Inequality, a scourge of the XXI century (Q2219581): Difference between revisions

The article applies agent-based modeling to address the problem of economic inequality and the impact of fiscal policy as a way to reduce inequality. The authors draw on econophysics models of market dynamics that address wealth distribution dynamics in terms of a model of wealth exchanges among economic agents, which lead to a condensed state, characterized by a power law structure, where a minority of agents concentrate most of the wealth of society, consistent with Pareto's law of wealth distribution. The authors employ agent-based modeling to address two ways for avoiding this condensed state, the first is based on regulatory policy that favors the poorest agent in the wealth exchanges, increasing the probability for the wealth to be transferred in these exchanges from the richest to the poorest agent, the second is based on a tax system and fiscal policy's impact on wealth distribution. For economic and fiscal policymaking, the models addressed by the authors provide relevant insights into possible ways to reduce inequalities to avoid the condensed state. The work is of primary interest for economics, fiscal policy and econophysics, showing how the field of econophysics may provide new insights and approaches for economic, financial and fiscal policymaking as well as for new sustainable economics solutions. The work is divided into four sections. The first section, which is the introduction, reviews the empirical data on power law tails in wealth distribution and some explanations for it, including the contribution of econophysics, therefore, the introduction not only addresses Pareto's law from a standard economics standpoint, it also reviews the econophysics contribution for the study of Pareto's law, reviewing the main agent-based model of wealth exchange with which the authors work, which includes a control parameter, that is interpreted in the article as a ``social protection factor'', which sets the probability level of favoring the poorest agent in a wealth exchange interaction. In section 2, the authors simulate the wealth exchange dynamics for different levels of the social protection factor, showing how rising values of the social protection factor lead to lower inequality. In section 3, the authors set the social protection factor to zero, in order to address the effect of taxes and wealth redistribution schemes on inequality in such a way that, in the absence of taxation and redistribution, the economic dynamics would tend towards the condensed state with Gini index equal to 1. Two redistribution schemes are simulated, first one in which collected taxes are equally distributed among all agents independently of their wealth, a second one which implements a targeted redistribution scheme. Tax collection is assumed to be such that all agents pay the same fraction of their wealth as taxes. For the universal redistribution case, the authors found that the higher the tax rate, the lower is the resulting inequality, but taxes seem to have a higher impact on inequality than the social protection factor. The authors found that it is possible, in this model, to obtain all possible values of the Gini index, from the maximum inequality, where there are no taxes, to the complete egalitarian society, when the tax rate is set to one. In the targeted redistribution case, the total amount of wealth collected as taxes is distributed among a fraction of the poorest population. The findings, in this case, show that if this fraction is set to less than 1 percent of the population the impact on the Gini index is almost negligible, it becomes necessary to extend this percentage to between 3--4 percent of the poorest population to have an impact on inequality reduction. In this regard, the authors found that there is an optimum value that minimizes the inequality for each value of the tax rate, namely, for intermediary values of the tax rate (of around 0.35) one can achieve an optimal performance in strongly reducing inequality. The importance of this result for fiscal policy is high, in that it raises the possibility of using agent-based modeling for fiscal policy planning, aimed at inequality reduction, with feasible tax rates. The authors' work is, therefore, of major importance for economists, econophysicists and mathematicians working on agent-based modeling of inequality and the impact of taxation on inequality, providing a basis on which future models, that may include more complex economic relations and different tax allocations, and that may, possibly, be implemented for effective inequality reduction.