Goldratt Research Labs / Wealth Gap Simulator

 

No income inequality existed in the known human history of 12,000 years until the Industrial Revolution. Income inequality has become an important problem in the last 200 years that passed with capitalism. UNSDG10-Reducing Inequalities is among the Sustainable Development Goals of the United Nations. Three sub-objectives of this goal seem important to decision-makers at the national level:

• 10.1 - By 2030, progressively achieve and sustain income growth of the bottom 40 percent of the population at a rate higher than the national average
• 10.2- By 2030, empower and promote the social, economic, and political inclusion of all, irrespective of age, sex, disability, race, ethnicity, origin, religion, or economic or other status
• 10.4- Adopt policies, especially fiscal, wage, and social protection policies, and progressively achieve greater equality

Wealth Gap Simulator looks like a good app in that sense. Let's get to know the application in outline:

• Number of traders: At some point, all transactions turn into trade, even while producing goods or services. Labor trade with salary, overtime, bonus, and premium; trade in goods and capital with profit, and loss; real estate trade is completed with rent, sale, profit, and loss. Therefore, the simulator simplified the economic interaction as trade. It is also associated with the concept of the population involved.
• Enforce unique trades: Participation in the economy can sometimes be limited; actual conditions such as unemployment, preferred brands or institutions, technological competence, capacity adequacy, legislation, and enforcement, ... can be seen. In the simulator, this situation is represented by an equal opportunity for everyone. 
• Days of trading: Economic programs are implemented over a certain period. This period is also included in the simulator.
• Gains and losses: The functioning of the economy is based on trade, and the profit and loss subject to trade are actually limited to the price of the relevant goods and services. However, in the simulator, this relationship was not established with the product, but with wealth. This is different from than conventional concept of a product-based profit and loss. For example, whether the refrigerator sold is a Vestel or Arçelik brand affects the result differently. Wealth is largely capital, those with more capital have an advantage in product-based trade. Therefore, with the volume increase, the results are formed by the capital multiplier effect. In the simulator, it is possible to determine lower and upper limits for profit and loss. We can interpret this as the state setting a floor-ceiling price, entering the market as a manufacturer, and intervening in the market with legislation. 
• Conservation of wealth: If states issue emissions by printing money, involving foreign trade or allowing financial circulation, the amount of wealth in the country can change. There is an option to allow the change of wealth in the simulator. Moreover, if you choose the "isolated" economy in the simulator, there is an option to arrange the losses and gains according to the rich-poor. Policies can be formed in this sense by adapting taxes and subsidies.
• Wealth tax: In the simulator, instead of the income tax we are used to, wealth tax and lower-upper limiting options are offered. Taxation on accumulated wealth, not on commercial activity, represents direct rather than indirect taxation. Indirect taxes include inflation and VAT. Direct taxes include income tax on vehicles, real estate, securities, and even wages.
• Tax redistribution: The main source of income for states is the taxes they collect. Budgets show where the collected income and provided internal and external funds will be spent. Therefore, social transfers are also included in the budget. In the simulator, options are offered to determine not the entire income, but the amount of wealth taxes to be allocated to social transfers and to what extent this will be distributed to the poorest segments.

The results are given with a satisfying set of parameters. Total wealth is the cumulative wealth of the entire population, Taxes is the amount of wealth tax collected, are Gini coefficient is a widely accepted measure of income inequality (0 if very smooth, 1 if very bad), Wealth percentiles are the distribution of the population in 20-point wealth strata, Wealth distribution is the distribution of wealth over time, Wealth over time shows wealth accumulation and initial status over time. It also keeps the wealth difference between the richest and the poorest and shows it as "X" fold.

Before I continue, I would like to give an example of how wealth is affected by accumulation. Let's not forget that today's excessive wealth gap is formed by only 200 years of accumulation. Let's start a business with a capital of 1000 TL, work with a 20% profit rate, let's win with a 50% probability in trade. Let's assume that we lost in our first activity but won in the second:

• We deducted 1000 TL * (-20% loss) = 800 TL in the first transaction. In the second transaction, we reached 800 TL * (+20% profit) = 960 TL. We lost once, we won once, but our capital has eroded.
• Now let's consider the other side of the trade. He started with a capital of 1000 TL. After the first transaction, he gained 200 TL and became 1200 TL, after the second transaction, he lost 160 TL and became 1040 TL, and his capital increased.
• The higher the % ratio, the greater the gap will be as the repetition increases.

We will have 3 main scenarios:

• Allowing wealth to  increase or decrease,
• Constant wealth but limited gains/losses by the poor (capped),
• Constant wealth but letting the rich gain uncapped (free from the poor )

First, we will create the base case, then we will run it three times, changing one parameter at a time, and evaluate our findings. Our goal is to lower the Gini Coefficient.

Allowing Wealth to  Increase or Decrease Scenarios

Initial scenario: A population of 100 people starting on equal terms with a wealth of 100 USD, a period of 100 days, 20% profit limit, 20% loss limit, free participation in trade, suitable for wealth increase, no wealth tax, and therefore no social transfers. 

In two of the 3 rounds, wealth increased, but while wealth decreased (which can be thought of as GDP), there was an improvement in the Gini Coefficient, "we equalize in poverty", with 90% of the population in the poorest 10%. Our benchmark will be the Gini Coefficient of 0.81. 

To see the effect of population on income inequality, we try increasing the population from 100 to 500 people. Gini Coefficient is around 0.80, with no improvement, and no worsening. Whether the state is small or large does not matter much.

The prolongation of the period allows the gradual/less painful implementation of economic measures. We try increasing the period from 100 days to 200 days. There was an explosion in poverty, and the Gini Coefficient rose to 0.96. The program to be applied should be a short-term shock type.

