Why Wealthy People Pay Less Taxes Legally
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Summary
In this episode, Patrick and Patrick talk with Tom Wheelwright, an expert in taxes, about the history of taxes and the impact of the Biden tax plan. Tom is a tax expert, but he sees taxes in a very different way than most. He sees taxes as incentives, not taxes.
Transcript
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Was it sold as temporary or this is here to stay forever?
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They kind of like having all that money and that power.
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So under a Biden tax plan, who wins, who loses?
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Somebody who has amassed $100 million of wealth
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with Biden's tax laws could potentially only transfer
00:00:25.440
upon death only 2 million of that 98 to their heirs?
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Correct. And 98 million would go to the government.
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There was always a question whether a tax was even legal
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capital gains, certain write-offs, corporate taxes,
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Taxes on small business hurts the economy the most.
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When they say that the rich don't pay a lot of tax,
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they kind of imply that it's because they're cheating.
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But what I find, they just have better tax advice.
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My author today is an expert in taxes, but he looks at taxes in a very different way
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that hopefully by the time you're watching, you're done watching this interview,
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you will also look at taxes in a incentive compensation structure type of way.
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He's fully qualified to speak on the topic of taxes.
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He was with Ernst & Young for many years, also with PWC.
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At one point, he was training thousands of CPAs that were coming through Ernst & Young.
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At the same time, he was an adjunct professor at master's tax program at Arizona State University
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With that being said, Tom Wheelwright, thank you so much for being a guest on Valentine.
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Well, you know, Einstein said that the most complicated thing in the world to understand
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I'm going, why not take on the most complicated area?
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If Einstein thought it was hard and if there was a way to make it simple
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for people to understand, then that sounds like a good thing to do.
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So because the way you explain taxes is a lot more simpler than sometimes others explain.
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Well, so I look at taxes as really what most of the tax law is.
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So there's 6,000 pages in the U.S. tax law, roughly.
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There's about 30 pages that actually give you the rates and how much tax to pay.
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There's one line that says all income's taxable unless you say it isn't, unless we say it isn't.
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There's another line that says nothing's deductible unless we say it is.
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Well, primarily, it's really incentives that the government uses to encourage people to
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undertake certain behaviors, whether it's buying a home versus renting a home,
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whether it's sending your kids to college, or whether it's starting a business, investing in energy,
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So if you look at it as this is really just an instruction guide for reducing taxes and
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doing what the government wants you to do, all of a sudden, it completely changes the picture
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Because one of the things, I got 50 pages of notes on taxes, history of taxes.
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Okay, so I'm enamored by the topic of taxes, because I look at taxes as if you're in a company
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that pays you commission, and you see how the sales commission is structured, and you have
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to figure out a way to maximize the compensation structure of a sales company.
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You're doing real estate, you're with Keller Williams, you're with Compass, you're with
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You're with insurance, you're an advisor at Morgan, you're selling pharmaceutical sales,
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Walk us through the history of taxes, I don't know how far back you can go, but specifically
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in the States, walk us through how taxes began, why it became, you know, started, and where
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we are today, how much more complex it is today versus what it was in 1913 when it first got
00:04:02.400
So remember in 1913, it was only a tax on surplus income.
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It wasn't tax on all income, it was really a tax on what they called excess earnings, and
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it really only applied to the very wealthiest people.
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Around 1944, they changed the law to apply to employees, but even then, they exempted a
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So basically, the standard deduction, the personal exemptions, they were intended to exempt the
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living wage, so that only the excess earnings, again, were taxed.
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And then in the 1960s, we started to see some tax increases, and we started to see,
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we started to see incentives, you know, we had the 1954 Act, which was a major tax act.
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It was supposed to simplify it, then it complexified things.
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Then we had the 1986 Act, which is supposed to simplify again, which is what it really did was
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So it made more things taxable, added more complexity.
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What we have now is, we actually have a lower tax rate than we've had in many, many years
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At one point, it was upwards of 90% on the highest rates.
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And there's all sorts of shenanigans going on to get out of those, right?
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So right now, you know, we're in that 40% range, which is actually kind of a sweet spot
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for governments, they find that if people are paying more than 40%, they have a huge incentive
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And if they pay much less than 40%, the difference between a lot less than 40% and 40%
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So what the government really started doing back in the early 60s with the investment tax credit
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was to kind of test the waters and see what would happen if we gave a tax incentive,
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they finally realized people hate paying taxes, right?
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So if we give a little tax incentive, what will that change behavior?
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And what they found was, yeah, and in fact, it changes behavior.
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The right incentive will change behavior in a massive way.
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So really, what taxes have become is a way for the government to leverage government funds.
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Instead of the government building houses, for example, they encourage private industry to
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And as a result, private industry does 10 times the work for the same number of dollars,
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because they're getting rewarded through profits.
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And then when they make the profits, they're also paying the government.
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So the government wins multiple times with these incentives.
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So let's go back to the one topic that always comes up is, what's the big deal with 40%?
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You know, at one point, the top marginal tax rate in 1944 was 94%
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for any income above $200,000, which is in today's correlation of $2.5 million.
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But then I've read by a lot of different people saying no one ever actually paid 94%.
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And by the way, if we look at the 90% tax rate, we stayed at 88% or higher from 1942,
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top marginal tax rate, to 1963, it was minimum of 88%.
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48, 49, we dropped to 82%, but then it went back up to 91%.
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So first of all, if you can kind of walk us through, what does that mean, 94%, 88%?
