Valuetainment - Why Wealthy People Pay Less Taxes Legally

00:00:00.160 Was it sold as temporary or this is here to stay forever?

00:00:04.240 Income tax is always intended to be temporary.

00:00:07.120 And then what happens is the government goes,

00:00:09.040 hey, look, we've got all this money.

00:00:10.640 We can do all these projects.

00:00:12.160 They kind of like having all that money and that power.

00:00:14.240 So under a Biden tax plan, who wins, who loses?

00:00:17.280 I actually think everybody loses.

00:00:18.880 Somebody who has amassed $100 million of wealth

00:00:21.440 with Biden's tax laws could potentially only transfer

00:00:25.440 upon death only 2 million of that 98 to their heirs?

00:00:28.160 Correct. And 98 million would go to the government.

00:00:30.720 There was always a question whether a tax was even legal

00:00:34.320 until we got the constitutional amendment.

00:00:36.480 Out of all the tax increases that we can have,

00:00:38.640 capital gains, certain write-offs, corporate taxes,

00:00:41.520 which one hurts the economy the most?

00:00:43.760 Taxes on small business hurts the economy the most.

00:00:46.560 When they say that the rich don't pay a lot of tax,

00:00:48.800 they kind of imply that it's because they're cheating.

00:00:50.800 But what I find, they just have better tax advice.

00:00:53.200 My author today is an expert in taxes, but he looks at taxes in a very different way

00:01:01.360 that hopefully by the time you're watching, you're done watching this interview,

00:01:04.480 you will also look at taxes in a incentive compensation structure type of way.

00:01:09.040 He's fully qualified to speak on the topic of taxes.

00:01:11.840 He was with Ernst & Young for many years, also with PWC.

00:01:15.040 At one point, he was training thousands of CPAs that were coming through Ernst & Young.

00:01:18.720 At the same time, he was an adjunct professor at master's tax program at Arizona State University

00:01:24.320 for 14 years.

00:01:25.680 And he wrote a book called Tax-Free Wealth.

00:01:28.080 With that being said, Tom Wheelwright, thank you so much for being a guest on Valentine.

00:01:31.680 Thanks for having me, Patrick.

00:01:32.720 Great to be here.

00:01:33.440 So there's a lot of things to like.

00:01:35.440 Why do you like the word tax?

00:01:36.800 Why do you like learning about taxes?

00:01:38.400 Tell us.

00:01:39.840 Well, you know, Einstein said that the most complicated thing in the world to understand

00:01:44.800 was the tax law.

00:01:45.600 I'm going, why not take on the most complicated area?

00:01:48.640 If Einstein thought it was hard and if there was a way to make it simple

00:01:53.200 for people to understand, then that sounds like a good thing to do.

00:01:56.480 So unpack that for me.

00:01:59.120 So because the way you explain taxes is a lot more simpler than sometimes others explain.

00:02:04.960 How do you view taxes from your lens?

00:02:07.840 Well, so I look at taxes as really what most of the tax law is.

00:02:12.560 So there's 6,000 pages in the U.S. tax law, roughly.

00:02:16.160 There's about 30 pages that actually give you the rates and how much tax to pay.

00:02:21.920 There's one line that says all income's taxable unless you say it isn't, unless we say it isn't.

00:02:26.880 There's another line that says nothing's deductible unless we say it is.

00:02:31.520 Okay, so that's 30 pages.

00:02:33.600 There's another 5,970 pages.

00:02:39.600 And what is that?

00:02:40.480 Well, primarily, it's really incentives that the government uses to encourage people to

00:02:46.560 undertake certain behaviors, whether it's buying a home versus renting a home,

00:02:50.480 whether it's sending your kids to college, or whether it's starting a business, investing in energy,

00:02:55.680 whatever it is.

00:02:56.640 So if you look at it as this is really just an instruction guide for reducing taxes and

00:03:03.760 doing what the government wants you to do, all of a sudden, it completely changes the picture

00:03:08.720 and your view and your outlook on taxes.

00:03:11.120 So can you walk us back?

00:03:13.360 Because one of the things, I got 50 pages of notes on taxes, history of taxes.

00:03:17.360 Okay, so I'm enamored by the topic of taxes, because I look at taxes as if you're in a company

00:03:26.000 that pays you commission, and you see how the sales commission is structured, and you have

00:03:30.080 to figure out a way to maximize the compensation structure of a sales company.

