Chapter 4 The History of Taxes and the Power of Corporations

Study Session for Chapter Four, Part Two of Two

The following quotes have been taken from the fourth chapter of Rich Dad, Poor Dad and form the foundation of the discussion points for this chapter. These quotes are not meant to be debated, which means that you are not supposed to agree or disagree with them. Rather, their meaning is supposed to be explored. What does Robert Kiyosaki mean by these statements.

I have written my thoughts about each quote below. If you would like, please look at the following statements first and formulate your own thoughts/responses to them before reading the ones I have written. Feel free to either leave your thoughts in the comments below, or turn your reactions into a post and share the link to your post with me here.

Quotations

1 My rich dad just played the game smart, and he did it through corporations—the biggest secret of the rich.
2 The reality is that the rich are not taxed. It’s the middle class who pays for the poor, especially the educated upper-income middle class.
3 Every time people try to punish the rich, the rich don’t simply comply. They react. They have the money, power, and intent to change things. They don’t just sit there and voluntarily pay more taxes.
4 If you work for money, you give the power to your employer. If money works for you, you keep the power and control it.
5 A person who understands the tax advantages and protections provided by a corporation can get rich so much faster than someone who is an employee or a small-business sole proprietor. It’s like the difference between someone walking and someone flying.
6 Employees earn and get taxed, and they try to live on what is left. A corporation earns, spends everything it can, and is taxed on anything that is left. It’s one of the biggest legal tax loopholes that the rich use.

My Thoughts

1 My rich dad just played the game smart, and he did it through corporations—the biggest secret of the rich.

Let’s break this quotation into two parts. The first part, My rich dad just played the game smart, is referring to how Kiyosaki’s Rich Dad approached taxes. He knew that he had to pay them, and he knew that the more money he made, the more he would be taxed, so he learned all that he could about taxes. Kiyosaki even writes something to the effect of this, While my Poor Dad considered himself to be an expert in the history of education, my Rich Dad fancied himself as an expert in the history of taxes. In a previous chapter, Kiyosaki referred to how his Rich Dad paid for good accountants and lawyers to prepare is taxes because, for the rich, even expensive accountants and lawyers cost less than being taxed fully by the government.

Essentially, the first half of this quote suggests that Kiyosaki’s Rich Dad learned the rules of taxation and used them to his advantage. And just what did he do exactly? Well, the details are written out, but they have to do with setting up a corporation, or a series of corporations, and using it/them to help reduce his tax burden and to help shelter him from risk.

2 The reality is that the rich are not taxed. It’s the middle class who pays for the poor, especially the educated upper-income middle class.

With this quote, I’m not sure if Kiyosaki literally means that the rich don’t get taxed (because their wealth and earnings are completely tied up in assets and corporations, which are taxed in their place), or if he is just saying that compared to the middle class, the rich are taxed so little that it’s almost as if they are not taxed at all. Regardless of what he is trying to say, his point is that the rich, based on the percentage of income that they pay in taxes, pay less than the middle class do.

As for why the educated upper-income middle class would bear the brunt of the poor’s tax burden, Kiyosaki seems to be referring to a couple of sub-topics that run through his book. One is that the more income a person makes, the more income that person will lose to taxes. The other is that, like his higher educated Poor Father, Kiyosaki seems to think that many highly educated people are not highly educated in the area of personal finance, which means that even though their education grants them access to larger salaries and more income, it doesn’t make them savvy enough to know how to keep and grow that income. Instead, they merely give it away in taxes.

If the rich don’t pay taxes, or if they report an earning statement that shows less income than a person in the upper-income middle class, that essentially makes the upper-income middle class the group with the most money. Hence, the group that pays the most in taxes and supports the poor.

3 Every time people try to punish the rich, the rich don’t simply comply. They react. They have the money, power, and intent to change things. They don’t just sit there and voluntarily pay more taxes.

When I think of taxes, sayings like Keep your friends close, and your enemies closer, and Know thy enemy are starting to come to mind. Having never been interested in finance or tax, I have never learned anything about taxes other than that they are a hassle to do every year. As a result, I’ve never felt like I have ever had any choice but to suck it up and pay the bill when and if the bill came.