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What was the cause of raising it to that level?
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Well, you know, taxes are, by definition, a burden, right?
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And what they found, and it was actually the great Reagan experiment, right?
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John F. Kennedy was the first president to really look at taxes as,
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what if we reduce taxes, would that stimulate the economy?
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Do we really need to have such a high tax rate?
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And what he found was, yeah, I mean, it actually did stimulate the economy.
00:08:02.540
Of course, Reagan, I remember the Reagan years very well,
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not just because I was there in Washington, D.C. when that law was passed.
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But I remember when we had that stagflation, and we had high interest rates,
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and we had high taxes, and we had low economic production.
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And so what Reagan did was he pretty much went in and turned it on its head
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and said, look, let's try a really low tax rate.
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Let's get rid of all of these tax shelters, which he did a pretty good job of.
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Let's get rid of the tax shelters that people were using to get out of that 90% rate.
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Actually, that was the closest we've ever had to a flat tax.
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We only had two tax rates after the 1986 Act, right after the 1986 Act.
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So all Reagan was looking at was, look, we think that we could stimulate the economy.
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You look at the, you know, Art Laffer and the Laffer curve, and supply-side economics.
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And that's pretty much where we've been since then.
00:09:03.540
Going back to your question about 40%, you know, there's been a lot of studies.
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And my reading of the studies is 40% is that magic number where you get much over 40%
00:09:14.540
and people really stop doing what you want them to do.
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If you get much under 40%, that difference below 40% and 40% doesn't have a huge impact
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But interestingly enough, Patrick, it's actually not just the US that uses that 40% target.
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So who screwed up the tax system from 1913 until today?
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Meaning which president abused and raised taxes the most that created a lot of different
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Oh, I don't think any one president could take credit for that.
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We're actually the, we have the highest compliance rate in the world.
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You know, we're at 85% compliance rate, which is really good.
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So I was in Italy with Mr. Kiyosaki and I was looking at the law in Italy.
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You know, they actually have two levels of tax evaders.
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They have the little tax evader, which kind of they expect and you just get a slap on the
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hand and then they have a major tax evader that, you know, goes to prison and so forth.
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If you avoid taxes legally, you don't go to prison.
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And so that's really the key is just stay away from cheating.
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And the cheaters, by the way, are not all the rich.
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And if you look at the data, it's primarily the middle income.
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And that's the small business where you get a lot of the cheating.
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So, for example, a small business, I mean, how many times, Patrick, have you had a contractor
00:11:01.320
or somebody say, well, if you pay me cash, I'll give you a discount.
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Or you have a small business that reports what we call a Schedule C in the US.
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Well, Schedule C is basically a one-sided entry.
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See, we have double entry bookkeeping, you know, left side, right side.
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And the idea is that they have to balance, right?
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But in a Schedule C, a small business, they only report one side of that transaction.
00:11:29.540
Well, that makes it really easy for them to fudge the numbers.
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And they find that a large proportion of the cheating goes on in that small business.
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And that's where the IRS does try to audit those.
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But the IRS has been hampered with lack of qualified professionals.
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So, if I look at the numbers right now, history of it, here's what it looks like.
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So, from 7% by 1931, where 25%, World War I happens, we go up to 63% under FDR.
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By the time FDR is done, he takes it all the way up to 94%.
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Truman comes down, and he takes it down to 86.5%.
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And then it goes all the way down under Truman.
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Reagan takes it from 69% all the way down to 28%.
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So many times when you talk about Reagan economics and the way he did his taxes was very interesting.
00:13:01.080
He lowered, you know, he increased the bottom line marginal to, I think, 15% and matched it
00:13:08.880
But what he did, you will hear a lot of people saying this trickle-down economics doesn't work.
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Can you give the argument of the people that say it doesn't work?
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And what is the argument for saying, no, it absolutely worked?
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Well, of course, the argument for people to say it doesn't work, they're saying, look,
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that's such a low rate, okay, when you get to 28%, that the difference between 28% and
00:13:34.640
50%, say, is not going to change behavior substantially.
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And so you're not going to get a lot of bang for your buck out of that difference between
00:13:44.820
What Reagan did, though, so on the flip side of this, remember what the world looked like,
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and particularly the U.S. economy looked like when Reagan came in.
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And he started, by the way, he started, his first tax bill was his first year in office,
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It wasn't 1986 when we had the flattening of the rates.
00:14:06.060
He actually brought, gave huge deductions, incentives to real estate in 1981 under the Economic
00:14:14.640
And so what Reagan was thinking was, look, what if we bring it down and we get rid of
00:14:24.620
So there were massive tax shelters, you know, cattle shelters, real estate shelters, all
00:14:30.900
these other shelters that were going on prior to 1986.
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I mean, there's a famous case with Jack Benny, the comedian who was able to set up a corporation
00:14:44.240
so that he paid corporate rates instead of individual rates of 90%.
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So people were, you know, playing, I mean, it was, they were playing fast and loose with
00:14:56.940
And what Reagan said was, look, what if we tighten everything up?
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So we're going to take away a lot of the tax deductions, a lot of the tax shelters, and
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instead say, look, you really are going to pay tax.
00:15:11.580
You're not going to, we're not going to say it's 90% and you pay 28%.
00:15:18.400
Well, what it did was at the time is it takes all the incentive out of doing something for
00:15:25.460
Well, actually what happened, Patrick, is the government doesn't actually like not having
00:15:31.360
And so they started raising the rates almost immediately and started adding back in incentives.
