The Transatlantic 10%
It never dawned on me how uniquely American my job is until I came to the United Kingdom. I am working remotely from the middle of England for most of 2024. My wife Elizabeth is English. We want our kids to better understand this half of their heritage. We will come back to the US in August for the start of the new school year. Liz was granted leave from her job in Ann Arbor for about eight months. I’m writing this from the guest room, now the home office, of my in-laws’ rental property in the small town of Rothwell, Northamptonshire, keeping some late hours due to the time difference.
Traveling reveals lots of interesting details about other cultures. This immersive, extended stay is teaching me some subtleties of English life I hadn’t observed during shorter visits in the past. You’re probably aware of our different definitions of “football”. In the US we drive on the right. In the UK it is optional. Beyond the big, obvious differences, I’ve found the schools here are generally a little stricter. Farms are smaller, which greatly affects the landscape. People socialize in pubs differently.
For the most part, life is not that different here. American culture absorbed a lot from its English beginnings, the language being the one obvious example. They would say we have strayed from the true path in that regard, but there is not too much of a barrier. Straighten out the roads and change the architecture, I could be back in Michigan in many respects.
So, I was surprised to learn that by some measures the US is more than 50% richer than the UK, the most direct measure being GDP per capita. According to the International Monetary Fund, US GDP per capita is over $80,000, while for the UK measured in dollars it is closer to $49,000. That is a 63% increase going from the UK to the US. I was aware that the US was generally considered richer, but looking up the magnitude of the difference shocked me.
There seem to be some lifestyle compromises here. Cars are smaller. So are appliances. Restaurant portions are generally smaller, which might be a good thing. The healthcare system, while good by global standards, is more basic than ours. It might have the advantage of being more accessible for some people. That is a hard question to answer succinctly. My main point is that none of these differences seem particularly stark. England certainly does not seem poor by American standards. Living in America did not seem 63% grander than living here.
I should mention that one place the UK has the US beat is in vacation time, a lifestyle choice that tends to lower measured GDP to the benefit of recreation. OurWorldInData.org estimates that the average UK worker logs about 85% as many hours as the average American, 1,531 versus 1,810. That fact alone could explain about one third of the difference in GDP, but it does not explain where the fundamental “hole” is in the UK economy that makes it so much poorer on paper.
Returning to the subject of investment management. It turns out that one big reason why people over here seem almost as wealthy as Americans is that the shortfall is mostly driven by the right tail of the income distribution, the affluent, Provident’s clients.
I asked the question, what is the cutoff to be in the top 10% of the US population versus the UK? I wasn’t satisfied to ask Google or Microsoft’s Copilot. Economic statistics can mean different things when applied to different countries with different tax codes. I went down a bit of a rabbit hole to get an answer I could believe in. Here is what I found.
According to Income in the United States 2022 published by the U.S. Census Bureau, the cutoff for having an income in the top 10% of American households is about $200,000, a pleasingly round number. It is a (mostly) pretax number and only accounts for the employer’s share of payroll taxes. You (the worker) pay about 7% off the top for your share of payroll tax, or $14,000. You also pay income tax. With the standard deduction, a married couple filing jointly with two children would keep about $165,000 after paying Federal taxes. According to the Tax Foundation, the average combined tax burden at the state and local level is a little over 11% nationally, which equates to about $24,000 based on pretax wages before employer withholding. That leaves after-tax income of $141,000. It is pretty easy to spend that much annually, but on the other hand most people who earn that much can save quite a bit if they choose to. They have a good shot at becoming Provident clients someday.
Here in Blighty, UK.gov publishes national statistics on pre- and post-tax income distributions. The cutoff for joining the top 10%, after taxes, is about £51,000, or $65,000. From there, I had to estimate the downstream tax burden—mainly value-added tax (VAT) and local council tax. The VAT burden is baked into prices and paid by the seller based on, effectively, gross profit. I divided total VAT collections by UK GDP, about 7%, and applied this to the pretax income figure. Ultimately, the downstream burden appears roughly similar to the 11% that Americans pay. That implies the cutoff for the for the top 10% of incomes, after all taxes and translated to US dollars, is about $56,000 in the UK. That is a huge difference! To go from earning a top 10% income in the UK to doing the same in the US is worth about $85,000 per year, a 150% raise. The cutoff for the top 10% in the UK approximates only about the median disposable income in the USA. When I look out the window, I don’t see missing millionaires, but at some level that is the biggest difference between our two economies. Provident won’t be opening a UK branch anytime soon. It is too hard to get rich here.
Money is one thing and living is another. While I’d much rather work an American job and pay American taxes, I don’t think America’s top 10% are more than twice as happy or satisfied. On that theme, here is a TV recommendation. Detectorists is a witty, charming series about small-town England full of beautiful music and sweeping scenery. It ran for three short seasons, and it is TV gold. I don’t think I have yet heard a bad review of it.
Miles Putnam, CFA