00:03:34.800 You're doing real estate, you're with Keller Williams, you're with Compass, you're with

00:03:38.160 whoever, here's the comp structure.

00:03:39.840 You're with insurance, you're an advisor at Morgan, you're selling pharmaceutical sales,

00:03:43.840 there's a compensation structure.

00:03:45.520 Walk us through the history of taxes, I don't know how far back you can go, but specifically

00:03:50.720 in the States, walk us through how taxes began, why it became, you know, started, and where

00:03:55.920 we are today, how much more complex it is today versus what it was in 1913 when it first got

00:04:01.120 started.

00:04:02.400 So remember in 1913, it was only a tax on surplus income.

00:04:06.560 It wasn't tax on all income, it was really a tax on what they called excess earnings, and

00:04:11.520 it really only applied to the very wealthiest people.

00:04:15.440 Around 1944, they changed the law to apply to employees, but even then, they exempted a

00:04:23.040 living wage.

00:04:23.920 So basically, the standard deduction, the personal exemptions, they were intended to exempt the

00:04:30.000 living wage, so that only the excess earnings, again, were taxed.

00:04:35.040 And then in the 1960s, we started to see some tax increases, and we started to see,

00:04:41.760 we started to see incentives, you know, we had the 1954 Act, which was a major tax act.

00:04:48.000 It was supposed to simplify it, then it complexified things.

00:04:51.680 Then we had the 1986 Act, which is supposed to simplify again, which is what it really did was

00:04:56.320 broaden the base.

00:04:57.920 So it made more things taxable, added more complexity.

00:05:01.680 What we have now is, we actually have a lower tax rate than we've had in many, many years

00:05:07.200 in the US.

00:05:08.480 At one point, it was upwards of 90% on the highest rates.

00:05:13.040 And there's all sorts of shenanigans going on to get out of those, right?

00:05:16.720 Those kind of 90% taxes.

00:05:18.400 So right now, you know, we're in that 40% range, which is actually kind of a sweet spot

00:05:23.360 for governments, they find that if people are paying more than 40%, they have a huge incentive

00:05:29.120 to get out of taxes.

00:05:30.080 And if they pay much less than 40%, the difference between a lot less than 40% and 40%

00:05:36.560 doesn't impact behavior a whole lot.

00:05:38.640 So what the government really started doing back in the early 60s with the investment tax credit

00:05:44.240 was to kind of test the waters and see what would happen if we gave a tax incentive,

00:05:51.600 they finally realized people hate paying taxes, right?

00:05:54.080 So if we give a little tax incentive, what will that change behavior?

00:05:59.200 And what they found was, yeah, and in fact, it changes behavior.

00:06:02.560 The right incentive will change behavior in a massive way.

00:06:05.440 So really, what taxes have become is a way for the government to leverage government funds.

00:06:12.160 Instead of the government building houses, for example, they encourage private industry to

00:06:17.440 build houses.

00:06:18.960 And as a result, private industry does 10 times the work for the same number of dollars,

00:06:25.760 because they're getting rewarded through profits.

00:06:28.000 And then when they make the profits, they're also paying the government.

00:06:30.640 So the government wins multiple times with these incentives.

00:06:33.760 So let's go back to the one topic that always comes up is, what's the big deal with 40%?

00:06:38.880 You know, at one point, the top marginal tax rate in 1944 was 94%

00:06:43.360 for any income above $200,000, which is in today's correlation of $2.5 million.

00:06:49.760 But then I've read by a lot of different people saying no one ever actually paid 94%.

00:06:55.520 They just had it there, right?

00:06:56.880 And by the way, if we look at the 90% tax rate, we stayed at 88% or higher from 1942,

00:07:05.760 top marginal tax rate, to 1963, it was minimum of 88%.

00:07:12.400 48, 49, we dropped to 82%, but then it went back up to 91%.

00:07:16.960 So first of all, if you can kind of walk us through, what does that mean, 94%, 88%?

00:07:22.800 Did anybody ever pay it?

00:07:24.520 How did people get around it?

00:07:26.440 What was the cause of raising it to that level?

00:07:28.360 And why do we get away from it?