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And the rate needed to get a little higher in order to incentivize people to reduce their
00:15:46.680
taxes by investing in real estate, energy, et cetera.
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And so, you know, the government actually has been tweaking this a long time and they really
00:15:56.680
just found, I think what they tried to do is tweak it to a point where it's both fair
00:16:04.280
And so, but it doesn't, it doesn't inhibit the economy, but it gives them some tools to
00:16:12.860
You explained it the way you did, you know, back in the days, one of the biggest things
00:16:16.720
that the government convinced the people to agree on is to withhold taxes before they get
00:16:22.600
So it was almost like before you'd get your money and then you would pay the tax you would
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get, if you made four grand this month, you'd make four grand this month.
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So you are okay with that because you won't really see the $1,200 being kept by the government.
00:16:40.800
How, how would they, I mean, that's gotta be one of the biggest sales of all time to
00:16:46.080
How do you convince the populace to say, don't worry about it.
00:16:51.480
Well, you, you can even, even go one, one better than that, Patrick.
00:16:54.540
I mean, consider what happened in 2017 when, when Trump reduced the tax rates, everybody,
00:17:03.260
almost everybody got a tax cut and yet the Democrats were able to say, this is a bad deal.
00:17:09.400
It really was because what Trump did at the same time was reduce the withholding rates.
00:17:17.600
They were upset with, with Trump because they didn't get as big a refund, even though their
00:17:23.280
What they really wanted was the refund because they counted on that for vacations.
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People do not like having to pay taxes on April 15th.
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Let me tell you, they would much rather get a refund.
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I don't, I don't know what it is about our psyche, but that seems to be the way it goes.
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Like, do you know the history of how they were able to convince the pocket?
00:17:44.820
Now in 1939, another interesting statistic for you.
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I'm curious to know what you know about this one in 1939 in America, only 4 million people
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This is 39 and they collect, the government collected 900 million, $900 million.
00:18:01.000
Four years later, they went from only 4 million people filing taxes to 41 million.
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They went from raising $900 million in taxes to $13 billion.
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Do you know kind of what happened during that four year period, 39 to 43?
00:18:15.760
Well, yeah, we had a war is what was really going on.
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And what they're trying to do is raise taxes to pay for the war.
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But what happened was employees had never been taxed.
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Prior to 1943, 44, employees had never been taxed.
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And what they really wanted was they wanted the federal employees to be taxed because they
00:18:40.620
In order to do that, though, constitutionally, they couldn't just tax federal employees.
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Do you think it was, I mean, again, this is your world.
00:19:00.520
This is why we brought you on because I want to learn from you.
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Was it sold as temporary or was it sold that this is here to stay forever?
00:19:15.920
I mean, the idea is that it's a tax to pay for wars.
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And then it was supposed to actually go back and go away.
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And then what happens is the government goes, hey, look, we've got all this money.
00:19:48.600
And so they kind of like having all that money in that power.
00:19:54.340
That's insane to me to say, hey, guys, listen, we're going through tough times right now.
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We've got to figure out a way to everybody take a cut and they're like, you know, it'll
00:20:01.740
Let's just say you're running a mortgage company.
00:20:07.120
You know, more, you know, no income, no assets.
00:20:11.220
And you sit down and say, guys, I hate to say to you, I can't afford to pay the salary
00:20:16.560
I either have to fire you or I have to pay half your salary for the next 12 months.
00:20:19.620
I hope you guys are OK with that, because there's only this this is only thing I can
00:20:26.880
But the idea is 12 months later, if there's recovery, I want to go back to my old salary.
00:20:31.920
But in this case, they said, no, we're going to stay here now that we realize we can go
00:20:36.860
from taxing four million to taxing forty one million and you're not complaining about
00:20:49.620
OK, because it's a tax not seen is not a tax in a lot.
00:20:55.280
You know, when when we look at it, it's the it's the sales tax that we see on the bottom
00:21:08.040
But if we're not seeing that because it's just taken out of our paycheck, it's much easier
00:21:15.220
And fast forward 80 years later, we're not saying nothing about it.
00:21:18.540
And we're just constantly sending the money to him.
00:21:20.800
And, you know, the government's gotten much bigger than what it was before.
00:21:26.240
It's and it's not a Republican or Democrat thing.
00:21:28.840
Both of them are spending a lot of money when it comes down to it.
00:21:40.200
You know, capital gains is going to go from 20 to 39.6 to a corporate tax is going to go
00:21:46.120
You know, top line marginal ordinary income is going to go 39.6.
00:21:49.920
And I'm not counting the additional Obamacare, which is the three point two nine or whatever
00:21:56.280
What are your thoughts about what's being proposed?
00:22:00.220
And will they be able to retroactively take it back to one one of 2021?
00:22:09.380
Let's start with the capital gains tax, because I think that's the most interesting one, because
00:22:15.500
Even the liberal think tanks say, look, this doesn't raise revenue.
00:22:19.540
The government accounting offices, this doesn't raise revenue.
00:22:23.460
And so and yet they want to raise capital gains tax.
00:22:27.220
And it's almost like it's a, you know, we've got this big call to tax the rich.
00:22:32.580
Well, what I think what people miss is, is that the rich pay all the taxes to begin with.
00:22:39.420
The taxes aren't 50 percent of the public doesn't pay tax hardly at all.
00:22:44.300
And the and the other 50 percent is paying all of it.
00:22:46.600
And most of that's being paid by the top 10 percent.
