, when the Treasury's own simulations say that it will make no difference within the margin of error either way?

For that, Cameron decided to throw away an admittedly weak but still viable tradition of his party, that of compassionate Conservatism. I still remember the surprise, as I sat in the press gallery of the House of Commons, when Tony Blair, leader of the opposition, asked John Major if he accepted that it was a responsibility of government to prevent the gap between rich and poor growing too large. “Yes,” said the Prime Minister from Brixton, and sat down.

An inexplicable reversal

More recently, I remember Cameron's rebranding. Days after he was elected Tory leader in December 2005, his outrider Oliver Letwin, told the Daily Telegraph: “Of course, inequality matters. Of course, it should be an aim to narrow the gap between rich and poor.” I even remember the Tory party's statement of aims and values, “Built to Last”, which, on the Blair model, was put to a referendum of party members and approved by 93 per cent of them the following year. It included this: “The right test for our policies is how they help the most disadvantaged in society, not the rich.”

In an inexplicable reversal of all assumptions about politicians in general and him in particular, Cameron has been true to the “one nation” principles that many people thought he had insincerely espoused. And yet, by cutting the one symbolic tax rate for the richest, he has encouraged everyone to think the worst of him. And Nick Clegg went along with it.

John Rentoul is Chief Political Commentator for 'The Independent on Sunday'