£70,000 puts workers in the top 5 per cent of UK earners – why are we so reluctant to acknowledge this?

When Austin Powers’ nemesis Dr Evil came out of deep freeze and held the world to ransom he hilariously imagined that one million dollars was a lot of money. The response to the suggestion of Labour’s shadow chancellor John McDonnell last week that earning an annual salary of more than £70,000 makes one rich has prompted similar guffaws.

Doesn’t he know how much it costs to buy a house in London these days? Doesn’t he know how expensive private school fees are? Honestly, how out of touch can you get? Of course, as many have pointed out, it’s not McDonnell who is out of touch.

The most recent data from HMRC shows that the median average pre-tax income is around £22,400. An income of over £70,000 a year will actually put you in the top five per cent of all UK earners.

When Ed Miliband proposed a “mansion tax” on properties valued at more than £2m in 2015 right wing newspapers exploded with fury, screaming about how that this would lay waste to middle England. In fact, it would have affected around 100,000 homes, less than half a per cent of the total UK residential dwelling stock. The average house price today, by the way, is around £220,000. And wealth is a far more unequally distributed than income, with the luckiest tenth owning almost half of all the assets.

Rich is like the inverse of “middle class”. In Britain, everyone seems to think of themselves as middle class, whether they’re earning hundreds of thousands of pounds a year or taking home barely more than the minimum wage. Being middle class (preferably the “hard working” variety) is a badge of honour.

But people are extraordinarily reticent about allowing themselves to be labelled rich. Many would sooner present themselves in the Daily Mail offices as a Brexit saboteur.

Is this simply because people don’t want to pay more tax and fear that admitting wealth will invite a raid from opportunistic politicians? Up to a point. But another big influence is reference point psychology. People don’t have a mental snapshot of the national distribution of income or assets in their heads when they consider the question of whether or not they are “rich” or “well off” or not. They answer an easier question instead: where do they feel themselves to be relative to their peer group and relative to their own expectations?

This helps explain why research shows people from all over the income distribution have a tendency to place themselves in the middle of the pack when asked to guess. We all know some people who are doing better than us and some who are doing worse.

Even the indisputably prosperous are prone to this. Consider the FTSE 100 chief executive who is awarded a compensation package of £4m a year. Rich? Not when you consider that the boss of an American company earns five times as much.

What about the investment banker who extracts a bonus worth tens of millions of pounds from his employer? Well off? Not compared to that banker’s hedge fund or private equity friends who might earn ten times as much. And so on right up to the billionaire classes.

But this psychology can be found well down the pay scale too, even among those who earn below £70,000. As HL Mencken put it, wealth is “any income that is at least one hundred dollars more a year than the income of one’s wife’s sister’s husband”.

So where does this fiesta of unscientific relativity leave tax policy? In a dire state is the answer. Most public finance experts, at least those who are not employed by the super-rich to evangelise for tax cuts, now agree that residential property in the UK is inefficiently and unfairly taxed.

But it’s proven impossible to reform the system in a more equitable direction because the bulk of the public can be so easily misled by politicians and the partisan media into believing that they personally will feel the pain.

The consequence is that residential wealth, which has risen substantially in recent decades, is under-taxed relative to income, which impedes our national productivity growth and encourages us to plough our savings into property, leaving us perpetually prone to a dangerous orgy of housing speculation. If we are ever to escape from this doom loop of public ignorance, dysfunctional policymaking and financial instability, the first step out will probably be an acknowledgement of the source of the problem: misinformation and right wing propaganda.

When political commentators react like scalded cats to the very suggestion that someone on more than three times the average income could be labelled well off, there is a problem. When we are inundated with chin-stroking discussions in the broadcast media (even among public broadcasters like the BBC) about who can fairly be considered rich, that tells us something important and troubling about whose financial interests the essential channels of information in our society are, directly or indirectly, serving. And it’s not those who really are in the middle.

This article was first published on 23rd April, 2017...