00:22:49.860
So I think a lot of it is is show now that the challenge with the capital gains tax, of
00:22:55.220
course, there's the capital gains tax during life, which is bad enough.
00:23:02.280
And there's a question, you know, can you do that?
00:23:06.980
But the capital gains tax at death is actually pretty serious because, you know, there have
00:23:12.900
been some calculations that if you follow Biden's tax proposals through somebody with
00:23:18.860
a hundred million dollar estate could easily end up with two million dollars, his heirs
00:23:23.820
end up with two million dollars, but ninety eight million dollars is taken by the government
00:23:31.780
So we're talking about a massive shift in policy.
00:23:36.900
Let me say that one more time, because the audience may have not paid attention to what
00:23:40.700
So somebody who has amassed one hundred million dollars of wealth, OK, with Biden's tax laws,
00:23:46.680
they could potentially only transfer upon death only two million of that ninety eight
00:23:54.100
And ninety eight million would go to the government.
00:23:56.800
If if his tax laws pass, if you follow it exactly the way I mean, these calculations
00:24:04.500
If you follow all of his proposals through, you've got to assume that somebody with a
00:24:10.980
you know, if they have a hundred million dollar estate, they probably have it's probably a
00:24:15.860
And they probably don't have any what we call basis for that.
00:24:19.520
So when they sell, if they sold that business, they pay capital gains right on a hundred million
00:24:25.240
But they'd also under what the plain language is, they'd also pay forty five percent estate
00:24:39.180
You know, when we you know, the Biden talks about this increase in corporate rates like
00:24:43.120
the federal rate is the only rate corporations pay when that's not that's far from the truth.
00:24:48.440
I mean, some states charge a large portion of the taxes.
00:24:56.720
I'm going to have my editors show this so they understand.
00:25:05.340
And I'm in California, let's just say, or New York, because I see what you're doing.
00:25:11.700
How much do I pay in capital gains taxes under Biden's laws?
00:25:15.240
So in California, just California alone, you're going to pay 13.3 percent.
00:25:20.940
OK, Biden, you're going to pay somewhere between thirty nine point six million.
00:25:29.740
And depending on if you end up having to pay the Obamacare tax, that's another three point
00:25:38.700
You literally could end up paying forty three point four percent.
00:25:45.760
So at this point, you have me at fifty six point four million is gone.
00:25:50.040
I have forty three point six million left to my name.
00:25:54.980
But then you've got a understand that you've got a forty five percent.
00:26:00.000
OK, so you have three and a half million dollar exempt.
00:26:02.260
So out of that hundred million, three and a half million dollars isn't subject to a state
00:26:06.400
But ninety six point five million is subject to a forty five percent of state tax.
00:26:13.400
So you take night of forty five percent of ninety six point five million.
00:26:20.460
And I think you come up with right around ninety eight.
00:26:26.560
So I take ninety six and a half million at forty five percent.
00:26:34.480
Add it to what you've got that you're already paying, which is an additional forty three
00:26:44.040
Let's just say it's a ninety million bucks right there.
00:26:48.160
OK, if you've got you got forty three million and then you've already got fifty six million.
00:26:57.220
So the forty five million plus the fifty six million, that's that's ninety nine million.
00:27:29.020
It's possible, you know, hopefully saner minds will prevail.
00:27:33.120
But but, you know, if you just look at it on this black and white, you know, hopefully
00:27:39.080
you're not paying the state tax on top of income tax.
00:27:42.980
But that's what I mean, that's that's kind of what the proposal looks like.
00:27:47.660
So it's it's pretty much a confiscation of your assets when you die.
00:27:52.020
So under a Biden tax plan, who wins, who loses?
00:28:00.520
I don't think I don't think there are any winners because
00:28:03.540
if you take away if you take away the incentives, do you still get, for example,
00:28:13.180
do you still get the technology that that we're creating?
00:28:17.980
Business owners, you know, we're business owners.
00:28:24.780
OK, are you are you going to take that risk if you can't leave anything to your kids?
00:28:37.080
I mean, do you think the average person is going to be happy
00:28:40.340
when their neighborhood restaurant goes under because the government confiscated it?
00:28:47.040
I'll tell you who the big winners are, actually.
00:28:49.440
The big winners are big corporations, corporate America.
00:28:53.120
They are the biggest winners under this plan, because what happens is if you had
00:28:57.960
let's say that you've got a small business worth 10 million dollars.
00:29:02.520
But you get a four of five million dollar capital gains tax at death.
00:29:08.760
OK, you get a five million dollar capital gains tax at death.
00:29:19.700
But it's a distress sale because it's a fire sale.
00:29:27.140
OK, so I actually believe, Patrick, that the big winners out of all of these tax plans
00:29:34.380
OK, so let me be a skeptic here and I'm going to go to conspiracy town for a second here with
00:29:39.400
and let's see if there's anything that you say.
00:29:41.700
So I'm at a program in Boston with 144 other entrepreneurs from around the world,
00:29:48.000
64 different countries, and we're all learning about different laws and how it's played.
00:29:51.380
In many different countries, it's very open how to manipulate the market by buying politicians out.
00:29:55.740
It was very open when one guy from Brazil was like, look, pay the guy half a million dollars
00:30:01.300
If you're going to make 10 million on this, what's a half a million dollars?
00:30:04.420
Let him come out with a new law to make it higher to compete in the marketplace.
00:30:08.740
So how much is that is happening in the U.S. where guys are saying, look, a Biden or this camp,
00:30:16.780
I'll give up a little bit of taxes here and I'll be a wink, wink.