00:07:29.680 Well, you know, taxes are, by definition, a burden, right?

00:07:36.000 So they drag something down.

00:07:38.560 And what they found, and it was actually the great Reagan experiment, right?

00:07:42.480 And it actually started with John F. Kennedy.

00:07:45.920 John F. Kennedy was the first president to really look at taxes as,

00:07:50.600 what if we reduce taxes, would that stimulate the economy?

00:07:54.160 What if we didn't have such a high tax rate?

00:07:56.240 Do we really need to have such a high tax rate?

00:07:58.480 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,

00:08:06.480 not just because I was there in Washington, D.C. when that law was passed.

00:08:10.240 But I remember when we had that stagflation, and we had high interest rates,

00:08:16.720 and we had high taxes, and we had low economic production.

00:08:21.460 And so what Reagan did was he pretty much went in and turned it on its head

00:08:24.760 and said, look, let's try a really low tax rate.

00:08:29.280 Let's get rid of all of these tax shelters, which he did a pretty good job of.

00:08:33.480 Let's get rid of the tax shelters that people were using to get out of that 90% rate. 0.76

00:08:38.200 And instead, let's just have closer.

00:08:40.460 Actually, that was the closest we've ever had to a flat tax.

00:08:44.040 We only had two tax rates after the 1986 Act, right after the 1986 Act.

00:08:49.840 So all Reagan was looking at was, look, we think that we could stimulate the economy.

00:08:56.160 You look at the, you know, Art Laffer and the Laffer curve, and supply-side economics.

00:09:01.060 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.

00:09:08.500 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.

00:09:19.060 If you get much under 40%, that difference below 40% and 40% doesn't have a huge impact

00:09:25.840 on the economy.

00:09:26.820 So it seems to be some kind of a magic number.

00:09:29.420 I don't know why that is.

00:09:30.860 But interestingly enough, Patrick, it's actually not just the US that uses that 40% target.

00:09:36.140 It's most of the world.

00:09:37.100 So who screwed up the tax system from 1913 until today?

00:09:41.120 Meaning which president abused and raised taxes the most that created a lot of different

00:09:47.820 opportunities for new tax laws to be created?

00:09:50.940 Oh, I don't think any one president could take credit for that.

00:09:57.060 There's a lot of opportunities.

00:09:58.340 We're actually the, we have the highest compliance rate in the world.

00:10:02.600 You know, we're at 85% compliance rate, which is really good.

00:10:06.300 So I was in Italy with Mr. Kiyosaki and I was looking at the law in Italy.

00:10:15.260 You know, they actually have two levels of tax evaders.

00:10:17.740 They have the little tax evader, which kind of they expect and you just get a slap on the

00:10:21.600 hand and then they have a major tax evader that, you know, goes to prison and so forth.

00:10:25.740 We don't get that.

00:10:27.080 Okay.

00:10:27.740 You evade taxes, you go to prison.

00:10:29.920 If you avoid taxes legally, you don't go to prison.

00:10:33.520 And so that's really the key is just stay away from cheating.

00:10:36.700 What they're looking at right now is cheaters.

00:10:39.740 And the cheaters, by the way, are not all the rich.

00:10:43.140 That is completely false.

00:10:45.080 And if you look at the data, it's primarily the middle income.

00:10:49.240 And that's the small business where you get a lot of the cheating.

00:10:52.180 Oh, so tell me more.

00:10:53.440 Can you elaborate on that?

00:10:54.640 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.

00:11:04.100 Plenty.

00:11:04.460 Well, that's just non-taxable income.

00:11:06.840 They're not reporting that income.

00:11:08.820 Or you have a small business that reports what we call a Schedule C in the US.

00:11:13.500 Well, Schedule C is basically a one-sided entry.

00:11:16.820 See, we have double entry bookkeeping, you know, left side, right side.

00:11:21.660 And the idea is that they have to balance, right?

00:11:24.520 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.

00:11:32.920 And they find that a large proportion of the cheating goes on in that small business.

00:11:38.000 It's just easy to do.

00:11:39.620 And that's where the IRS does try to audit those.

00:11:42.520 But the IRS has been hampered with lack of qualified professionals.

00:11:47.940 So, if I look at the numbers right now, history of it, here's what it looks like.

