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Ivan Kitov
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I am a Doctor of Physics and Mathematics, Lead Researcher at the Institute for the Geospheres' Dynamics, Russian Academy of Sciences. Founding member of the Society for the Study of Economic Inequality Published three monographs in economics and finances: Deterministic mechanics of pricing... More
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Economics as Classical Mechanics
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Deterministic mechanics of pricing
  • Increasing Income Inequality Is A Political (Taxation) Problem  5 comments
    Mar 10, 2014 9:52 AM

    Here we show that the source of increasing income inequality in the tax law. At the end of the day, the whole set of US politicians is responsible for the increase in the portion of personal income for the richest families. This is good news since the return to "normal" income distribution is a political procedure. There are no economic forces behind the change, which would be much more difficult to overcome.

    According to the reports of the Bureau of Economic Analysis (BEA), the proportion of personal (money) income in the Gross Domestic Product has not been changing since 1947. This is the year when the BEA started to measure personal incomes. We have revealed the source of virtual increase in income inequality - private companies redistribute their income in favor of personal income of their owners. The question is - how do they get extra money to redistribute to their private owners? This post answers this question - the US tax system started to reduce the level of tax for private companies. Primarily, it is made by increasing the rate of depreciation, which enterprises are officially permitted to charge for tax purposes (usually fixed by law). Hence, the tax law in responsible for the increasing income inequality.

    We start with a graph showing the growth in GDP, gross personal income (NYSE:GPI) and compensation of employees (paid) since 1929. Figure 1 demonstrates that the level of GPI has been rising faster than that of the GDP (and the compensation) since 1979. (The share of GPI in the GDP has been rising since 1979!) The difference between the GPI and GDP curves depicted in Figure 2 has a striking kink around 1979. And this is the start of the current rally in the rich families' personal income. In other words, a new political (taxation is a political issue) era started in 1979. We would like to stress again the proportion of the compensation of employees in the GDP has not been changing since 1929, with a small positive deviation in the end of 1990s and a negative deviation since 2009. This observation supports our previous finding that the proportion of personal (money) income in the GDP has not been changing.

    So, where the extra money is from? The level of personal income has been actually increasing faster than that of the GDP and it should be the last fool, who lost its share in the GDP. Figure 3 shows two major components of the GPI. The net operating surplus (private) has been changing at the same rate as the GDP since 1929, while the proportion of taxes on production and imports has been growing at lower rate since 1980. We have allocated the source of income for rich families. They take money from the decreasing taxes. But what is the mechanism of money appropriation? Figure 4 demonstrates that the decrease in taxes goes directly into the increasing share of consumption of fixed capital.

    This is the force behind the increasing income inequality.

    The increasing share of the consumption of fixed capital is successfully converted in private money, not in investments! This is a political problem started in 1979.

    It seems that there is no economic problem behind increasing income inequality.

    Figure 1. GDP, GPI, and compensation of employees normalized to their respective levels in 1960.

    Figure 2. The difference between the GPI and GDP curves in Figure 1.

    Figure 3. GDP, net operation surplus (private), and taxes (on production and imports) normalized to their respective levels in 1960.

    Figure 4. GDP and consumption of fixed capital normalized to their respective levels in 1960.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (5)
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  • Naida
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    Dr. Kitov Thank you for this article. I understand little, but wonder if I could interpret from Fig. 2 that the greatest economic "instability" occurred from about 2000 to 2010?
    19 Mar 2014, 02:21 PM Reply Like
  • Ivan Kitov
    , contributor
    Comments (211) | Send Message
    Author’s reply » Yes, I would say that this is a period of higher turbulence in many economic parameters. In my view, this "instability" still exists but many parameters are back to track. In one sentence, this post says that the richest 1% does not eat income from 99% of population, which they receive as labor compensation, but receives this extra money from tax reduction.
    20 Mar 2014, 01:08 AM Reply Like
  • Naida
    , contributor
    Comments (132) | Send Message
    Thank you for your reply. In biology, we have some theories about pushing to, and falling off the edge, with regard to certain variables (biodiversity, climate, etc.). Could it be that the difference between the 1% and the 99% has fallen off an "edge" or "tipping point"? Beyond this we may expect chaos and volatility for a time? In biology, this chaos could end in major extinction, followed by a new rise in biodiversity, then a sort of stability. Just theory, but that's what's interesting. It could also happen as a series of chaos/volatility/insta... periods, interspersed. Sorry, I could go on and on, but need better words to describe it.
    21 Mar 2014, 02:29 PM Reply Like
  • Naida
    , contributor
    Comments (132) | Send Message
    I have PhD in biology, interest in developmental, evolutionary theory.
    21 Mar 2014, 02:32 PM Reply Like
  • Ivan Kitov
    , contributor
    Comments (211) | Send Message
    Author’s reply » I am not sure that the change in income sharing started in 1980 can be interpreted as a bifurcation. However, I do not exclude so called "self-organized criticality" in economic system. For example, high income distribution follows a power law or Pareto law, which is observed in many sciences.
    21 Mar 2014, 03:04 PM Reply Like
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