00:30:21.340
But behind closed doors, I want you to eliminate 80% of my competition
00:30:26.920
And rather than paying $100, you know, 100 pennies on a dollar, I'll pay 50 cents on a dollar
00:30:38.160
How much of those conversations actually takes place?
00:30:41.420
And how much of it is just conspiracy skepticism that'll never happen?
00:30:48.980
I don't think it's, it may not be the primary driver, but just look at what's happened during
00:31:07.120
And they're talking about raising the corporate rate from 21% to 28%.
00:31:15.180
And so you're raising it to still only half as, you only half the way back to where you
00:31:23.620
Well, maybe we could take 25%, but boy, that would be really tough to be competitive, even
00:31:32.080
In exchange, we get to buy out all of these small business at fire sale prices.
00:31:37.920
I think that's a pretty good trade-off, frankly.
00:31:41.140
And if I were a big business, let me give you one more.
00:31:44.500
So one of the proposals of Biden is to eliminate the like-kind exchange on real estate, right?
00:31:58.840
So they eliminate it on real estate, which by the way, only affects middle America.
00:32:09.840
Okay, but remember who still gets a like-kind exchange.
00:32:15.460
Anytime a business acquires another business in exchange for stock, that is a tax-free exchange.
00:32:24.160
It is exactly the same as a 1031 like-kind exchange.
00:32:28.320
But they're not even talking about getting rid of the tax benefits of mergers and acquisitions.
00:32:35.260
They're only talking about getting rid of the tax benefits of real estate.
00:32:47.200
Hurts the small business who owns their, you know, they own their own building.
00:32:53.540
What they want to do is they really want to trade into, let's say, a triple net lease on a Walgreens,
00:32:58.980
something like that, and have a nice, you know, reasonable income for their retirement, right?
00:33:04.460
We're talking about retirement assets of entrepreneurs.
00:33:08.400
And what you're talking about is let's, you know, the entrepreneurs, they don't really need retirement assets.
00:33:13.540
What we really need is we need the big corporate America to actually own those companies and be able to take them over.
00:33:20.220
So, seriously, these are conversations I'm having with clients right now, Patrick,
00:33:25.100
is that if this capital gain, if this goes through,
00:33:28.600
then it will completely change the way a small business exits,
00:33:33.940
the small business owner exits their business because no longer will they be able to just sell it for cash
00:33:41.600
Instead, what they're going to have to do is they're going to have to sell to a big business
00:33:45.140
because the only way they can, the primary way to avoid that big capital gains rate,
00:33:50.880
because remember, they're only getting that, they're only over a million dollars once in their lifetime,
00:33:56.660
So, the capital gains on business is a little like, Patrick, if the day you retired,
00:34:15.800
Well, the same is, that's what they're proposing for business owners.
00:34:18.700
So, what happens is, is instead, businesses are either going to have to aggregate and become big
00:34:23.620
or they're going to have to sell out to a big business.
00:34:25.660
Those are really the two choices that they're left with.
00:34:28.240
Out of all the tax increases that we can have, right?
00:34:33.820
Real estate, we got certain write-offs that we got going on.
00:34:38.260
Which one hurts the economy the most when we raise it?
00:34:42.040
Which one hurts the economy the most when we raise it?
00:34:45.200
Oh, I think the taxes on small business hurts the economy the most.
00:34:49.780
The capital gains tax probably has the least beneficial, has the least benefit.
00:34:56.400
Because what it does is, remember also that, you know, capital gains tax will definitely have a
00:35:07.240
Because people won't want to sell, they'll hold on to it longer, people won't be buying as much.
00:35:12.220
And so, what happens is, is that that hurts the 401ks, okay?
00:35:15.640
It's average Americans who own 401ks, it's not the big guys who own 401ks.
00:35:20.680
You know, you're not finding rich people with lots of money in 401ks outside of maybe Mitt Romney.
00:35:27.500
And so, what happens is, is that the capital gains tax doesn't raise much money, but it does hurt a lot of people.
00:35:34.980
So, I actually think from a policy standpoint, that's one of the, to me, that, that plus the capital gains at death, that whole capital gains scenario is, to me, probably the worst part of this.
00:35:52.860
I think, you know, the international rules, they've got to be really careful with, because that could have a huge impact.
00:35:58.640
That was probably the best thing, by the way, that came out of the 2017 Act, was the international, the corporate international rules.
00:36:08.120
Yeah. So, you know, we had this, before 2017, we had these corporate inversions.
00:36:15.300
This is where Apple, for example, they did this, right?
00:36:19.480
They have a small company in Ireland, which has a 12% tax rate, basically acquires Apple.
00:36:28.040
It's kind of a minnow swallowing the whale type of thing.
00:36:31.460
And now, we have all these earnings that are in, outside of the U.S.
00:36:38.320
Well, Apple can't bring them back in, because if they bring them back in, they pay 35%, right?
00:36:44.020
Well, what the FIDI rules did was allow you to have these earnings from intellectual property at roughly 13.5%, okay?
00:36:57.700
So, now, we've had, by what I've seen, the calculations I've seen, about $1.6 trillion brought back into the U.S.
00:37:11.260
Well, so, let's say you push, you get rid of those rules.
00:37:14.660
Biden's talking about a 28% tax rate, not a 13.5% tax rate.
00:37:20.700
Well, unless you can, you know, in La La Land, you can have a worldwide minimum tax, but that is purely La La Land, okay?
