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Are You Among Those Who Pay the Most in Taxes?

When it comes to taxes, it pays to be poor or ultra-rich

Most people like to complain about the “rich” not paying their fair share in taxes. But new analysis from the Tax Policy Center, a non-partisan think tank in Washington D.C., shows that those whom most people would consider “rich” pay almost all of the income taxes collected by the US government.

This chart published by the “Wall Street Journal” helps break down the numbers published by Tax Policy Center.

The top 1% and 0.1% of taxpayers will see their share of income taxes rise in 2018.

As the Journal reports: “For 2018, households in the top 20% will have income of about $150,000 or more and 52% of total income, about the same as in 2017. But they will pay about 87% of income taxes, up from about 84% last year.”

Conversely, when you look at the lower tier of income earners, people making up to $48,000 a year actually pay net negative income tax. They get money back.

What’s interesting, however, is when you break down the share of income tax paid by the rich vs. the ultra-rich. Based on 2018 estimates, while the top 1% of earners (those above $730,000) pay 43% of all income tax, the 0.01% (those above $3.2 million) only pay 22%. When you take into account that the average earner in the 0.01% makes $26.1 million, you can start to see that those who many would consider “rich”—the top 1% of earners—are actually paying a lot more in income tax than those who are ultra-rich, the top 0.01%.

Why is this?

Getting it wrong on taxes

Many years ago, I was asked by a newspaper reporter how much money I’d made in the last year. I told him that I made about a million dollars that year (considered 0.01% at the time).

The reporter’s follow-up question was, “How much did you pay in taxes?”

To his surprise, I said that I paid nothing.

“How could that be?” he asked.

I then went on to explain that I had sold three pieces of property and was able to defer my income by placing the proceeds into a 1031 exchange. The money was never technically income but instead reinvested into new, larger properties.

Later, when the reporter published his article, the headline read, “Rich Man Makes $1 Million and Admits to Paying Nothing in Taxes.” While he had the facts right—I did pay nothing in taxes—he got the spirit all wrong.

The difference between the “rich” and the ultra-rich

The reality is that the IRS tax code is written to encourage and reward certain types of behaviors. I’ve written about this before, most notably when I published “Why I Hope Donald Trump Paid $0 in Taxes.”

At a high level, the IRS wants people doing activities that spur growth and that provide jobs. Thus, they have many tax breaks for entrepreneurs and investors. On the other hand, the IRS has little value for people who make a lot of money but don’t create anything for the economy in terms of growth or jobs.

So, it then is not surprising that the top 1% of earners pay the largest share of taxes rather than the top 0.01%. Why? Because most of those in the top 1% are not entrepreneurs or investors. They are high-paid employees who earn the highest-taxed type of income: earned income.

The ultra-rich, on the other hand, are those whose wealth is often built on starting a company or investing professionally. These activities are rewarded by the IRS and so they have many more tax breaks than even those making hundreds of thousands of dollars a year. The ultra-rich know how to limit their earned income and instead make most of their money via passive income vehicles like their companies and investments. Thus, they pay a substantially lower tax percentage than high-income earners.

You can think like the ultra-rich

The biggest difference between the “rich”, that is high-income employees, and the ultra-rich is mindset. And the good news is that you can start thinking like the ultra-rich when it comes to taxes and money, and your wealth will grow.

First, stop looking for a high-paying job and start thinking how you can create them instead. The IRS will reward you if you take entrepreneurial risks.

Second, invest your earned income into assets that produce passive income via cash flow every month. The IRS will also reward you for that. By this, I do not mean your 401(k), which is taxed at an earned income level. You have to find true assets like rental properties, businesses, and commodities that are taxed at the passive income level.

You do not have to start big. Just do what you can and continue to build into larger and larger opportunities. The most important thing is to think like the ultra-rich, not like an employee.

Two choices on taxes

At the end of the day, there are two groups who pay the least in taxes: the poor and the ultra-rich. If you don’t want to pay taxes, but you’re also not interested in being an entrepreneur or an investor, then your only choice is to become poor.

But if you want to be financially free and pay little-to-nothing in taxes, you’ll need to choose the path of the ultra-rich. Speaking as one who has walked that path, it is one of the most rewarding journeys you can take. Because at the end of the day, it’s not about how much money you make, but how much money you keep.

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