Blog | Entrepreneurship
Tax the Rich?
Why the solution to income inequality might not be to tax the rich but instead provide even more incentives
September 21, 2021
I don’t pay much attention to the New York Met Gala. Not really my kind of crowd. But when Alexandria Ocasio-Cortez (AOC), the highly-liberal representative from New York, crashed the gala with a tax the rich dress, it was kind of hard to ignore.
Source: L.A. Times
AOC has a complicated background. Much of AOC’s mythos stems from an identity built around growing up in the Bronx and a mother who cleaned houses. But the full story is more complicated. Her family lived in the Bronx until she was five, and then moved to a wealthy suburb in North New York. Her father was an architect and the CEO of his firm. While AOC was attending Boston University, her father tragically died of lung cancer at the heart of the Great Recession, leaving her family financially hurting. She took a job as a bartender and her mother started cleaning houses. So AOC has seen life from both the poor side of the coin and the upper-middle class side of the coin.
But one thing I’ve learned over the years is that politicians are willing to say and do just about anything to get elected. And there’s no denying that on the far-left, socialism is selling like hotcakes. And one of their favorite mantras is tax the rich. But is that really such a good idea?
Tax which rich?
The reality is that the rich are easy to pick on right now because everyone is hurting financially. In fact, I acknowledged in a past post that one thing Bernie Sanders and I agree on is that income inequality is one of our most pressing issues in America. We just disagree on how to solve the problem.
One important factor in any conversation about the rich is to define what you mean when you say rich—because there are many different types of rich people in the world.
The rich and the CASHFLOW Quadrant
One of the very first lessons I learned from my rich dad was the CASHFLOW Quadrant.
-
E stands for employees. Whether they are a janitor or a CEO, they are an employee of a business.
-
S stands for small business or self-employed. These are small business owners and specialists. Many highly educated professionals such as doctors and lawyers fall into this category.
-
B stands for big business. These are companies with 500 or more employees.
-
I stands for investor. These people are always looking for other people’s money to fund their business projects.
In each category of the CASHFLOW Quadrant, there are many people who would be considered rich because they make a lot of money. However, the real dividing line between the true rich and those who simply make a lot of money is how much money they actually keep in their pockets. Those with high financial intelligence can make a lot of money but also keep that money come tax time. And that all comes down to mindset, which manifests itself in words.
The words of the CASHFLOW Quadrant
My rich dad once said to me, "If I listen to a person's words, I begin to see and feel their soul." Rich dad understood what many successful business people understand, that being able to quickly measure up a person based on things like body language or the words they use is just as important as understanding financial statements and economic reports.
One of my rich dad's greatest skills was being able to "read" people, but he also believed you couldn't judge a book by its cover. Like Henry Ford, my rich dad didn't have an excellent education, but both men knew how to hire and work with people who did. Rich dad explained to me at an early age that the ability to bring smart people together and work as a team was one of his primary skills.
As a young boy, I sat with my rich dad when he hired people. From those interviews I learned to listen, not so much for just words, but also for core values. From that experience, I learned that, when it comes to the CASHFLOW® Quadrant, people in each quadrant had their own way of talking that expressed who they truly were at their core.
E-quadrant words
A person who comes from the E quadrant might say, "I'm looking for a safe, secure job with good pay and excellent benefits."
Words like these tell me that a person's core value is security in the face of fear. People who embrace security as a response to fear like to have things in writing, knowing exactly what they'll make and what their benefits are, such as health insurance provided by the employer. For them, the idea of security is often more important than money.
Employees can be presidents of companies...or janitors. It's no so much what they do but the contractual agreement they have that's important to them.
This is why, when it comes to taxes, they don’t understand why it’s beneficial for the rich to not be taxed. As we’ll discuss later, the tax code incentivizes certain behaviors that those in the E-quadrant would consider “risky”.
On final note, AOC is in the E-quadrant. She is an employee of the Federal Government. And she makes $174,000 per year.
S-quadrant words
A person who comes from the S quadrant might say, "My rate is $75 per hour." Or, "My normal commission rate is six percent." Or, "I can't seem to find good people to work on this project and get the job done right." Or, "I've got more than twenty hours into this project."
Those in the S quadrant like to be their own boss or "do their own thing." When it comes to money, those in the S quadrant don’t like to have their income dependent on other people. If they work hard, they expect to get paid for their work. Conversely, they understand that if they don't work hard, they don't deserve to get paid well. They have fiercely independent souls.
Because they are literally in it for themselves, S-quadrant people are some of the highest-taxed people. They don’t generate jobs or massive wealth and the government does not reward them with tax breaks because of it.
B-Quadrant words
A person operating out of the B quadrant might say, "I'm looking for a new president to run my company."
Those in the B quadrant are almost the opposite of those in the S quadrant. They like to surround themselves with people who can do the job better than they can. Their true motto is, "Why do it yourself when you can hire someone to do it for you, and they can do it better?"
Those in the B quadrant like to work on their company and hire smarter people to work in it.
They create jobs and generate massive wealth—something the government highly values and is willing to give a tax break for.
I-Quadrant words
Someone operating from the I quadrant might say, "Is my cash flow based on an internal rate of return or a net rate of return?"
Investors make money with money. They don't have to work because their money is working for them. Because of this, they know how money works. They understand the language of money, and they speak it fluently.
Many investors make investments in key projects that advance the government's agenda, such as affordable housing, speculation for natural resources, and more. As such they are rewarded with tax cuts.
The tax code is an incentive code
As my tax advisor, and author of Tax-Free Wealth, Tom Wheelwright, teaches, the tax code is simply a tool for governments to get you to do what they want you to do. If the government wants cheap housing, they’ll give you a tax break to build it. If they want oil discovery, they’ll give you a tax break to do oil exploration. If they want to encourage debt, they’ll give you a tax break for debt.
In this political climate, there is a lot of talk about taxing the rich. This is funny and depressing because the only rich who pay lower taxes are those who do what the government wants—stimulate the economy by creating housing, industry, jobs, and more.
You can complain about the system, but the solution is not to tax the rich. The solution is to come up with better incentives. So far, no one has.
Avoiding taxes takes a high financial IQ
Those with a high financial IQ—those on the B and I side of the CASHFLOW Quadrant—have a lower tax rate because they’re rewarded for doing activities that the government needs to help the economy.
There are many rich who already pay extremely high taxes—in fact, for those on the E and S side of the CASHFLOW Quadrant, the more they make the higher their percentage in taxes paid—sometimes up to 40 percent of their income. In fact, by most standards, AOC would be considered rich. I’m sure she prides herself on paying her fair share of taxes. But the reality is that even if she wanted to reduce her tax burden, she couldn’t as an employee. Even as an employee of the government, she doesn’t engage in activities that they would deem worth a tax cut.
Again, it’s only the rich who build the economy and provide jobs who are rewarded with tax breaks. But that’s an inconvenient truth when rhetoric—and fancy dresses—gets you further than facts.
Focus on the facts and not the rhetoric. As you get rich for all the right reasons, you shouldn’t be punished for it. You should be rewarded. And my hope is that all of you will experience the benefits of building a better world through financial intelligence.
Original publish date:
March 06, 2012