00:37:28.200
That is never going to happen, because why would Ireland agree to that?
00:37:37.480
So, if you had a minimum tax, it may work, but without a minimum tax, what are you going to do?
00:37:43.180
You're just going to go back to this corporate inversion.
00:37:45.000
People will just, they'll just leave the money offshore.
00:37:49.460
I mean, tax planning is, when it comes down to it, once you understand the rules, it's just not that hard, Patrick.
00:37:55.740
So, you know, that's actually, frankly, what I liked best about the 2017 Act.
00:38:02.480
I liked the reduction in the corporate rate, and I liked the international rules, the 50, the guilty stuff, even though they're very complex.
00:38:10.520
I think they're a really good start in the right direction to really encourage investment in the U.S.
00:38:16.820
What I would have liked to have seen was, rather than the Democrats arguing about, well, we need to undo this 21% corporate tax rate, is that I wish they'd said, we need it to be at 15%, because that would then make the U.S. a tax haven.
00:38:34.480
Instead of punishing U.S. companies, right, and punishing people for locating the U.S., which they are, now remember also, we don't have a value-added tax.
00:38:51.940
Not only do they pay corporate income tax in France, but there's a value-added tax, okay?
00:39:11.320
Because we have sales taxes, and we've never gone that next step to a federal level.
00:39:18.220
This is what really people like Ted Cruz have been arguing for, is a flat tax, right?
00:39:28.240
The concern, of course, is a value-added tax is an absolute fabulous idea, as long as you don't also have a high income tax.
00:39:37.640
But the challenge is that, you know, once you get a tax, as you were just talking, right?
00:39:43.320
As you were just saying, once you start that tax, it never goes away.
00:39:48.160
I mean, if we're going to tax anybody, why don't we tax other countries that want to do business with us rather than taxing?
00:39:54.160
We're getting taxed when we're doing business with others, but we're not taxing them when they're doing business with us.
00:39:59.540
Well, I'll tell you, that's actually the idea behind tariffs, right?
00:40:02.220
I mean, tariffs are the alternative to a value-added tax.
00:40:11.480
It's really the opposite of the value-added tax.
00:40:17.160
And so when the other countries add tariffs, they're adding tariffs on top of their value-added tax.
00:40:22.680
So it's still not an even, it's not an even plan.
00:40:27.040
For the longest time, I mean, that's how the country ran, based on excise tax and tariffs that we had.
00:40:32.300
That's kind of how a lot of the money was made.
00:40:34.520
By the way, an interesting fact, when we're talking about the war, how they raised, you know, from 4 million people doing taxes to 41 million,
00:40:40.360
and they raised from 900 million to, what, $13 billion, the number I read you.
00:40:43.740
Back when Lincoln was president in 1862, they passed the tax for, it was the first income tax they passed in 1862.
00:40:53.500
No one paid it, only the well-off, the rich people paid it.
00:40:56.960
By the end of Civil War, only 10% paid the income tax.
00:41:03.340
Meaning, hey, we collected money, 11 years, we paid off the Civil War, now go back and don't pay any taxes.
00:41:08.940
They did it the right way then, but now it's kind of like, no, no, no, keep paying it, keep paying it, keep paying it.
00:41:13.680
Well, what happened was, Patrick, we got a constitutional amendment.
00:41:18.920
So really, there was always a question whether a tax was even legal until we got the constitutional amendment, right, back in 1913.
00:41:31.360
They could only be done for certain short periods of time.
00:41:33.880
With the constitutional amendment, that brought on the IRS, and it made it permanent.
00:41:40.420
Going back to you saying you're talking to your clients, what are some of the common questions you hear your clients asking right now?
00:41:47.060
Oh, you know, a lot of their question is, okay, what am I going to do to exit my business?
00:41:51.980
What am I going to do from an estate planning standpoint?
00:41:53.880
You know, how do I make sure that all my money doesn't go to the government?
00:41:58.420
What am I going to do about these capital gains?
00:42:02.240
So nobody's complaining about the raise in the corporate tax rate.
00:42:05.760
Nobody's, really, nobody's complaining about the raise to 39.6%, the top rate from 37 to 39.6%.
00:42:15.080
They don't like the 1031 like kind of exchanges going away.
00:42:18.880
That's, you know, that's going to put a damper on the real estate market for sure.
00:42:22.140
You know, that takes liquidity out of the market is what it does.
00:42:26.880
You know, these capital gains, and 1031 is really a capital gains tax, right?
00:42:32.340
So what you're doing is you just take liquidity out of the market, and nobody that's in the market wants to lose liquidity in the market.
00:42:39.600
That's what makes the market work is liquidity.
00:42:41.940
And so I think that the capital gains tax is the one that's probably the most problematic.
00:42:47.760
The reality is, Patrick, you could go back to a 70% or 75% tax rate over 10, 20, 30, 40, $50 million.
00:43:01.600
Are there going to be fancy ways to deal with that?
00:43:06.260
If you got that high of a tax rate, you're going to play the games legally to make sure that you don't pay that high tax rate, just like you were saying, like when Jack Benny did back in the early days.
00:43:18.860
So this is where we are right now, and it's just really interesting to see.
00:43:25.180
It'll be really interesting to see what actually transpairs and see if we get some cooler heads in there to say, you know what?
00:43:31.340
We don't really want to confiscate business owners' retirement.
00:43:35.600
I think by the end of the year, it's a very likelihood that in 2022, man of the year could be Joe Manchin.
