What 'income inequality', exactly?

From The Daily Mail:

An average earner was paid £7.78 an hour in 1986 – calculated at 2011 prices – which had gone up to £12.62 last year, an increase of 62 per cent.

By contrast, the average pay of someone in the top 1 per cent of the earnings league went up from £28.18 an hour to £61.10 an hour, an increase of 117 per cent.

Those in the top tenth of the league saw their pay rise from £14.78 an hour to £26.75 an hour, an increase of 81 per cent.

At the bottom, the lowest 1 per cent of earners saw their pay go up from £3.48 an hour to £5.93, an increase of 70 per cent.

1. Now, as a completely separate debate, I could point out that some of the hyper-earners deserve every penny, if J K Rowling sells millions and millions of books and DVD's, then she can keep every penny of her millions and millions of pounds, nobody is forced to buy them (I do, as it happens). Ditto Premier League footballers, nobody is forced to buy a season ticket or subscribe to Sky Sports (and I certainly do not). And there are plenty of high earners who are just rent-seekers (quangocrats, directors of large companies, bankers etc.), i.e. add little or no value and create little or no wealth (and possibly destroy it). I don't exclude myself from the latter category, by the way.

2. But be that as it may, the ratio between bottom and top percentiles is only a factor of ten. Is it not possible that, broadly speaking, some people are simply ten times luckier than others? The lucky ones will claim that they are hard working, diligent, skilled etc, and possibly they are, but there is still a large element of luck, not only in being born and raised with those innate abilities, but also being in the right place at the right time to be able to use them. The best coal miner in the world would struggle to make a living in the UK today; and heck knows what would have happened to Mark Zuckerberg had he been born twenty years earlier. If we improved the education system, this might go some way to evening things out, remembering always that 'social mobility' means mobility downwards as well as upwards.

3. The ten-to-one ratio is flattened enormously by the tax and welfare systems, plus the value of all the stuff which everybody gets "for free" (NHS, state education, refuse collection, the right to vote, use a public library etc), so if you adjust for this, the ratio is probably more like four-to-one. Whether you consider this A Good Thing or A Bad Thing is up to you, that's just the way it is.

4. There are diminishing returns to scale and/or higher earners/spenders get worse value for money. A £200,000 Ferrari does not make you ten times as happy as a brand new £20,000 family saloon, which in turn does not make you ten times as happy as a fifteen-year old midnight blue Golf Mark II for £2,000. Plus higher earners who send their kids to private school get shafted by the system.

5. The real inequalities of course, and those which are impossible to justify on any sort of level, moral, economic, whatever, are inequalities in the amount of national wealth (primarily land rent):

(a) which some people can enjoy or collect (heavily subsidised and lightly taxed), and
(b) which other people have to pay through the nose for.

So with income inequality, even if the ratio between top and bottom were a hundred or a thousand, at least there is no such thing as negative earnings potential (because nobody is forced to pay to do a job). But with "land", about half the population is paying to live somewhere, so actually they have negative land wealth; most of the other half is enjoying owner-occupation, and the top few per cent are collecting from the bottom half.

If we are going to worry about inequality, that's where we ought to start (and probably finish). Once that's sorted out, everything else will pretty much fall into place.