Why do asset owners seem to get richer faster, even in years when “the economy” feels flat? Part of the answer is a 300-year-old idea from a banker who got rich from exactly this mechanism.
Who was Richard Cantillon?
Richard Cantillon was an Irish-French banker who lived in the early 18th century. He made a fortune in Paris during John Law’s Mississippi Bubble – an early experiment in paper money that ended in a spectacular crash.
His Essay on the Nature of Trade in General, published after his death, is one of the first serious works of economics. One observation in it now carries his name.
The Cantillon effect in one paragraph
When new money is created, it doesn’t land in everyone’s account at once. It enters at specific points and spreads outward. The first recipients spend it while prices are still at the old level. As the money travels, it bids up prices. By the time it reaches the last recipients, prices have already risen, and they’re worse off.
So money isn’t “neutral” in the short run. It doesn’t just raise the price level – it shifts relative prices and moves purchasing power from later to earlier recipients.
A nerdy example
Imagine a small island economy with a fixed amount of money. One day the island bank prints 10% more and lends it to the local property developer.
- The developer buys bricks and hires builders at today’s prices.
- Brick sellers and builders now have more money and spend it at the market.
- Market traders raise prices as demand rises.
- The fisherman, whose income hasn’t changed, pays those higher prices at the end of the chain.
Nobody cheated. The fisherman is simply last in line.
Where it shows up today
In Cantillon’s day, the entry point was gold from mines or a king’s spending. In modern economies, new money mostly comes through two channels:
- Credit. Commercial banks create money when they lend. Borrowers with collateral and good credit get it first and cheapest.
- Central bank asset purchases. Quantitative easing buys bonds from financial institutions. That pushes up bond prices and tends to lift shares and real estate too.
The result: people who already own assets see them rise first, while wages and savings accounts adjust later, if at all. Economists still argue about how large this effect is compared with other drivers such as low interest rates, technology or globalization. But the direction is widely accepted.
Bitcoin fans often point to its capped supply as a fix. It does remove the “who prints the money” question – but early adopters still captured most of the gains. Being early matters in every system.
Where taxes come in
Tax planning doesn’t create the Cantillon effect. It changes how much of your money is left to compound.
Wealthier people tend to earn more of their income from assets, which are often taxed later, at lower rates, or only when sold. Many salaried people are taxed at source on every euro, every month. Add professional advice and flexible residency, and the gap grows – legally.
The good news: most of these tools aren’t reserved for billionaires. They’re just rarely explained.
What a normal entrepreneur can legally do
1. Let your company compound
Profits left inside a company are often taxed less than profits paid out to you. In Estonia, retained profits are taxed at 0%.
Example: €100k profit in an Estonian company, reinvested: €0 corporate tax. Paid out: €22k. You decide when the tax is due.
2. Pick your residency on purpose
Your personal tax residency usually matters more than your company’s location.
- UAE: no personal income tax on salary, dividends or capital gains; corporate tax 0% up to AED 375,000 profit, 9% above.
- Cyprus: non-doms pay no Special Defence Contribution on dividends and interest for 17 years; corporate tax is 15%.
- Malta: non-doms are taxed on foreign income only when it’s brought to Malta.
A move only works if you really live there. See our residency guide for how to choose.
3. Use the boring allowances at home
Pension schemes, depreciation, business expenses, loss carry-forwards. Unexciting, fully legal and underused by most small business owners.
4. Think in assets, not just cash
Cash in a current account quietly loses purchasing power during inflation. Productive assets – your business, property, diversified investments – tend to move with the price level over time. That’s general economics, not a recommendation for any specific investment; your risk tolerance is your call.
5. Stay squeaky clean
Banks share account data automatically between more than 100 jurisdictions under CRS. Hidden accounts aren’t a strategy; they’re a liability. Real substance, proper filings and exit rules at home are what make a structure hold up.
This article is general information, not tax or legal advice.
Curious what the legal options look like for you? Start with Optimize tax.
