How The Very Rich Get Richer, An Example

This is one way the gap increases dramatically between people, even when there are laws to prevent that from happening, and you can apply to similar situations in other aspects of economic and social life.

Let’s say there is a loophole in the tax system. This loophole allows certain people to manipulate the system somehow and pay 10% less in taxes than they should. People start exploiting this loophole and save some money while the government makes less.

The party will soon end, when the government comes up with a new regulation, a patch basically, that covers up for the previous loophole. Now it is almost impossible to get away with that loophole and people are back to paying the full tax, and they are not saving that 10% anymore.

This new patch is not perfect, as everything in life, and it will create new loopholes in the process, but it’s still extremely difficult to get past the new regulation.

But… There are the very big guys. These people will be able to afford the country’s top tax consultant, who will hire 4 specialists in the field, spend months analyzing their specific situation, come up with a plan, and charge them, let’s say, three hundred thousand dollars for their time. The plan they suggest will also cost half a million to implement. Total cost: $800k.

Not much, if through this new plan they end up saving millions every year.

The smaller guy, let’s say, Mr. $200k cannot afford to hire such consultants, and therefore will not. He will go back to paying his taxes, and will have to wait a few more year to increase his wealth by tax savings.

The small guy? Sorry! Maybe in another lifetime.

Let’s also remember that the 10% reduction in taxes for the big guy is more than the lifetime savings of hundreds of not-yet-rich people. With this huge advantage, the big guy invests in getting more powerful in the market, and enjoys a big competitive advantage over the smaller guys.

With every new cycle of regulations and loopholes the same happens, and the gap widens. The only way out of that I can think of, is either the big guy going bankrupt, or the whole system collapsing.