Insights from GDI

We often talk about GDP, but rarely GDI (Gross Domestic Income). Since product value always goes to someone, GDP = GDI. But we rarely use GDI in our discussion about economics.

Income may go to capital or labor. So GDP =  GDI = income to capital + income to labor. Suppose GDP grows at 2% per year, income to capital grows at 8% per year. What is the income growth to labor?

GDP = income to capital + income to labor.

Probably there is little income growth to labor. This is exactly what happens. In the past twenty years, the world has experienced the longest bull market in history. At the same time, the median income of the household is virtually unchanged. From the relation GDP = income to capital + income to labor, this is obvious.

The standard explanation of the disparity between capital labor income growth is the change of technology. It seems nothing can be done by the society. But the real reason is the tax system that favors capital over labor. In the United States, in 1950, corporate taxes accounted for about 30% of the total tax. In 2019, corporate income taxes accounted for 3.9% of total tax revenue.

Capital is very liquid. Labor is much less liquid. Wealth from labor stays in a community and country. Capital is much less so. 

But the world is dominated by capital. That is why policies favor capital over labor.