00:43:41.760
I think man of the year in 2022 could be Joe Manchin because he has more control than Kamala Harris.
00:43:48.280
He's probably the most influential politician right now in America because he's not willing to compromise certain values on helping advance the economy, and you have to respect the guy where he's at.
00:44:02.280
Your client asks you, hey, Tom, man, what do I do?
00:44:09.020
Are you saying sell this year rather than next year?
00:44:12.140
Are you saying, look, are you keeping it for five, ten years?
00:44:19.140
I know, obviously, you can't give a blanket advice to everybody, but what are some of the feedback you're giving to your clients?
00:44:24.620
No, look, once you understand the tax law, you realize that there are a lot of different options.
00:44:32.140
And, you know, my job, for example, is to help you do what you want to do and not pay tax.
00:44:39.240
And so, there are ways, there are always going to be ways to deal with this, okay?
00:44:47.160
Now, what I am telling every client is, do your estate planning now.
00:44:51.820
You asked the question, Patrick, earlier, could they go back to the beginning of the year?
00:44:56.880
That is really horrible, horrible policy, okay?
00:45:04.800
I mean, I'm not sure that that's legal to go back.
00:45:10.440
I mean, if you look at the 2017 Act, that was retroactive to September, right?
00:45:17.500
September 27th is when those provisions were retroactive.
00:45:20.540
Most of them were retroactive to September 27th.
00:45:22.780
Well, that's when the legislation was first proposed.
00:45:28.280
Now, we don't yet have legislation actually proposed.
00:45:34.500
So, what we're hopeful at, that we have this small window of opportunity right now to do
00:45:44.800
You never do estate planning without doing income tax planning.
00:45:48.980
But if you do that right now, there's at least a hope that you're going to be within the window.
00:45:55.640
If you don't do it now and you wait until the end of the year and it passes, then, you
00:46:04.500
States, a lot of people are looking into moving to different states, okay?
00:46:09.020
When I met with Arthur Laffer in Tennessee, I said, why are you in Tennessee?
00:46:11.900
He said, it's the lowest all-in taxes in all of America.
00:46:15.980
You moved this practice to Nashville, Tennessee.
00:46:18.360
What are some states that are winning right now?
00:46:21.680
What are some states that people ought to consider?
00:46:24.540
And what are some deciding factors on somebody to sit there and said, I should look at this state,
00:46:38.400
And they just get it different ways, whether it's sales tax or property tax, income tax.
00:46:42.800
Those are pretty much the three legs of the stool, right?
00:46:58.820
And like you say, Tennessee has a low personal income tax, but they actually have a pretty high
00:47:08.540
So Tennessee probably would not be my first choice.
00:47:14.160
And Texas is even better than Florida because Florida does have a corporate income tax.
00:47:26.260
Of course, you have to look at, you know, where do you want to live?
00:47:31.440
Texas does raise a lot of their revenue from property tax.
00:47:34.160
So you have to look at, okay, what are my property tax going to look like?
00:47:41.100
But it is those states with low income tax or no income tax that are really the big winners
00:47:47.840
I mean, even like, I mean, take, I'm in Arizona and the surrounding states, not Arizona itself,
00:48:00.380
So now what we have is we have Utah, New Mexico, Colorado, all with much lower tax rates
00:48:09.100
So I don't think Arizona is going to be the big growth state if this Prop 208 stands up
00:48:16.540
If it stands up in court, then I think that we're going to go the way of California.
00:48:20.820
I think the West Coast and the East Coast outside of, again, Florida, I think they're pretty
00:48:27.940
People are just going to keep moving out unless they want to pay the high, what I call a beach
00:48:38.840
They're winning with, you know, they're winning.
00:48:41.300
They've won throughout the pandemic, frankly, is that they've got lower tax rates.
00:48:51.440
First time in 172 years, California's population didn't grow.
00:48:54.900
That's pretty insane to be thinking about that.
00:49:08.200
Oh, I'm hopeful that the Supreme Court turns down Prop 208 and we'll be OK.
00:49:14.980
So so there's there's a couple of things that people and this will be the last thing I want
00:49:19.180
to address before we wrap up is there's a couple of things with P&L.
00:49:23.180
There's a couple of things that you'll hear about.
00:49:25.140
So there's a look million dollar homes in California are selling like hotcakes.
00:49:31.940
The average home stays on the market for eight days before selling right now.
00:49:38.040
We put our house on a market 24 hours, two offers done cash deals.
00:49:43.000
I in two years prior to that, I put in a market one year.
00:49:51.140
So people who are in money making years of their lives versus people who have made the
00:49:57.900
money in their lives, which means I'm 62 years old.
00:50:04.000
I've accumulated some of its stock, some of its bonds, some of its real estate, some of
00:50:08.220
its artifacts, collections, cards, whatever you want to call it.
00:50:17.540
I've already sold my little business, small business that I had, et cetera, et cetera.
00:50:21.380
What is the different mindset on how somebody should be thinking about if they're in the
00:50:25.000
prime money making years of their lives versus somebody who has already made their money?
00:50:34.080
Well, I'll tell you, my clients, I mean, I just had a note from a client this morning
00:50:48.960
She has clients who moved from Arizona to Texas once Prop 208 passed.
00:50:53.680
To think that people don't react to tax increases is pretty crazy because people do.
00:51:02.880
So if you're, you know, if you're earning a lot of money or you're about to, how about
00:51:12.740
Let's figure out a way to do that in such a way that you don't pay high taxes and lose
00:51:16.780
half of your wealth to the government because there are ways to do it.