00:11:50.760 In 1931, our top marginal tax rate was 25%.

00:11:54.700 If we go all the way back to 1913, it was 7%.

00:11:58.320 So, from 7% by 1931, where 25%, World War I happens, we go up to 63% under FDR.

00:12:07.220 By the time FDR is done, he takes it all the way up to 94%.

00:12:10.920 In 45, that's the top marginal tax rate.

00:12:13.780 Then comes Truman.

00:12:15.000 Truman lowers it.

00:12:15.860 He's a Democrat as well.

00:12:16.860 Truman comes down, and he takes it down to 86.5%.

00:12:22.540 And then it goes all the way down under Truman.

00:12:26.340 It goes back up to 92%.

00:12:27.700 Then comes Ike.

00:12:28.740 Ike, 91%, keeps it 91% the entire time.

00:12:32.220 JFK takes it from 91% to 77%.

00:12:34.800 Ike being a Democrat, Ike being a Republican.

00:12:37.200 LBJ goes from 77%, stays at 77%.

00:12:40.480 Nixon takes it from 77% to 70%.

00:12:42.800 Ford stays 70%.

00:12:43.900 Carter takes it from 70% to 69%.

00:12:46.500 Reagan takes it from 69% all the way down to 28%.

00:12:49.900 And in comes everybody else.

00:12:51.320 So many times when you talk about Reagan economics and the way he did his taxes was very interesting.

00:12:58.100 He actually raised corporate taxes slightly.

00:13:01.080 He lowered, you know, he increased the bottom line marginal to, I think, 15% and matched it

00:13:07.440 with 28-28.

00:13:08.880 But what he did, you will hear a lot of people saying this trickle-down economics doesn't work.

00:13:13.100 Trickle-down economics doesn't work.

00:13:14.360 Trickle-down economics doesn't work.

00:13:16.080 Can you give the argument of the people that say it doesn't work?

00:13:19.620 What is their argument?

00:13:20.960 And what is the argument for saying, no, it absolutely worked?

00:13:24.980 Well, of course, the argument for people to say it doesn't work, they're saying, look,

00:13:28.620 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.

00:13:38.540 And so you're not going to get a lot of bang for your buck out of that difference between

00:13:43.520 28 and 50.

00:13:44.820 What Reagan did, though, so on the flip side of this, remember what the world looked like,

00:13:51.440 and particularly the U.S. economy looked like when Reagan came in.

00:13:54.780 And he started, by the way, he started, his first tax bill was his first year in office,

00:13:58.600 was 1981.

00:13:59.740 It wasn't 1986 when we had the flattening of the rates.

00:14:04.260 He started with real estate.

00:14:06.060 He actually brought, gave huge deductions, incentives to real estate in 1981 under the Economic

00:14:12.620 Recovery Tax Act of 1981, right?

00:14:14.640 And so what Reagan was thinking was, look, what if we bring it down and we get rid of

00:14:23.740 all the tax shelters?

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.

00:14:35.620 And so you never paid 90%.

00:14:37.720 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%.

00:14:48.620 So people were, you know, playing, I mean, it was, they were playing fast and loose with

00:14:53.940 the law pretty well.

00:14:54.800 And it was pretty easy to do prior to 86.

00:14:56.940 And what Reagan said was, look, what if we tighten everything up?

00:15:00.400 So we actually are going to broaden the base.

00:15:02.080 So we're going to take away a lot of the tax deductions, a lot of the tax shelters, and

00:15:07.320 instead say, look, you really are going to pay tax.

00:15:09.920 You're going to pay 28%.

00:15:11.580 You're not going to, we're not going to say it's 90% and you pay 28%.

00:15:15.840 We're going to say it's 28%, 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

00:15:24.020 tax purposes.

00:15:25.460 Well, actually what happened, Patrick, is the government doesn't actually like not having

00:15:30.580 that tool.

00:15:31.360 And so they started raising the rates almost immediately and started adding back in incentives.

00:15:39.020 Okay.

00:15:39.280 That's pretty much what happened.

00:15:40.800 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.

00:15:51.120 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

00:16:03.380 on the one hand.

00:16:04.280 And so, but it doesn't, it doesn't inhibit the economy, but it gives them some tools to

00:16:09.940 do what they want to do.

00:16:11.340 Got it.

