The Dynamics of Wealth Inequality and the Effect of Income Distribution

Berman Y, Ben-Jacob E, Shapira Y (2016) The Dynamics of Wealth Inequality and the Effect of Income Distribution. PLoS ONE 11(4): e0154196. doi:10.1371/journal.pone.0154196

19 Pages Posted: 17 Jun 2016 Last revised: 20 Jun 2016

See all articles by Yonatan Berman

Yonatan Berman

London Mathematical Laboratory

Eshel Ben-Jacob

Tel Aviv University (Deceased)

Yoash Shapira

Tel Aviv University

Date Written: April 22, 2016

Abstract

The rapid increase of wealth inequality in the past few decades is one of the most disturbing social and economic issues of our time. Studying its origin and underlying mechanisms is essential for policy aiming to control and even reverse this trend. In that context, controlling the distribution of income, using income tax or other macroeconomic policy instruments, is generally perceived as effective for regulating the wealth distribution. We provide a theoretical tool, based on the realistic modeling of wealth inequality dynamics, to describe the effects of personal savings and income distribution on wealth inequality. Our theoretical approach incorporates coupled equations, solved using iterated maps to model the dynamics of wealth and income inequality. Notably, using the appropriate historical parameter values we were able to capture the historical dynamics of wealth inequality in the United States during the course of the 20th century. It is found that the effect of personal savings on wealth inequality is substantial, and its major decrease in the past 30 years can be associated with the current wealth inequality surge. In addition, the effect of increasing income tax, though naturally contributing to lowering income inequality, might contribute to a mild increase in wealth inequality and vice versa. Plausible changes in income tax are found to have an insignificant effect on wealth inequality, in practice. In addition, controlling the income inequality, by progressive taxation, for example, is found to have a very small effect on wealth inequality in the short run. The results imply, therefore, that controlling income inequality is an impractical tool for regulating wealth inequality.

Suggested Citation

Berman, Yonatan and Ben-Jacob, Eshel and Shapira, Yoash, The Dynamics of Wealth Inequality and the Effect of Income Distribution (April 22, 2016). Berman Y, Ben-Jacob E, Shapira Y (2016) The Dynamics of Wealth Inequality and the Effect of Income Distribution. PLoS ONE 11(4): e0154196. doi:10.1371/journal.pone.0154196, Available at SSRN: https://ssrn.com/abstract=2796523

Yonatan Berman (Contact Author)

London Mathematical Laboratory ( email )

8 Margravine Gardens
London, London W6 8RH
United Kingdom

Eshel Ben-Jacob

Tel Aviv University (Deceased)

Yoash Shapira

Tel Aviv University ( email )

Ramat Aviv
Tel-Aviv, 6997801
Israel

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