00:51:20.680
So it's not just what state you're in, but it's also the team you have around you, you
00:51:25.960
know, what advisors from tax, you know, tax advisors, accountants, lawyers, so forth.
00:51:31.000
I mean, when they say that the rich don't pay a lot of tax, you know, they kind of imply
00:51:36.820
But what I find is, is that they just have better tax advice.
00:51:41.260
And they're really doing things that government incentivizes to do.
00:51:44.380
They're doing things government wants you to do.
00:51:51.440
What should I be thinking about when considering hiring an accountant?
00:51:53.880
Like I've gone through good, bad, ugly, and great.
00:52:04.000
Because I've been part of a regional guy that's a smaller guy.
00:52:07.320
And then when he came down to trouble, he bailed out.
00:52:12.200
Then I've gone to the bigger ones, Cohen, Resnick, PwC, KPMG, BKD, all these other guys.
00:52:18.420
And if one guy decides to change careers, at least the company still takes care of you as a client and stays with them.
00:52:24.520
But from your perspective, what is the ideal criteria one should look for for hiring an accountant?
00:52:29.660
Yeah, I've been with the big guys, as you said.
00:52:36.640
So what I always look for is, are they looking at this from a transaction standpoint or from a relationship standpoint?
00:52:46.960
Because if you're just looking at a transaction standpoint, you're really going to be very limited in what you can do in a single transaction.
00:52:54.440
For example, somebody comes to you and says, OK, I've got these new mugs here.
00:53:03.080
The question should be, how do I make that mug deductible?
00:53:07.820
OK, how do I do what I want to do and pay less tax?
00:53:14.580
So what we look at, for example, what I teach people, my CPAs, we have a network of CPAs.
00:53:21.480
What I teach them is, look at the whole picture.
00:53:44.300
Well, if that's what you want to do, you don't have an estate tax issue, do you?
00:53:47.900
So, you know, looking at that personal, all the personal aspects and what you really want to do.
00:53:57.540
Like, you can't really find that out in day one.
00:54:00.700
So what is the process of saying, dude, is this a good guy, bad guy?
00:54:07.040
What are five questions I should ask the CPA when I'm hiring them?
00:54:13.120
Well, I do actually go through that in my book, Tax-Free Wealth.
00:54:15.440
So chapter 23 is all about finding the right tax advisor.
00:54:19.320
But nevertheless, I actually think it's more important the questions that they ask you than the questions,
00:54:28.560
If you're asking questions, the problem is you don't know what the answers are, so they could pull the wool over you.
00:54:35.320
I mean, you're not going to know whether they're right or not.
00:54:37.920
What your advisor is for, it's like when you go to a doctor and you spend 15 minutes talking to the doctor,
00:54:43.400
the doctor is spending 14 minutes asking you questions to get a good evaluation of what they should do,
00:54:50.960
and then they give you one minute of advice, right?
00:54:58.180
That's what your advisor should do, whether they're tax advisor, legal advisor, or health advisor,
00:55:02.900
is they ought to be asking you the questions rather than expecting you to ask questions and give you answers.
00:55:09.080
That would be asking you the questions so that they can delve into that.
00:55:11.760
We spend most of our time asking questions, not giving answers.
00:55:17.680
So since you brought up tax-free wealth, to finish up with your book here, a few things, a quick summary from your book.
00:55:23.560
In the book, you talk about the fact that tax laws are written as a set of incentives,
00:55:28.100
a way the government encourages certain activities that benefit the economy and promote social policy.
00:55:33.680
Vast majority of tax code is not written to raise money, but to stimulate growth.
00:55:37.340
It's not about what you make, but what you take home at the end of the day.
00:55:40.820
Everything you do either increases or lowers your taxes.
00:55:44.340
Tax planning is not an end-of-the-year activity, but a daily one.
00:55:48.060
Tell us a little bit on what we should expect from your book.
00:55:53.080
I mean, best review I ever got was that it was a great beach read.
00:56:11.480
It is meant for the average person, and it's written for the average person.
00:56:16.260
It's basically a lot of stories and a lot of explanation of how it really works in very simple terms.
00:56:22.640
What you really ought to expect is a completely different way of looking at taxes.
00:56:26.060
I think taxes, I think the tax law can be very positive from the standpoint that really it's not just a roadmap for reducing taxes, but it's actually a roadmap for building wealth.
00:56:42.080
A business expense is only deductible if it has a business purpose, it's ordinary, it's necessary, and it's documented.
00:56:49.480
If we only, as business owners, only spent money that had a business purpose, was ordinary, necessary, and it was documented, we'd make a lot more money.
00:56:58.540
So I look at the tax law as a great instruction guide to building wealth.
00:57:02.900
It's not just an instruction guide for reducing taxes, but they go hand in hand.
00:57:08.220
You make way more money when you pay a lot less tax.
00:57:15.560
Tom, thank you so much for being a guest on Valley Tainment.
00:57:22.280
Matter of fact, if you stuck around until the very end, just comment below and said, Pat, I watched the whole thing.
00:57:26.840
Maybe even send me a tweet because most people don't finish tax videos.
00:57:29.900
I'm proud of you because this is actually very important to learn about taxes.
00:57:33.300
If you enjoyed today's video, you want to go a little bit deeper, I did a video reacting to Biden's proposed tax plan just about four weeks ago.
00:57:42.240
And if you missed my interview with Arthur Laffer, which was four or five years ago, click over here.