Baltimore Sun

Wealth 101: How the rich get richer

Company executive explains why he's way ahead of the game

Dan Rodricks

3:40 PM EDT, September 22, 2010

Did you know that the rich have more money because the rich have more money? It's a fact of life. It's how the world works.

I have been so enlightened by the vice president of a project management company with a global profile, a headquarters in Virginia, an office in Maryland, lots of government contracts and a listing on the New York Stock Exchange. The signature on his e-mail indicated a PhD, too, so he must know what he's talking about. I'll call him Doc for the purpose of this column.

The other day, Doc was mulling my Sunday column about the rise in the nation's poverty rate, contrasted with all the whining we've been hearing about the possible expiration of the Bush-era tax cuts for the wealthiest Americans.

The column examined the growth in the disparity in U.S. income levels since about 1980. It cited Congressional Budget Office numbers that showed, in one example, average after-tax incomes for the top 1 percent rising by 281 percent compared with 25 percent for the middle fifth of households and 16 percent for the bottom fifth. The recession certainly has pushed more Americans into poverty, but the trends have been there for three decades.

Several readers, including a couple who run companies, wanted to set me straight about all this. They blamed the "global economy," too many college students getting worthless liberal arts degrees and the influx of immigrants for poverty's rise to levels not seen since the mid-1960s.

Doc, however, climbed a different branch of the money tree — to the subject of wealth and its accumulation.

"Having been pretty conscientious about saving and spending, my wife and I have amassed a pretty good retirement account," Doc wrote. "And what is so obvious to me, in tracking our progress, is that the more money you have, the more you make."

Key word there: "Amassed."

Whenever someone uses the word "amassed," you know they're talkin' serious paper. Doc didn't provide details, but I assume he and the missus are in the hundreds of thousands, if not millions, and I'm guessing he's still pulling down enough per year to be in the Obama administration's target group for more taxes.

But his e-mail wasn't about that. Rather, it was an explanation for why the wealthy are wealthy: They have more money. And the more money you have, the more money you'll get.

Are you following this at home?

"Gaining 5 percent on $500K in a year increases your wealth by $25K while earning the same 5 percent on $5K gives another individual only $250 in that same year," Doc wrote. "That individual will never catch up. So seems to me the [disparity] is not a nefarious plot by the wealthy against the poor. It's simply a matter of how finances work in the world today."

Oy vey, there's more:

"My wife and I have been sufficiently frugal to have created a nice nest egg from which we hope to be able to have a very comfortable retirement in our later years. So the thought that we should be penalized through higher tax rates because of our financial accomplishments is a bit distressing."

Distressing?

Bush-era tax cuts already put more money at Doc's disposal and presumably helped him build his nest egg. Since 2004, an individual making between $200,000 and $499,999 would have saved an extra $54,707, according to the nonpartisan Tax Policy Center, while someone making between $20,000 and $29,999, would have saved $4,302 over those six years.

So Doc is certainly right — when you're ahead of the game, you're ahead of the game and, barring calamity, you're probably going to stay there, even if your Bush-era tax cuts expire as you sip the Dom Perignon on New Year's Eve.

"It would take a lot of social engineering to change our entire financial system in a way that would prevent the further accumulation of wealth by the wealthy," Doc says. I couldn't agree more. When do we start?