00:16:11.640 Interesting.

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

00:16:21.660 the money.

00:16:22.300 Right.

00:16:22.600 So it was almost like before you'd get your money and then you would pay the tax you would

00:16:25.820 get, if you made four grand this month, you'd make four grand this month.

00:16:28.660 So they were able to get the people to agree.

00:16:31.220 No, we're only going to pay you $2,800.

00:16:33.620 We will withhold the $1,200.

00:16:34.860 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

00:16:44.780 convince them to do that.

00:16:46.080 How do you convince the populace to say, don't worry about it.

00:16:49.160 Take 30% of my income before I even see 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.

00:17:08.160 Well, why did that happen?

00:17:09.400 It really was because what Trump did at the same time was reduce the withholding rates.

00:17:14.360 And so people didn't get as big a refund.

00:17:16.200 They were pissed.

00:17:17.600 They were upset with, with Trump because they didn't get as big a refund, even though their

00:17:21.660 check was bigger.

00:17:23.280 What they really wanted was the refund because they counted on that for vacations.

00:17:27.880 That was a savings.

00:17:29.220 People do not like having to pay taxes on April 15th.

00:17:33.880 Let me tell you, they would much rather get a refund.

00:17:36.340 I don't, I don't know what it is about our psyche, but that seems to be the way it goes.

00:17:40.320 But do you know how to sell was made?

00:17:41.640 Like, do you know the history of how they were able to convince the pocket?

00:17:43.860 You don't know that.

00:17:44.340 Okay.

00:17:44.820 Now in 1939, another interesting statistic for you.

00:17:47.780 I'm curious to know what you know about this one in 1939 in America, only 4 million people

00:17:52.740 filed taxes, income taxes.

00:17:54.460 This is 39 and they collect, the government collected 900 million, $900 million.

00:17:59.740 This is in 39.

00:18:01.000 Four years later, they went from only 4 million people filing taxes to 41 million.

00:18:07.080 They went from raising $900 million in taxes to $13 billion.

00:18:11.900 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.

00:18:21.000 And what they're trying to do is raise taxes to pay for the war. 0.73

00:18:24.420 I mean, that's what this was.

00:18:26.140 But what happened was employees had never been taxed.

00:18:29.060 Prior to 1943, 44, employees had never been taxed.

00:18:33.100 And what they really wanted was they wanted the federal employees to be taxed because they

00:18:37.480 were government employees.

00:18:38.380 They said, look, we're giving you money.

00:18:39.720 We're going to take some back.

00:18:40.620 In order to do that, though, constitutionally, they couldn't just tax federal employees.

00:18:47.500 And so what they did was they taxed everybody.

00:18:49.840 And it does.

00:18:51.120 I mean, all of the money is in middle income.

00:18:53.740 That's where the money is.

00:18:55.020 And so that's where they went for it.

00:18:56.600 Do you think it was, I mean, again, this is your world.

00:18:59.700 It's not my world.

00:19:00.520 This is why we brought you on because I want to learn from you.

00:19:03.480 Was it sold as temporary or was it sold that this is here to stay forever?

00:19:09.240 Oh, for sure.

00:19:10.040 Income tax is always intended to be temporary.

00:19:13.240 It's always it's basically a war profits tax.

00:19:15.920 I mean, the idea is that it's a tax to pay for wars.

00:19:19.800 Every time there's been a tax.

00:19:21.760 I mean, even think about 1913.

00:19:23.340 What what we have?

00:19:24.860 I mean, we had World War One.

00:19:27.120 Right.

00:19:27.860 So it was it was a tax to pay for a war.

00:19:30.900 World War Two is a tax to pay for a war.

00:19:33.320 Right.

00:19:33.780 And then it was supposed to actually go back and go away.

00:19:36.800 I mean, the idea was it'll be temporary.

00:19:38.420 We'll start at seven, twenty five.

00:19:40.240 You know how it's getting higher.

00:19:41.340 But this is just temporary.

00:19:42.940 And then what happens is the government goes, hey, look, we've got all this money.

00:19:46.660 We can do all these projects.

00:19:48.600 And so they kind of like having all that money in that power.

00:19:51.980 I mean, that's that's just the way people are.

00:19:54.340 That's insane to me to say, hey, guys, listen, we're going through tough times right now.