What Kiyosaki is referring to when he says that the rich have the money, power, and intent to change things is that the rich, one, aren’t going to just roll over and let the government take their money and, two, the rich can afford to pay the best and smartest people around to find ways to save them money during tax season. In other words, the rich can spend the money they have on short-term investments (lawyer’s fees and accountant’s fees) to save themselves money in the long term.

I think I would add to this that the rich also live a lifestyle that allows them to take advantage of the current tax system, which is to say that their money is managed in a way that will benefit from the loopholes that their lawyers and accountants can find. Many people in the middle class, while they may be able to invest in a good lawyer and/or accountant, probably won’t be able to take advantage of the same loop holes that save the rich a lot of money because most people in the middle class haven’t managed their money in the same way as the rich. In other words, all they have (the people in the middle class) are liabilities (things that drain their money), while the rich have assets (things that not only bring in money, but can be used in a way to save them money).

4 If you work for money, you give the power to your employer. If money works for you, you keep the power and control it.

Yes, on the surface, the meaning of this quote seems very obvious, but I think that what Kiyosaki is referring to when he uses the word power is the power to take advantage of the tax system to save yourself money.

A person’s wages are taxed before they are received and before they can be spent (where they are taxed again). There is nothing anyone can do about this. @vdux described this well in his recent contribution to this book club when he described his house as a domicile, something that will be subject to increasing taxes so long as the value of his house increases. Like wages, there is nothing he can do about this.

Employers, on the other hand, people who own businesses, have the power to adjust their incomes to reflect the amount of money that they have spent on business expenses (which include employee wages). Again referring to @vdux’s post, a person who owns rental property can adjust the value of his/her property so that even when the value of the property increases, the amount he/she pays in taxes decreases. This means that rental property owners have the power to take advantage of the tax system so that it works in their favor whereas house owners do not.

Essentially, the power in this quote is referring to the power a person has to adjust and control his/her taxes. When you own things that produce income, you can take advantage of tax laws and loop holes that will save you money. When you only work for your wages, you don’t have the power to do this.

5 A person who understands the tax advantages and protections provided by a corporation can get rich so much faster than someone who is an employee or a small-business sole proprietor. It’s like the difference between someone walking and someone flying.

Kiyosaki’s formula is this: Buy things that produce incoming revenue for you. Use the money that you make from assets to buy more assets. As you do this, the amount of income that you receive from your assets will increase exponentially. Now, in addition to doing this, create a corporation. If you create a corporation, you will be able to save yourself money on the taxes that you pay. You can then use the money that you have saved on taxes to buy more assets, which will again produce more income for you in an exponential manner.

In other words, Kiyosaki is saying that you will build wealth so much faster if you understand how to use the structure of a corporation to your advantage. It is like using an airplane to fly around the world rather than trying to walk around the world.

6 Employees earn and get taxed, and they try to live on what is left. A corporation earns, spends everything it can, and is taxed on anything that is left. It’s one of the biggest legal tax loopholes that the rich use.

I’m trying to look for a deeper meaning to this quote, one that you might not see if you haven’t read this book yet, but I’m not seeing one. I really think the reason this quote is put in the study session is to drive home Kiyosaki’s main point: for those of us who are only working for a living, we aren’t taking full advantage of the money that we earn. We are merely giving a percentage of it away and then spending whatever is left to us. The rich, on the other hand, by way of corporations, are spending as much as they can and then paying taxes on whatever money they have left at the end of the day. These two ways of earning money and being taxed are the complete opposite.

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This concludes the second half of the study session for chapter four. Thank you for joining me.

If you would like to participate in this book club, buy or download a copy of Richard Kiyosaki’s book, Rich Dad, Poor Dad, and read it along with me. Each chapter is followed by a study session. I plan to read this book slowly, and to thoroughly explore each study session. I would love to do so in the company of others.

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Good discussion promotes deeper understanding and helps to reveal new and original ideas.

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I hope to write a post that explores the first half of the study session for Chapter 5 some time next week. If you would like to know when that post has been published, please let me know in the comments below and I will send you a link to the new post.

For those of you who missed the study sessions for chapters one, two, and three, you can find them by following the links below.

Chapter One: Part 1/2 | Chapter One: Part 2/2

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Chapter Two: Part 1/2 | Chapter Two: Part 2/2

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Chapter Three: Part 1/2 | Chapter Three: Part 2/2

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Chapter Four: Part 1/2