When It Comes To Taxes The Rich Make The Rules
They say there are only two sure things in life: death and taxes. And nobody likes either of them.
My rich dad said to me, “If you want to be rich, you need to play by the rules of the rich.”
The rules of money are skewed in favor of the rich, and against the working and middle classes. After all, someone has to pay taxes.
The middle class, of course, does not like this. That is why they get so mad when they find out that the rich can avoid paying taxes and when they find out that the rich often avoid paying taxes because they help write the rules.
The other day, a friend of mine texted to say, “I don’t understand why my small business has to pay so much in taxes when Amazon has to pay next to nothing.” He was tapping into something that most people understand on one level, and bristle at on another…mainly, the rich don’t pay their “fair share” in taxes.
I put “fair share” in quotations because I don’t believe in the idea that the rich should pay more in taxes, but I know that most people would howl and scream at this sentiment.
People simply don’t like the idea that the rich pay less in taxes than them. But there’s a reason they do…I’ll get into that later.
When I was asked years ago about how much I paid in taxes and my response was zero, it was clear that the reporter didn’t understand what I’d told him, or he purposely distorted the message by leaving out a few keywords.
It was a perfect example of different points of view coming from different parts of the CASHFLOW® Quadrant. He was thinking like an employee (E) on the left side of the quadrant, but I was talking like an investor (I) on the right side of the quadrant.
The Poor And Middle-Class Pay The Most In Taxes
Most parents want their kids to go to school, get good grades, and find a safe, secure job. In reality, that is some of the worst advice we can give our kids. Why? The answer is found in taxes and debt. For people who earn their income from the Employee (E) and Self-Employed (S) quadrants (like my friend who texted me), there are virtually no tax breaks. Thus, those on the left side of the CASHFLOW Quadrant pay the most in taxes, often while making the least.
Why would this be? The tax code is built to incentives certain kinds of behavior, mostly around creating wealth and jobs. Employees and self-employed people, while providing value to employers, don’t themselves create jobs or wealth for the economy. They are key to it, but they don’t directly do it. Investors and business owners do that. As such, the government has very little in the way of tax breaks for employees and the self-employed. Everyone needs a job, so they don’t need a tax break to be incentivized to get one. But not everyone has the courage to invest and start a business that employs other people. The government creates incentives for those that do via tax breaks.
While it seems like a good idea to get a good education and a high-paying job, the reality is that most people with high-paying jobs aren’t rich. Why? Because they have no financial education and have no idea how money actually works—and can work for you.
At the end of the day, remember this one cardinal rule: Being rich isn’t about how much money you make—it’s about how much money you keep. And one of the best ways to keep your money is to do things that the government wants you to do.
The Rich Pay The Least In Taxes
The rich pay very little in income taxes because they don’t earn their money as employees do. They know that the best way to legally avoid taxes is by generating passive income out of the right side of the CASHFLOW Quadrant—the Business (B) and Investing (I) side.
If you earn your income on the left side of the quadrant, the only tax break you have is to buy a bigger house and go into greater debt. But the rich have scores of tax breaks offered to them by the government to encourage investing and business development, which generates more jobs. The rich can make millions of dollars and pay virtually nothing in taxes.
One example of this is the government’s desire to have more affordable housing available to the general public. Because of this, rental income is treated as passive income, the lowest-taxed income. Additionally, you are allowed to write off all expenses for your investment property, and you can depreciate your property each year. Depreciation is a phantom income because it is a loss you can take against your taxable income, even though you didn’t actually lose any money. This allows you to pay less in taxes. If you invest in certain types of multi-family properties, you can even qualify for more tax breaks depending on the zones you’re developing in and the type of affordable property you’re investing in or building.
These incentives are well above the general interest deduction that a homeowner has. Why? Because the government doesn’t need to incentivize people to own a home. They do need to incentivize investors to purchase or build apartment buildings.
Want To Pay Less In Taxes? Create Passive Income
In 1994, Kim and I made it in the I quadrant. We had $10,000 a month in passive income coming in from real estate investments and only $3,000 in expenses, including a personal mortgage payment. We were free. We no longer needed money. We could create abundance out of nothing. Kim was 37 and I was 47. We celebrated for a week on luxurious Turtle Island in Fiji.
Rich dad often said, “You will never know true freedom until you achieve financial freedom.” By this, he meant that learning to invest is more important than learning a profession. He said, “When you learn a profession, let’s say to be a doctor, you learn how to work for money. Learning to invest is learning how to have money work for you. The moment you have money working for you, you have your ticket to freedom.” He also said, “The more money you have working for you, the less you pay in taxes—if you are a true investor.”
Editor, Rich Dad Poor Dad Daily