00:19:58.500 We've got to figure out a way to everybody take a cut and they're like, you know, it'll

00:20:01.020 happen to the company.

00:20:01.740 Let's just say you're running a mortgage company.

00:20:03.880 It's 2007.

00:20:04.880 Everyone's making money.

00:20:05.800 November, the rates change.

00:20:07.120 You know, more, you know, no income, no assets.

00:20:09.620 Again, the loan is going away.

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

00:20:14.600 I'm paying you right now.

00:20:15.660 I have one of two choices.

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

00:20:23.380 do.

00:20:23.760 People say, you know what?

00:20:24.720 It's OK.

00:20:25.220 I'll stick around.

00:20:25.880 I'll be patient.

00:20:26.880 But the idea is 12 months later, if there's recovery, I want to go back to my old salary.

00:20:31.260 Right.

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

00:20:42.020 it.

00:20:42.400 We ain't changing it.

00:20:43.340 We're going to keep it this way.

00:20:44.420 And the populace obviously accepted it.

00:20:46.900 Well, and you're right.

00:20:47.760 The withholding was a key to that.

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

00:21:00.460 of our of our when we pay at a restaurant.

00:21:04.440 That's what hurts.

00:21:05.640 Right.

00:21:06.080 Because we see that tax number.

00:21:08.040 But if we're not seeing that because it's just taken out of our paycheck, it's much easier

00:21:11.880 to get that by the general public.

00:21:13.920 I mean, obviously, it worked out.

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.

00:21:24.140 And it's very hard to back down.

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.

00:21:31.140 So that's the one part about the budget.

00:21:33.200 Let's take a different angle right now.

00:21:34.700 So President Biden's launched his tax plan.

00:21:38.280 We've heard about it.

00:21:39.100 Everyone reads about 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

00:21:44.220 from 21 to 28.

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

00:21:53.600 the percentage is that you have to pay for.

00:21:56.280 What are your thoughts about what's being proposed?

00:21:58.420 And what do you think will get done?

00:22:00.220 And will they be able to retroactively take it back to one one of 2021?

00:22:06.040 All very, very good questions, Patrick.

00:22:09.380 Let's start with the capital gains tax, because I think that's the most interesting one, because

00:22:13.680 it actually doesn't raise revenue.

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.

00:22:37.100 Right.

00:22:37.500 I mean, they pay 80 percent of the taxes.

00:22:39.420 The taxes aren't 50 percent of the public doesn't pay tax hardly at all.

00:22:43.820 Right.

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.

00:23:00.320 I mean, it's, you know, it affects markets.

00:23:02.280 And there's a question, you know, can you do that?

00:23:05.020 And what what will the impact be?

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

00:23:27.740 between the state tax and capital gains tax.

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

00:23:40.240 you just said.

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

00:23:51.140 to their heirs.

00:23:52.140 Is that what you just said?

00:23:53.680 Correct.

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

00:24:02.440 been run and not not just by me.

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

00:24:15.120 business.

00:24:15.440 Right.

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

00:24:24.820 dollars.

00:24:25.240 But they'd also under what the plain language is, they'd also pay forty five percent estate

00:24:33.560 tax.

00:24:34.220 Plus, you have state income taxes.

00:24:37.180 Right.

00:24:37.320 You can't ignore state income taxes.

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.

00:24:53.520 So it do you mind if we do this together?

00:24:56.720 I'm going to have my editors show this so they understand.

00:24:59.600 I'm tracking with you.

00:25:00.820 So I got a hundred million dollars.

00:25:02.400 I want to sell my business.

00:25:03.500 How much of that hundred million do I pay?

00:25:05.340 And I'm in California, let's just say, or New York, because I see what you're doing.

00:25:09.000 I'm in California.

00:25:09.780 I got a hundred million dollar business.

00:25:10.880 I sell it.

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.

00:25:19.080 OK, so that's 13.3 million.

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

00:25:35.380 eight percent.

00:25:36.200 Well, you can't avoid it.

00:25:36.840 So if you're living in I'm paying a three.

00:25:38.700 You literally could end up paying forty three point four percent.

00:25:42.680 So let's stay together.

00:25:44.180 Let's federal tax.

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.

00:25:53.180 What else will I pay?

00:25:54.720 Right.

