It’s cheap to be rich.
Most people understand that being rich comes with benefits for convenience and health. But one benefit is often missed: when you’re rich, many things are actually cheaper. I’m going to catalogue how.
To start, for clarity on “rich”, I’ll use B.C’s definition of an Accredited Investor:
– Individuals who have at least $1 million in financial assets (cash and securities) before taxes. (In calculating an individual’s financial assets, any outstanding loans incurred to acquire those assets must be deducted.)
– Individuals whose net income before taxes exceeds $200,000 (or $300,000 combined income with spouse) in each of the two most recent years and who reasonably expects to exceed that net income in the current year
– Individuals who have at least $5 million in net assets
It would be hard to argue that someone who meets the criteria above isn’t rich. Yet, somehow, they pay less for virtually everything compared to the average poor person. I’ve categorized how in a few buckets:
It’s cheaper to live
- Rich people are able to buy their homes instead of renting. Although with a mortgage and ownership expenses, the rich person could pay out the same cash in a month as a poor person’s rent, the majority of the rich person’s cash out is paying down the mortgage itself, effectively saving that money. So given two copies of the exact same home, a poor person will pay more to live there than a rich person.
- Rich people are able to buy much more food at a time than poor people because of their extra cash and storage capacity (pantries, freezers, fridges etc), allowing them to benefit from bulk/sale pricing. So even for the same food, poor people will often pay more than rich people.
- “Walkable” or “bikeable” cities often cost much more to live in than suburbs, so most poor people live in the suburbs. However, they still typically need to go to the city regularly to access work or services. They need to either drive or take public transit, both of which are more expensive than walking/biking in the city. So for the same necessary city activities (commuting, buying groceries, getting a haircut, etc), poor people pay more than rich people.
- Rich people are more likely to own vacation properties. Importantly, rich people are also more likely to be friends with other rich people, who can share their properties or vacation experiences for much cheaper (free) than it would be to rent that place. So for the same vacation, poor people often pay much more than rich people.
It’s cheaper to work
- Since they often own businesses, rich people are able to pay themselves via dividend (share of profit) instead of salary (cash for time). Dividends are taxed at about half the rate of salary (15% vs 30% on average). Rich people can also earn via capital gains (investments that grow), which are taxed at a lower rate and eligible to be shielded from tax altogether with a TFSA account. So if a rich person (dividends and capital gains) and poor person (salary) both increased their income by the same amount, the poor person would likely pay more in taxes.
- Rich people are able to “expense” (bill to the business) most flights they take. Most rich people also collect an incredibly high number of free flight rewards from their business’ credit card expenses, drastically reducing the cost of flying. I know many business owners (myself included, hopefully) that will never pay for a full plane ticket again. So poor people pay more to fly than rich people.
- Similarly, rich people are more likely to be able to expense their laptops, wifi, phones, phone bills, and sometimes cars. So for the exact same access to technology, poor people pay substantially more.
It’s cheaper to get more money
- Rich people are able to use their income to secure loans or lines of credit for very low interest rates, on average 5%. Poor people don’t have access to these loans, so their main access to debt is through credit cards, on average 18% interest. So poor people pay more to borrow the same money as rich people.
- Only rich people can access private equity/angel investment. While incredibly risky, this type of investing has become a major driver of wealth creation. There are legal limitations on who can invest (For example, B.C’s “Accredited Investors” above). But there are also practical limitations. Angel investments often require minimum $10k to $25k cheques per investment, and succeeding in angel investing requires making at least 5 investments and not needing liquidity on the investment for 5 to 10 years. If you don’t have the cash for that, you’d need to borrow it (see above). These liquidity and borrowing costs mean that a rich person and a poor person could have access to the exact same deal flow, but it will be more expensive for a poor person to invest than a rich one. Or in most cases, poor people just don’t invest.
The above list isn’t exhaustive and I may come back and add to it over time. But it does paint a clear picture of the hidden costs of being poor. I didn’t even go into downstream costs, such as how access to high-quality healthcare can help rich people avoid big medical bills down the road.
So what are my takeaways from reflecting on all this?
- We should do a better job of considering social policy and programs with these hidden costs in mind. To use Vancouver as an example, continuing to build infrastructure for public transit is good, but only if it doesn’t increase commuter costs, and the recently proposed downtown commuter toll is not good.
- IMO, the overall income tax brackets in Canada are high enough (although I’ll admit to a little wiggle room after writing this). But there is room to increase tax rates on dividends and capital gains as this disproportionally affects rich people.
I’m particularly in favour of taxing capital gains higher if they’ve been held for less than a year to also help address the insanity of tech-enabled high-frequency retail trading. So Chamath’s idea, but starting with a higher rate.
I’d also tax dividends higher only if the recipient owns less than 40% of the company issuing it (to protect small business owners).
- I’m struck by the number of new companies that are already working on ways to close the hidden costs of being poor. Or to put it another way, giving poorer people access to the benefits of being rich. I’m thinking of debt (Affirm et al), private equity investing (AngelList syndicates), and home-sharing (Airbnb et al) as great examples. The hidden costs are still very real, but the gap is closing.