Tax LOOPHOLES The Rich Don’t Want You To Know
My rich dad taught me, “When it comes to taxes, the rich make the rules.” He also said, “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.
And I often hear people say, “It’s un-American not to pay taxes.” Americans who say this seem to have forgotten their history. America was founded out of tax protest. Have they forgotten the famous Boston Tea Party of 1773? This rebellion sparked the Revolutionary War and was all about taxation—taxation without representation.
This rebellion was followed by Shays’ Rebellion, the Whiskey Rebellion, Fries’s Rebellion, the Tariff Wars, and many others throughout the history of the United States.
There are two other famous tax revolts that weren’t staged by Americans, but do demonstrate the passion with which people object to taxation.
The story of William Tell is a story of tax protest. That’s why he was forced to shoot the apple off of his son’s head. He was angry about taxes and refused to bow to the tax collector. His punishment was to put his son’s life at risk with a target on his head. And then there was Lady Godiva. She pleaded with her husband, the Earl of Mercia, to lower taxes in her town. Her husband said he would lower the taxes if she would ride naked through the town. She took him up on his offer.
Taxes may be a necessity of modern civilization but there are many ways that the rich make a lot of money and pay little to no money in taxes. On the flip side, the poor and middle-class toil away for their money, pay more in taxes the more they earn, and then park their earnings in savings and/or retirement accounts. In the meantime, they receive little or no cash flow on which to live while waiting for retirement—when they’ll live on their meager savings.
How to NOT Pay Taxes…Legally
When I was young, my rich dad often referred to the CASHFLOW® Quadrant. He would explain to me the difference between someone who was successful on the left side versus the right side. But being young, I really didn’t pay much attention to what he said. I didn’t understand the difference between an employee’s mindset and a business owner’s mindset. I was just trying to survive school.
Yet I did hear his words, and soon they began to make sense. Having two dynamic and successful father figures around me gave meaning to what each was saying. But it was what they were doing that allowed me to begin to notice the differences between the E-S side and the B-I side. At first, the differences were subtle. Then they became glaring.
The rich do not pay a lot in income taxes. Why? Simply because they don’t earn their money as employees. The ultra-rich know that the best way to avoid taxes legally is by generating income out of the B and I quadrants.
If people earn money in the E quadrant, the only tax break they’re offered is to buy a bigger house and go into greater debt. Viewed from the right side of the CASHFLOW Quadrant, that isn’t financially intelligent. To people on the right side, that’s like saying, “Give me $1, and I will give you 50 cents back.”
A few years ago, I read an article that said most rich people receive 70 percent of their income from investments, or the I quadrant, and less than 30 percent from wages, or the E quadrant. If they were an E, chances are that they were employees of their own corporation.
For most everyone else, the poor and the middle class, at least 80 percent of their income comes from wages from the E or S quadrants, and less than 20 percent from investments in the I quadrant.
By knowing the different features of each quadrant, you’ll have a better idea as to which quadrant, or quadrants, might be best for you.
The Difference Between Rich and Poor
In the world of business and investing, I find it shocking how little the middle class knows when it comes to where its tax dollars are going. Although tax dollars are going to many worthwhile causes, many of the larger tax breaks, incentives, and payments are going to the rich. And the middle class pays for them.
For example, insufficient low-income housing in America is a huge problem and a political hot potato. To help solve this problem, cities, states, and the federal government offers substantial tax credits, tax breaks, and subsidized rents to people who finance and build low-income housing. Just by knowing the laws, financiers and builders become wealthier by having taxpayers subsidize their investments in low-income housing.
Not only do most people on the left side of the CASHFLOW Quadrant pay more in personal income tax, but they are also often unable to participate in tax-advantaged investments. This may be another reason why the rich get richer.
Why Aren’t More People Investors?
The I quadrant is the quadrant for working less, earning more, and paying less in taxes. So why aren’t more people investors? The reason is the same reason many people don’t start their own businesses. It can be summed up in one word: risk.
Many people don’t like the idea of handing over their hard-earned money and, possibly, not having it come back. Many people are so afraid of losing that they choose not to invest, no matter how much money they could make in return.
A Hollywood celebrity once said: “It does not return on the investment that I worry about. It’s the return of the investment.”
So it’s not what you do, it’s which quadrant your mindset is in.
The good news about investing is that risk can be greatly minimized or even eliminated, and you can still receive high yields on your money if you know the game.
A true investor wants to recoup his or her money quickly. People who have a retirement account have to wait years to find out if they’ll ever get their money back. This is the most extreme difference between a professional investor and someone who sets money aside for retirement.
It’s the fear of losing money that causes most people to seek security. Yet the I quadrant is not as treacherous as many people think. The I quadrant is like any other quadrant. It has its own skills and mindset. The skills to be successful in the I quadrant can be learned if you’re willing to take the time to learn.
Editor, Rich Dad Poor Dad Daily