800-Pound Gorilla #4: Higher Taxes
Every time central banks print money, two things happen:
1. Higher taxes
2. Higher inflation (Inflation is another tax)
Taxes Are Not Patriotic
Many people believe paying taxes is their patriotic duty. Here again, they are victims of a lack of knowledge of financial history.
In 1943, the U.S. Congress passed the Current Tax Payment Act to fund another war, World War II. For the first time in history, the U.S. government began taking taxes out of workers’ paychecks before the worker was paid. The workers allowed this to happen in the name of fighting for freedom and liberty. That is why many Americans believe it is patriotic to pay taxes. The problem is: World War II is over, but the United States never stopped collecting taxes.
As you know, bureaucrats running the government know how to spend money, but they do not know how to make money. They only know how to increase taxes.
Runaway spending and raising taxes is not a rich or poor problem. The rich have just as many welfare programs as the poor. The rich have corporate welfare programs, and the poor have social welfare programs. Regardless of what you call them, the taxpayer pays the price.
Welfare programs for the rich are often called “pork.” Pork funds such programs as “bridges to nowhere” and “building weapons the military does not want.” Pork is welfare for the rich because it funds projects that generate profits for rich business owners.
Today, if government welfare to both the rich and the poor were cut off, there would be a crash bigger than the subprime crash of 2007. Granted, some government programs do a lot of good. The problem is that your child will pay the price for those programs with higher and higher taxes.
One discussion a parent should have with their child as early as possible is on the subject of taxes, and explaining who pays the most in taxes—and why.
To illustrate and explain the subject of taxes, rich dad drew the CASHFLOW® quadrant for me.
The letters in the four quadrants represent:
| E | for employee |
| S | for small business or self-employed |
| B | for big business (500 employees or more) |
| I | for investor |
Each of us resides in at least one of the four sections or quadrants of the CASHFLOW® quadrant. Which quadrant we are is determined by where our cash flows come from, hence the name CASHFLOW® quadrant. A person can have multiple streams of cash flow and reside in more than one of the quadrants.
Employees in the E quadrant are people with steady jobs who rely on paychecks.
Those in the S quadrant are the self-employed who work by the hour, on commission, or on a fee basis. Many “A” students, such as doctors and lawyers, reside in the S quadrant.
The B quadrant is filled with people such as Steve Jobs and Bill Gates, entrepreneurs who start large businesses.
People in the I Quadrant are professional, active investors like Warren Buffett.
Most people are passive investors who invest in pensions, IRAs, and 401(k)s. Since they are passive investors—not professional investors—their investments are taxed at higher levels.
Most CEOs are in the E quadrant. They are known as “managerial capitalists,” employees who work for entrepreneurs. True capitalists are people like Steve Jobs, Bill Gates, or Mark Zuckerberg, entrepreneurs whose companies employ more than 500 employees and who transitioned from the S quadrant to the B and I quadrants.
Our school systems prepare people for the left side of the CASHFLOW quadrant, the E and S quadrants. That is why most parents advise their kids to “Go to school to get a job” (E quadrant) or “Become a doctor or lawyer” (S quadrant).
The differences in taxes between the people and the quadrants are extreme.
Where a person resides in the CASHFLOW quadrant—meaning where their income comes from—determines how that income is taxed. The diagram here depicts different types of income from different quadrants… and who pays the highest percentages in taxes today.
TAX PERCENTAGES PAID PER QUADRANT
Now you know why President Obama paid 20.5 percent in taxes and Mitt Romney paid 14 percent. The difference is the blended differences in income earned in different quadrants. President Obama looks at the world from the E and S quadrants. Mitt Romney views the world from the B and I quadrants.
Most socialists live in the E and S quadrants. The true capitalists live in the B and I quadrants.
As you can see, advising and encouraging your child to “go to school and get a job” in the E quadrant or “go to school and become a doctor or lawyer” in the S quadrant is advising them to work for income on which they’ll pay the highest percentages in taxes. The “A” students, the doctors and lawyers in the S quadrant, pay the highest tax percentage of all quadrants.
Whenever the masses cry out, “Tax the rich,” the taxes are raised on high-income wage-earners in the E and S quadrants, people like CEOs, doctors, and lawyers. The truly rich, the true capitalists in the B and I quadrants, pay very little, if any, in taxes. To some people, people like President Obama, this may sound dishonest and unfair. Later in this book, we’ll look at why tax breaks for those in the B and I quadrants are not only fair but also important to keep the wheels of the economy turning.
Salary: $1 a Year
Question: Why was Steve Jobs’ salary only $1 a year?
Answer: He was a true capitalist. His income did not come from the E or S quadrants.
By understanding taxes early in life, your child has time to make better life decisions about what they want to study and which quadrants are best for them. A person should never choose a quadrant just to pay less in taxes, but understanding the fundamental differences is a part of financial education. Understanding the quadrants, different types of income, and the taxes on that income, will give your child a foundation for making informed choices about money, business, and investing.
Preparing your child for the B and I quadrants takes time. Steve Jobs, Bill Gates, and Mark Zuckerberg started their journey to the B and I quadrants as teenagers. These three men all dropped out of great schools, such as Harvard and Reed College, because school, primarily, prepares students for the E and S quadrants, not for the B and I quadrants.
In preparing your child for the gorilla-wrestling that lies ahead, it is important that your child knows that there are different options open to them, options other than “go to school, get a job, work hard, and pay higher and higher taxes.”
Later