Lesson-4

Income-Tax and the Power of Corporations

History of Income-Tax.

Universal income-tax, as it exists today, originated from the popular idea of “taking from the rich to give to the poor”. Although it was intended to punish the rich, the present reality is that the rich are not taxed, and the poor and middle class are made to pay. Once the government started collecting tax money, its appetite for money grew. The bureaucrats started spending this money, and they made laws that will force the government departments to spend more. They are rewarded for spending all the money allocated to them and saving nothing. The government spending grew from year to year, necessitating higher and higher taxes. This increasing tax burden falls squarely on middle class and poor, who work for a salary. The government deducts the tax before the employees receive their paychecks. The employee, on the average, works for several months in a year before they make enough money to pay the taxes. The harder they work, the more salary they get, and the more taxes they pay. The rich, in contrast, created corporations or companies, and trusts, which are taxed at much lower rates. The power of the legal structure of these corporations or trusts gives the rich a vast advantage over the poor and the middle class.

Power of corporations

A corporation protects the rich from taxes. Corporation is not really a thing. It is merely a file folder with some legal documents in it, sitting in some lawyer’s office registered with a government department. It is simply a legal body. Corporations have lower tax rates compared to individual income tax rates. Moreover, certain expenses could be paid with pre-tax money within the corporation. While an employee earns, get taxed, and then paid the rest, a corporation earns, spends everything it can, and taxed on anything left. It is one of the biggest tax loop-holes the rich use. If you own a corporation, your vacation in Kashmir is a board meeting, car payments, insurance, repairs are company expenses and most restaurant meals are partial expenses. You can do it legally with pre-tax rupees.

The rich have the money, power and intent to change things their way. They search for ways to minimize their tax burden. With money comes great power that requires the right knowledge to keep it and make it multiply. This knowledge is called Financial IQ.

Financial IQ

According to Robert T. Kiyosaki, the financial IQ involves the following:

1) Accounting or financial literacy.

It is the ability to read and understand financial statements. It enables you to identify the strengths and weaknesses of any business. It is a vital skill if you want to build your own empire.

2) Investing. - Science of money making money.

It involves strategies and formulae for wise decision making. Must be creative and use the right side of your brain.

3) Understanding Markets. - Science of supply and demand.

Needs to know the ‘technical’ aspects of the stock market which is emotion driven. Also you must know the ‘fundamental’ or the economic sense of an investment. Your instinct must make sense and must not be merely based on current market condition.

4) The Law.

Utilizing a corporation wrapped around the technical skills of accounting, investing, and markets can aid explosive growth of your wealth. An individual with the knowledge of the tax advantages and protection provided by a corporation can get rich so much faster than someone who is an employee or a small-business proprietor. The difference is profound when it comes to long term wealth.

Besides the tax advantages mentioned above, a corporation provides the rich with protection from law suits. The rich hide most of their wealth using vehicles such as corporations or trusts to protect their assets from creditors. When somebody sues a wealthy individual, he often finds that the wealthy person actually owns nothing. The rich control everything but own nothing. The poor and middle class try to own everything and lose it to the government or to creditors.

In conclusion, Financial IQ is the synergy of many skills and talents. But it is the combination of the four technical skills given above that make up basic financial intelligence.

If you want to be rich, own a corporation wrapped around your assets.