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  • Writer's pictureBelieve First

Laws that Help Make the Rich Rich and the Poor Poor

Our laws have impact, for good or bad. Understanding their impact will help us make better decisions. As laws can sometimes be an invisible force, we often don’t appreciate the impact they really have.

 

Here are some laws that have the effect of hindering a poor person from becoming rich:

 

Securities Laws

 

In the United States, it is illegal to sell ownership in a business to poor people unless the business has registered its stock with the government. Since the registration process is so complicated and expensive, most businesses do not do it (except for those that are listed on the stock exchange). For those businesses that do register, a significant amount of value is created prior to the “initial public offering”, and generally those that owned shares prior to the initial public offering make the most money.

 

The government states that it is protecting poor individuals by stopping them from buying into a business, as it does not want a poor individual to invest all that they have and lose it on a speculative business, as a large percentage of startup businesses tend to fail. Due to this, the government stepped in to ‘protect’ the poor, and said that private businesses (that had not registered their stock with the government) could not sell ownership to another investor unless the investor was an “accredited investor”, which means that the “accredited investor” had a certain net worth or yearly income. The theory is that if you have enough money, you can manage the risk or absorb the risk of a business failure and not have it bankrupt you.

 

Basically, there are many people willing to take your money. If you are poor, you may be seen as not having all of the knowledge necessary to discern what to invest in or not, and “accredited investors” are generally seen as having more business savvy as they make more money.

 

While there may be some truths in the rational for the laws, the flip side is that many Americans are denied the opportunity to put even $1,000 into a startup and experience the wealth that can come from a business growing and succeeding.

 

We allow poor Americans to gamble all they want, but we don’t allow them to make informed decisions and be part of the creation of actual wealth by buying into a business in the startup phase.

 

If the protection of the poor’s income was the true motivation behind the law, the law could simply limit the percent of income the poor could invest (or gamble in a casino), instead of banning private investment altogether.

 

Zoning and Development Laws

 

As Americans, we love to be in nice neighborhoods and we love to hold a lot of our wealth in our home. Because of that, we often do not appreciate it when neighbors do not keep their property to the same standards, as we argue that it hurts the value of our home. In other words, we feel that if someone does not do their part, it hurts our pocketbook.

 

There is some truth to that based on the way that our economy works. Unkept homes and yards can detract from overall market value. However, this concept gets extended into zoning and development requirements. Cities start setting requirements that create a certain look and feel to the neighborhood.

 

For example, cities will mandate minimum house sizes (which forces homes to be a certain price). They mandate master-planned communities. They limit the number of cars that can park at a home (which helps limit the number of occupants, thereby keeping those with less money out). All of these things create good-looking neighborhoods, but they also restrict the ability of poorer people to buy homes.

 

An interesting side effect of the neighborhood a person lives in is the culture they grow up with. Often, a way to do well in business or job placement is to have a connection or relationship. Relationships bring many opportunities for wealth, and poorer people tend to be excluded from the neighborhoods of the rich, or those with the ability to help things happen.

 

Cities then enact development requirements that often can only be met by a developer with a lot of money, and the developer usually makes a lot of money. Combine this with the securities laws which prevents a poorer person from buying into a development deal, and a poorer person lacks the ability to participate in the process.

 

Zooming out from the residential side of things, zoning laws can drastically alter the value of land. Zoning laws can both strip value from land (such as by prohibiting some of its more valuable uses), or can add significant value to land (by giving a certain neighborhood or parcel an exception for certain uses). The zoning game is often played to give exceptions to large or well-funded developers, as recently seen when Utah elected to move its main prison to create room for a significant new development.

 

These laws likely did not all come about to create or perpetuate a rich/poor divide, and zoning laws can also remove some wealth from the rich when the zoning laws do not go their way. It is important to understand though that our neighborhoods and cities have been working to separate themselves into certain types of people, and that this is often perpetuated through various zoning laws. As securities laws operate in most real estate deals too, zoning laws and securities laws have the effect of making land valuable for the rich, but not so much for the poor.

 

Business Veil for Liability Protection

 

America allows an individual to create a business and then use that business as a liability shield. In general, business liabilities do not have to be paid for by an individual owner. If the liabilities of the business exceed the assets of the business, the business simply closes up shop, but the owners could have kept the profits to themselves over the years.

 

When America chose to insulate owners from personal liability for business decisions, it created a mechanism to take wealth from people and pass it through a business, where the obligation to return it ceases to exist. Consider the following situations:

 

A new solar company forms and promises a client new solar panels and a 25-year warranty. The new solar company makes millions in the first few years, but eventually closes up shop. When the client needs warranty work done, there is no company left to do it, and the owners were allowed to get rich by making commitments (and taking money based on those commitments) that were never kept.

 

A pharmaceutical company releases a new drug that it markets as safe and makes billions in revenue from the drug. Years later, it is learned that the drug harmed millions of Americans, and the company does not have the money to pay for all of the harm suffered.

 

In these scenarios, wealth was transferred from one individual, through a business, and to another individual (the owner). The owner could still have millions, but the individual who paid for a service or product may be left hurt or damaged with nowhere to collect. The law allowed for wealth to be transferred based on false pretenses, and it allowed those who maintained the false pretenses to keep their funds.

 

These laws exist under the argument that more innovation occurs when the individual that innovates or tries does not have to bear all of the risk of the innovation. Innovation in America certainly has done some amazing things, but it begs the question of if this is the only way, or if there are better ways to go about this?

 

While any American can start a business, most businesses need some funds in order to really take off or be successful. When this concept of a liability shield is coupled with the securities laws that do not allow a poor person to buy in to a business, the outcome of laws that serve to help the rich stay rich and the poor stay poor is compounded as the poor cannot invest, even though their personal assets would be protected by the corporate liability shield.

 

There is some level of irony in the fact that securities laws allow the “accredited” (or those with money) to invest as they know how to manage risk, while the liability shield in corporate law is there to protect the business owner in case they did not properly manage risk.

 

From my perspective, the rationales for the laws are not consistent. Inconsistency in principle leads to unfair results, results that we often cannot fully measure or understand. While I do not believe it is the government’s job to make everyone rich, I do believe it is the government’s job to stay away from artificial barriers. If people can gamble their life savings away, then perhaps they should at least be allowed to invest in a business or real estate deal that may allow them to break the cycle of poverty they are in. I believe that we should reexamine more appropriate ways to balance any valid governmental interests with these regulations with opportunities for those without as much money to invest in private companies and real estate deals, as this is where a significant portion of the country’s wealth is generated.

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