Working Paper: NBER ID: w30018
Authors: Isaac Delestre; Wojciech Kopczuk; Helen Miller; Kate Smith
Abstract: The share of pre-tax income flowing to the top of the UK income distribution increased continually and substantially in the three decades leading up to the financial crisis, but has changed little since 2013. Using microdata sampled from UK tax records, we describe the nature of top incomes in the UK and how they are taxed. We show that wage income is the dominant source of pre-tax income, even for highest-income 0.1% of UK adults. But, ‘active’ business income – derived from self-employment or closely-held incorporated businesses – is considerably more important for the top 1% than for those with lower incomes. High-income wage earners work disproportionately in financial services. The high-income self-employed are predominately working in partnerships in professions such as accountancy and legal services. Overall, UK income taxes are progressive: average tax rates rise with income. Taxes on top incomes have been increased since 2010, with the result that the post-tax share of income flowing to the top has fallen. But average tax rates vary significantly within the top and depend on how income is received. Incomes from business ownership and investment are taxed at lower rates than employment income. We discuss options for reforming the taxation of top incomes.
Keywords: income inequality; tax policy; top incomes; UK tax records
JEL Codes: D31; H2; H24; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher tax rates on top incomes (H31) | discourage certain forms of income generation (H27) |
| tax policy changes (H29) | decrease in post-tax share of income flowing to the top 1% (E25) |
| structure of income generation (E25) | affect tax liabilities (H25) |
| tax treatment of different income types (H24) | alter income reporting behavior (H31) |
| economic factors (P42) | increase in share of pretax income flowing to the top 1% (D33) |