Redistribution spurs growth by using a portfolio effect on risky human capital

PLoS One. 2013;8(2):e54904. doi: 10.1371/journal.pone.0054904. Epub 2013 Feb 4.

Abstract

We demonstrate by mathematical analysis and systematic computer simulations that redistribution can lead to sustainable growth in a society. In accordance with economic models of risky human capital, we assume that dynamics of human capital is modeled as a multiplicative stochastic process which, in the long run, leads to the destruction of individual human capital. When agents are linked by fully redistributive taxation the situation might turn to individual growth in the long run. We consider that a government collects a proportion of income and reduces it by a fraction as costs for administration (efficiency losses). The remaining public good is equally redistributed to all agents. Sustainable growth is induced by redistribution despite the losses from the random growth process and despite administrative costs. Growth results from a portfolio effect. The findings are verified for three different tax schemes: proportional tax, taking proportionally more from the rich, and proportionally more from the poor. We discuss which of these tax schemes performs better with respect to maximize growth under a fixed rate of administrative costs, and the governmental income. This leads us to general conclusions about governmental decisions, the relation to public good games with free riding, and the function of taxation in a risk-taking society.

Publication types

  • Research Support, Non-U.S. Gov't

MeSH terms

  • Financing, Government / organization & administration
  • Financing, Government / statistics & numerical data*
  • Government
  • Humans
  • Income Tax / economics
  • Income Tax / statistics & numerical data*
  • Models, Economic*
  • Population Dynamics / trends*
  • Population*
  • Public Policy / economics
  • Risk-Taking
  • Socioeconomic Factors

Grants and funding

The work was partly financed within the COST-MP0801 action with the title “Evolving Networks of Agents Competing For Centrality” (http://www.sg.ethz.ch/projects/physics_of_competition_cooperation_and_conflicts) supported by a grant of the Swiss State Secretariat for Education and Research under number C09.0055, and the European Commission’s 7th Framework Programme Project CYBEREMOTIONS (No. 231323, http://www.sg.ethz.ch/projects/cyberemotions). The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscript. No additional external funding received for this study.