Wednesday, March 22, 2017

Why the Rich Pay Less in Taxes and How You Can Do the Same to Build Wealth


People look at rich people / politicians and their low tax rates, and they get upset because the rich person makes so much money and pays only 15% when they make much less and pay 30% or more, as an example.

Instead of griping about it and saying it's not fair, ask yourself...why are they only paying 15%?  The tax bracket clearly states that somebody making that much money should be paying 40%+.  What's going on?

The thing is, that tax bracket people typically refer to is specific to only one type of income; earned income.  This is the type of income you earn when you work a job.  This type of income gets the highest tax rates, and gets very little tax savings.  There is another type of income that gets taxed at a much lower rate; unearned income.

Unearned income is from a lot of things, but generally it's an investments of some sort.  Dividends / distributions from companies you own, stocks you've invested in, real estate you've invested in, etc.  This is all taxed MUCH differently than earned income, so that tax bracket you probably think about when comparing yourself to these people is often obsolete in the rich person's case.

The reason these things are taxed so differently is because these things are exactly what the government WANTS people to do.  The low tax rates and benefits are an incentive to get you to do things.

The government wants you to build businesses.  The government wants you to invest in the stock market.  The government wants you to invest in energy and agriculture.  The government wants you to save for your own health care and retirement.  If you do these things the government will let you keep more of your money.  The tax code is something like 6k pages, and 99% of that is all about how to save money on taxes...not about paying taxes.  It's not a bunch of tricky BS, either.  It's simply "invest in this", "get this".  

Here's the cool part.  If you can't beat em, join em, right?  ANYBODY can do these things.  You don't have to be rich.  At any level of wealth you will be keeping more of your own money in your own pocket because you're doing what the government wants you to do.

The easiest way to get going is to create a small business.  By creating a small business in something you're passionate about, the goal is to build something that eventually creates jobs, of course.  The government will give you lots of tax breaks in order to help you achieve this goal because that's exactly what they want...more jobs. Take your hobby, make a business out of it, and the government will help you grow it!

You continue working your job, but you add a small business on the side.  Now an entire new tax world opens up to you, and you can begin to put thousands, if not 10s of thousands of dollars back into your pocket every year simply by converting many of your personal expenses to business expenses, and you'll be generating extra income from the business, of course.  The government gives you this money in the form of tax deductions as an incentive because you're building a business, and this drives down your overall tax rate.  Imagine getting an $8k tax refund check when you usually only get $1k.  That’d be nice, right?

This additional cash flow can be used for whatever you want, but of course it opens the door to re-invest larger numbers and begin to build wealth.  As this picks up it can really start to happen quickly.  Each year you get thousands in tax savings,  you invest that in more things the government gives gives incentives for, and these investments give you even more tax breaks while earning you even more cash flow.  You're putting cash in your pocket, but the incentives offset the tax you would owe.  The end result is that you make a lot of money and you pay a very low tax rate over all.

Think about it, though.  You get the incentive because you're doing exactly what the government wants you to do.  These aren't loopholes, which are unintended consequences of laws.  These are intended results, offering incentives for people to do these specific things (create businesses/jobs, invest in the stock market, invest in housing, etc.)

This sort of financial planning and investing is a very important part of building wealth.  The extra cash you get in your pocket by doing these things allows you to get out of debt, begin saving and investing in more assets that generate positive cash flow with low tax rates.  This builds wealth, and one of the best things about wealth is giving back in the way you want to give back.  Building charities to help with specific causes you feel strongly about, for example.  And guess what...when you build such a charity you get even more tax benefits.  

These "rich ass holes" are really doing nothing more than supporting their country, living wealthy lives, of course, and giving back in their own way.  Is this really such an evil thing?  Is there any reason you aren't going to create your own small business today and begin following the same procedures to build your own wealth and put more of your money back into your own pocket while helping the government and the country at the same time?