UK Income Inequality and Taxation, 2000--2023: A $\kappa$-generalised Distribution Analysis

TL;DR

This study analyzes UK income distribution from 2000 to 2023 using a $$-generalised model, revealing shifts in income shares and implications for tax policy, with a focus on the top earners and redistribution effects.

Contribution

It introduces a $$-generalised distribution fitting approach to model income data and assesses tax reform impacts using simulated income scenarios.

Findings

Income share of the bottom 40% increased over time.

Middle-upper income groups lost share, top 10% remained stable.

Tax increases on high earners need to be more than four times larger to generate equivalent revenue.

Abstract

We analyse the UK income distribution from 2000 to 2023 using HMRC annual percentile data for both pre-tax and post-tax income. We fit a prefactor-adjusted $\kappa$-generalised specification to the data by weighted non-linear least squares and use inverse transform sampling to generate simulated income populations. The results suggest a redistribution of income shares over the period: the bottom 40\% appears to have increased its share, the middle-upper part of the distribution (50th--90th percentiles) lost share, the top 10\% remained broadly stable, and the top 1\% increased its share of pre-tax income. Because the modified specification is defined only above a positive threshold, conclusions concerning the lower tail should be interpreted with some caution. Using simulated 2023 pre-tax incomes to examine tax reform scenarios, we find that revenue-equivalent tax increases on high-income earners must be more than four times as large as comparable increases on lower-income earners. This suggests that, despite increased concentration at the top, the UK tax base remains driven primarily by the large number of taxpayers outside the very top of the distribution.