IRS vs Entrepreneurs
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.
You will notice I put “fair share” in quotation marks 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.
Most of us know taxes are our greatest expense. Yet most people choose to ignore the subject of tax. They choose to be ignorant, then get angry at people like Donald Trump who know how to make money and pay less in taxes—legally.
Without financial education, most people are financially ignorant about taxes. Many of these people vote for politicians who promise to “tax the rich.” Then they wonder why their taxes keep going up. The problem is not taxes; the problem is spending.
One of the reasons for wealth and income inequality is tax. Simply stated, the rich know how to make more money and pay less in taxes than the poor and middle class—legally. The rich are not always smarter, they simply prefer not to be ignorant.
Taxes Upon Taxes
There are more taxes than just income tax. There are taxes on taxes. It is estimated that for every dollar a person spends, 80% goes directly or indirectly to some kind of tax and back to the government.
For example, if you pay a dollar for gasoline, not only is your dollar net after-tax, which means your dollar has already been taxed, most of the money you pay for the gasoline is going to other levels of tax. The oil company receives very little of the dollar you used to purchase your gasoline. Then the oil company pays taxes on the tiny bit of your dollar they receive. Talk about pennies on the dollar!
I think many people would agree that the lack of financial education shows up in our political leaders. Most are employees, like my poor dad, who know how to spend money but have no idea how to make money. Financially ignorant leaders are at the core of this global crisis.
Who Pays the Highest Taxes?
Pictured below is the CASHFLOW® Quadrant. That book, Rich Dad’s CASHFLOW Quadrant, was the second book in the Rich Dad Series.
E stands for employee.
S stands for self-employed, small business, or specialists such as doctor, lawyer, real estate agent, or sports superstar.
B stands for a big business owner with 500 employees or more.
I stands for investor: an active investor not a passive investor.
The quadrant not only tells a story about where one earns their income, but it also tells the story of who pays the most—and least—in taxes.
I want to introduce you to Tom Wheelwright. Tom has been my advisor on taxes for years. Tom has guided me through the racetrack of life and business. He has made me and Kim millions and saved us millions in taxes. He has been one of our greatest teachers.
To further explain why people in different quadrants pay different taxes, I’ll have Tom explain:
Think of the E, S, B, and I quadrants in terms of consuming and producing. Someone in the E quadrant produces whatever they can produce by themselves and consumes an equal amount.
Someone in the S quadrant produces a little more (if they have some employees) and consumes a little less than they produce.
Someone in the B or I quadrant, however, produces much more than they consume. In the B quadrant, they are creating hundreds or thousands of jobs, and in the I quadrant they are producing energy, food, and housing. They still only consume the same amount as someone in the E or S quadrant. The government encourages and rewards these activities through tax breaks because the producers stimulate the economy and produce the food, fuel, and housing that the rest of the citizens need to live happy productive lives.
The point I want to make is that people on the E and S side of the CASHFLOW Quadrant pay the highest percentages in taxes. There is little a person like Tom can do for them unless they are first willing to invest in their financial education.
I have met so many successful accountants, attorneys, and doctors who will tell me and Tom, “You can’t do that here.” No matter where we are in the world, some expert will raise his or her hand and say, “You can’t do that here. It’s illegal.”
The problem is that these experts are locked into the mindset of their quadrant. It requires financial education to move from the left side, the E and S side, to the B and I side.
Choose Your Entity Wisely
If you plan on becoming rich in the I quadrant, you must know how to protect your assets from two predators: lawsuits and taxes.
Garrett Sutton is an attorney and my legal Advisor on asset protection. If not for Garrett, Kim and I would have lost everything due to frivolous lawsuits. He is a genius on asset protection and protecting your wealth from other people and the government.
To do that, you must protect your assets the way corporations in the B quadrant protect their assets.
You must follow the rules, real estate laws, finance laws, tax laws, and corporate laws. Following the spirit of the law, as well as the letter of the law, is required for those who live in the I quadrant.
Here’s how Garrett explains different entities:
Each entity type has its advantages and specific uses. Each one is utilized by the rich and the knowledgeable in their business and personal financial affairs.
Limited Liability Company (LLC) – is a good entity to use in certain situations. It provides the limited liability protection of a corporation and the flow-through taxation of a partnership, some refer to the LLC as an incorporated partnership.
Limited Partnership (LP) – is similar to a general partnership with the exception that it has two types of partners. The first type is a general partner who is responsible for managing the partnership. The second type has a limited partner and by definition, he or she is limited to his contribution of capital to the partnership and may not be actively involved in the business of the partnership.
Corporations – are entities with a life of their own. It has its name, business purpose, and tax identity with the IRS. As such, it is responsible for the activities of the business. In this way, the owners, or shareholders are protected. The owner’s liability is limited to the monies they used to start the corporation, not all of their other personal assets. If an entity is to be sued it is the corporation, not the individuals behind the legal entity.
Garrett says, “Whether you are concerned about protecting your business, preventing business claims from affecting your assets, or planning for the distribution of your assets to your heirs, you need to know how to limit liability. And as Robert Kiyosaki always says, you don’t have to decide alone. Use an attorney or other professional advisor, like an accountant, to decide.”
Three Sides of the Coin
All coins have three sides: heads, tails, and the edge. Intelligence is found on the edge of the coin, and in the ability to see both sides.
Taxes make the poor and middle class poorer, yet on the other side, the very same tax laws make the rich richer. The same is true for debt. Debt makes the poor and middle class poorer, while debt makes the rich richer. The difference is the mindset, skillsets, and financial education.
If you want to live your life in the B and I quadrants, you must know how to use debt and taxes to get richer.
Editor, Rich Dad Poor Dad Daily