Limiting the profit limit to 10% by intervening in the free market is a painful practice. The differences between the percentiles are getting smaller, the Gini Coefficient goes down to around 0.70, and the wealth decreases significantly. 

Similarly, we can limit the loss limit to 10%. When the public pays for the losses, the wealth increases explodingly, but the Gini Coefficient remains around 0.70.

Wealth level was not affected much when we gave everyone equal opportunity to participate in economic activity, the Gini Coefficient remained around 0.85.

When we took 20% wealth tax and did not transfer any funds for social causes, wealth decreased, Gini Coefficient decreased to 0.70, I think there is no significant difference.

When we transfer 20% of the collected 20% wealth tax to the poorest 20%, a significant improvement is achieved in income inequality while the wealth level is almost the same, and the Gini Coefficient decreases to around 0.25.

When the share distributed to the poor from the collected 20% wealth tax is increased from 20% to 50%, the Gini Coefficient still stands at around 0.25. Increasing transfers to the poor do not help.

The Gini Coefficient rises to 0.30 when we transfer the 50% share of the collected 20% wealth tax to the wider segment, instead of the poorest 20%, with 50% a tranche. Helping the wider public doesn't help.

When we distribute 80% of the collected 20% wealth tax to the poorest 50% instead of 50%, the Gini Coefficient still remains around 0.30. Increasing the transfer expenditure made from the collected tax does not help.

When we increase the wealth tax rate from 20% to 50% and transfer 80% of the collected tax to the poorest 50%, the Gini Coefficient drops to 0.11. Considering the difficulties of implementation, the government should first determine the target Gini Coefficient.

While the wealth tax rate is 50%, when we transfer 20% of the collected tax to the poorest 20%, the Gini Coefficient remains around 0.11.

In this main scenario, the policy proposal is: Determine the target Gini Coefficient, gradually increase the wealth/income tax from the wealthy to 20-50%, implement in the shortest possible run, transfer 20% of the collected funds to the poorest 20%.

Constant Wealth but Limited Gains/Losses by the poor (capped)

Initial scenario: A population of 100 people starting on equal terms with a wealth of 100 USD, a period of 100 days, a profit limit of 20%, a loss limit of 20%, free trade participation, fixed wealth, gains and losses for the poor, no wealth tax and therefore no social transfers. 

Wealth has not changed in our isolated economy, the Gini Coefficient has dropped to around 0.65. Maybe global markets and free trade are not as good as we think?

Population growth is not effective in this scenario the Gini Coefficient is 0.67.

The prolongation of the period increased income inequality, and the Gini Coefficient rose to 0.77.

When the profit rate was limited to 10%, the wealth decreased significantly, with the Gini Coefficient of 0.75.

When the loss rate is limited to 10%, wealth has increased, income inequality has decreased, and the Gini Coefficient is 0.40.

Giving everyone equal opportunity to participate in the economy is useless the  Gini Coefficient is 0.70.

The 20% wealth tax without social transfer did not work, the Gini Coefficient is 0.70.

Injustice decreased when 20% of the 20% wealth tax collected to the poorest 20% was distributed  Gini = 0.30

When the share distributed to the poor increased to 50%, it did not contribute, Gini = 0.30

Expanding the coverage of the poor reduces efficiency  Gini = 0.37

Increasing the resource allocated to the transfer is inactive, Gini = 0.30

Wealth tax 50%, transfer rate 80%, injustice reduced when the poorest 50% were chosen, Gini = 0.14

Choosing wealth tax 50%, transfer rate 20%, poorest 20% reduces injustice , Gini = 0.10

Policy recommendation in this main scenario: In an isolated economy, determine the target Gini Coefficient, gradually increase the wealth/income tax from the wealthy to 20-50%, and transfer 20% of the collected funds to the poorest 20% in the shortest possible run.

Constant Wealth but Unlimited Gains for the Rich and Limited Loss for the Poor (full) Scenarios

Initial scenario: A population of 100 people starting on equal terms with a wealth of 100 USD, 100 days, 20% profit limit, 20% loss limit, free participation in trade, fixed wealth, unlimited gain for the rich and limited loss for the poor, no wealth tax and therefore no social transfers. 

In our isolated economy, closer to real life (you can't lose money that doesn't exist), there is a gain for the rich and a loss for the poor (for example: if there is a 20% gain in trade of 1000 TL for the rich and 100 TL for the poor, the rich gains 200 TL and the poor loses 20 TL) and inflation is also better represented. The Gini Coefficient of 0.29 is the best among the initial base scenarios. Limiting the loss of the poor in an isolated economy reduces injustice.

Population growth is not effective  Gini = 0.27

PriodPeriod prolongation is not effective, Gini = 0.30

Limiting the profit limit to 10% does not help, Gini = 0.28

Limiting the loss limit to 10% contributes little, Gini = 0.20

Giving everyone equal opportunity has no effect, Gini = 0.27

If the income tax is 20%, the effect is small, Gini = 0.25

Income tax is 20%, transfer rate is 20%, injustice decreases with the poorest 20%, Gini = 0.17

Increasing the transfer rate is not effective, Gini = 0.17

No effect of transfer to larger segments, Gini = 0.17

Further transfer to large sections is not effective, Gini = 0.19

Income tax is 50%, transfer rate is 80%, injustice decreases with the poorest 50%, Gini = 0.10

Income tax is 50%, transfer rate is 20%, injustice decreases with the poorest 20%, Gini = 0.09

Policy recommendation in this main scenario: In an isolated economy, determine the Gini Coefficient, gradually increase the wealth/income tax from the wealthy to 20-50%, and transfer 20% of the collected funds to the poorest 20% in the shortest possible run.