00:25:54.980 But then you've got a understand that you've got a forty five percent.

00:25:59.340 You've got.

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

00:26:06.040 tax.

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.

00:26:18.760 And add that to your number.

00:26:20.460 And I think you come up with right around ninety eight.

00:26:23.000 You see if I'm close there.

00:26:25.260 I think I'm pretty close.

00:26:26.560 So I take ninety six and a half million at forty five percent.

00:26:31.400 Correct.

00:26:32.020 I get forty three million dollars.

00:26:34.280 Right.

00:26:34.480 Add it to what you've got that you're already paying, which is an additional forty three

00:26:39.800 million.

00:26:40.360 So that's eighty six million.

00:26:44.040 Let's just say it's a ninety million bucks right there.

00:26:46.700 No, because because you've got.

00:26:48.160 OK, if you've got you got forty three million and then you've already got fifty six million.

00:26:53.560 Yep.

00:26:53.840 I paid fifty six.

00:26:54.760 Oh, that's right.

00:26:55.260 So it's ninety.

00:26:56.140 I got you now.

00:26:57.220 So the forty five million plus the fifty six million, that's that's ninety nine million.

00:27:02.080 Just so you know, well, forty three.

00:27:06.680 OK, forty forty plus fifty is ninety.

00:27:10.180 Right.

00:27:10.780 That's ninety nine million dollars.

00:27:13.540 Fifty three.

00:27:14.980 Right.

00:27:15.720 Plus five.

00:27:16.600 That's eight.

00:27:17.660 That's ninety eight million dollars.

00:27:19.100 So there's your ninety eight million.

00:27:22.840 And all of that, what you just said.

00:27:25.720 Could realistically happen to somebody.

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.

00:27:41.600 You shouldn't have to.

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?

00:27:56.860 I actually think everybody loses.

00:27:59.660 Tell me why.

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?

00:28:16.220 Do you still get the businesses?

00:28:17.980 Business owners, you know, we're business owners.

00:28:20.980 Right.

00:28:21.680 And business owners take a lot of risk.

00:28:24.780 OK, are you are you going to take that risk if you can't leave anything to your kids?

00:28:30.200 What happens to family farms?

00:28:32.000 What happens to family businesses?

00:28:33.540 You never have a second generation business.

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.

00:29:12.640 A 10 million dollar business cannot pay that.

00:29:16.620 They don't have money.

00:29:17.860 So what do they have to do?

00:29:18.640 They have to sell it.

00:29:19.700 But it's a distress sale because it's a fire sale.

00:29:22.800 Who are they going to sell it to?

00:29:24.040 Well, the people with the money.

00:29:25.020 Who has the money?

00:29:26.100 Big corporate America.

00:29:27.140 OK, so I actually believe, Patrick, that the big winners out of all of these tax plans

00:29:32.300 is corporate America.

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.

00:29:40.980 Awesome.

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

00:29:59.420 who needs to be reelected.

00:30:01.300 If you're going to make 10 million on this, what's a half a million dollars?

00:30:03.640 Just pay to the guy.

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,

00:30:15.540 you win, great.

00:30:16.780 I'll give up a little bit of taxes here and I'll be a wink, wink.

00:30:19.520 Yeah, we should raise taxes.

00:30:21.340 But behind closed doors, I want you to eliminate 80% of my competition

00:30:24.520 and I'll buy him at distressed sales.

00:30:26.920 And rather than paying $100, you know, 100 pennies on a dollar, I'll pay 50 cents on a dollar

00:30:32.640 and I'm saving 50 cents.

00:30:34.600 Who cares if I'm paying 10% more in tax?

00:30:36.640 I'm still netting 40% more.

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?

00:30:46.160 I actually think, I'm sure it takes place.

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

00:30:54.280 the pandemic.

00:30:55.700 Who won and who lost?

00:30:57.400 Small business got crushed.

00:30:59.020 Big business made out like bandits.

00:31:01.220 Mess.

00:31:01.600 Okay.

00:31:02.480 So now, fast forward.

00:31:04.720 Now you're talking about new tax laws, right?

00:31:07.120 And they're talking about raising the corporate rate from 21% to 28%.

00:31:11.440 Well, it was 35% three years ago.

00:31:14.180 Okay.

