Not knowing a secret can be tortuous, especially a secret of the rich. So, right away, I shall reveal that secret as set out in Robert T. Kiyosaki’s book Rich Dad, Poor Dad written with Sharon L. Lecther, CPA: The rich own nothing personally but control everything. The poor and middle class try to own everything personally and lose to the government.
The rich utilise the legal structure of a corporation to reduce their tax liability. The rich exploit their financial knowledge in order to lighten their tax burden. No matter how the tax law changes, the rich continually seek ways of reducing their tax burden. The middle class therefore ends up with the heaviest part of the tax load.
The ready image of a large manufacturing plant and other offices, employees, and so on, are not necessarily parts of a corporation. It can be registered through a lawyer’s office and maintained in appropriate fashion. Accountants are needed to prepare the financial statements and to file the taxes, and independent auditors to attend attest to the fairness of the financial reports.
The incentive for setting up a corporation is to reduce the income tax burden where the personal income tax rate is higher than the corporation income tax rate. In more recent times, with the introduction of indirect taxation through the Value Added Tax (VAT), the personal income tax rate and the Corporation Tax rates have moved closer together. However, there is still the added benefit that certain expenses may be paid with pre-tax dollars within a corporation.
On the other hand, if you went to school and got a good, safe and secure job, as many of our parents would have recommended, you will be paying taxes as you earn. That means that the taxes would be deducted before you receive your pay cheque and you would have the net pay to spend.
The rich work on establishing a corporation as a business and set about minimising their tax burden. They can afford to. They hire accountants, lawyers and tax specialists just to ensure that they pay minimum taxes.
If you don’t learn certain lessons, life will push you around. One of the biggest bullies to push you around is the taxman. And most of us are afraid of him. Kiyosaki suggests that we widen our personal finance knowledge as an antidote to our fears.
We need to learn the basics of accounting, investing, markets and law if we want to succeed financially. Accounting is the basis of financial literacy, the ability to read and understand financial statements. Investing is about understanding and using various strategies and formulas to make money make more money. Understanding markets involves knowledge of the science of supply and demand, which is fundamentally driven by emotions. Finally, you need an on-going knowledge of the tax laws and their applicability.
In summary, it is recommended that if you own any sizeable assets, you should investigate the usefulness of a corporate structure to protect yourself from excessive taxation.
It can be described as follows: If you work for money you give up your power to your employer. When you make your money work for you, you can control your power.
