Yesterday the government said it was not going to meet its targets for 'reducing child poverty'. I was asked onto the Jeremy Vine show on Radio 2 to debate with a Scottish MSP whether it was genuinely the case that real poverty still exists in Britain.

As is well known, the current definition of 'poverty' in Britain is a relative one, not an absolute one. People are said to be in poverty if they have less than 60 per cent of average income. If Bill Gates became a British citizen, average income would rise and therefore more people would have incomes below 60 per cent of the increased average. Therefore it would be said, by this government, that poverty had increased because Bill Gates had become a citizen.

This is clearly ridiculous. For a fuller discussion of this, see the afterword in 'The Welfare State We're In' on "Why do people talk more about 'poverty' now that there is less of it?"

But on this matter of differentials of income, my suspicion is that there is a natural tendency, as a capitalist economies grow, for a reduction of differentials. I suspect this happens even without re-distributive taxation.

Think of the enormous numbers of servants the very rich could afford in centuries gone by. Going back only as far as the late 19th century:

In 1891 Waddeson [Manor - owned by the members of the Rothschild family] had an indoor staff of 24 , with a further 24 coming in to work and at least 66 gardeners.

(This is from Waddesdon's 'Diary 2006' advertising events for this year.)

In other words, this one household had 114 employees. Compare this with the number of personal or household staff that someone like Richard Branson, Alan Sugar or even the Duke of Westminster has. I have little doubt that they have far fewer. And there were plenty of similar grand houses that existed in the late 19th century, many of which have been destroyed or turned into hotels or made into National Trust and other houses that people visit.

The large number of servants whom the rich could employ in former centuries reflected the enormous gulf between the wealth of the rich and that of the rest. It was surely far more dramatic than now.

Further evidence comes from the luxury in which the rich in developing countries often live. When I was in the Philippines in the early 1980s, I remember a chauffeur-driven Mercedes was sent to collect me when I went to have supper at the home of rich person. It is, I think, typically the case that the contrasts in developing countries are very dramatic. At the same time, it was said of Hong Kong that it had the highest number of Rolls Royces per capita of any country in the world (probably excluding Brunei, I suppose, where the Sultan had an astonishing number of them).

But then, as capitalist economies mature, the contrasts in wealth appear to become less extreme. You could argue that this is because of re-distributive taxation. It would be hard to disentangle the two possible causes. I wonder now whether Hong Kong, as somewhere which continues to have low taxation, has lower differences in wealth than it used to? If so, that would support my contention. If not...

Posted by James Bartholomew • Indexed in Tax and growth

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