00:31:15.180 And so you're raising it to still only half as, you only half the way back to where you

00:31:21.180 were.

00:31:22.060 And then there's pushback.

00:31:23.620 Well, maybe we could take 25%, but boy, that would be really tough to be competitive, even

00:31:28.520 at 25% because we've got state rates.

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?

00:31:52.260 Somehow this is some big loophole.

00:31:53.880 It's obviously not a loophole.

00:31:54.980 It's a code section.

00:31:56.320 So here's what happens.

00:31:58.840 So they eliminate it on real estate, which by the way, only affects middle America.

00:32:03.700 I mean, the big guys don't use 1031 exchanges.

00:32:06.260 They don't do that anyway.

00:32:07.060 Okay, so that's who it's affecting.

00:32:09.840 Okay, but remember who still gets a like-kind exchange.

00:32:13.800 That's a non-taxable 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. 0.54

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.

00:32:40.920 Who does that hurt?

00:32:42.840 Well, that hurts the family farms. 1.00

00:32:44.780 It hugely hurts the family farms.

00:32:47.200 Hurts the small business who owns their, you know, they own their own building.

00:32:51.100 They're wanting to sell their 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.

00:33:07.400 That's what we're talking about.

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

00:33:39.220 and pay a small capital gains rate.

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,

00:33:54.960 and it's when they sell their business, right?

00:33:56.660 So, the capital gains on business is a little like, Patrick, if the day you retired,

00:34:04.040 your entire 401k plan was taxable.

00:34:08.700 It's the same effect, right?

00:34:11.160 You didn't get taxed when you took it out.

00:34:13.300 You get taxed the day you retire.

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?

00:34:31.380 Ordinary income, okay, fine.

00:34:32.740 Capital gains, fine.

00:34:33.820 Real estate, we got certain write-offs that we got going on.

00:34:36.740 We got corporate taxes.

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

00:35:03.020 downward effect on the market, right?

00:35:06.040 Downward pressure on the market.

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.

00:35:48.160 The corporate rate, they can raise that 25%.

00:35:50.680 I don't think that hurts a lot.

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.

00:36:05.340 Those were actually...

00:36:06.020 Can you go deeper on that? Unpack that?

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?

00:36:42.400 They've got to leave them outside the U.S. 0.96

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.

00:37:08.680 as a result of the changes in these rules.

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.

00:37:19.480 Well, now, what do you do?

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?

00:37:33.100 And you have to get 100% agreement.

00:37:36.440 It's never going to happen.

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.

00:37:47.440 They can do that.

00:37:48.300 It's just not that hard.

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.

00:38:31.960 Now, everybody wants to be here, okay?

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.

00:38:44.040 So, you know, you take an example, if I can.

00:38:47.880 Boeing sends an airplane to France, okay?

00:38:51.940 Not only do they pay corporate income tax in France, but there's a value-added tax, okay?

00:38:57.880 22%, right?

00:39:00.180 But think about this, okay?

00:39:02.700 But Airbus sends a plane to the U.S.

00:39:06.660 There's no value-added tax.

00:39:08.080 There's just a corporate tax.

00:39:09.220 Why don't we?

00:39:09.500 Why don't we have a value-added tax? 0.73

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?

00:39:22.500 Which is really a value-added tax.

00:39:25.200 I mean, that's what a flat tax would be.

00:39:26.760 It's a national sales tax.

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.

00:39:47.400 I mean, it's permanent.

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.

00:39:57.920 And this is where the money's at.

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.

00:40:05.600 Trump did a lot of that.

00:40:06.540 Trump put tariffs on China.

00:40:08.240 That's what tariffs are for, is to compensate.

00:40:11.480 It's really the opposite of the value-added tax.

00:40:15.440 We don't have value-added tax.

00:40:16.560 We have tariffs.

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.

00:41:00.400 It started in 1862.

00:41:01.820 By 1873, it went away.

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.

00:41:17.740 That's what happened.

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.

00:41:28.960 So taxes had to go away.

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?

00:42:00.940 Here's an interesting one.

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%.

00:42:13.600 Nobody's talking about that.

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?

00:42:31.300 That's what it is.

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.

00:42:56.200 Nobody would bat an eye.

00:42:57.780 They wouldn't even bat an eye.

00:42:59.640 Nobody's going to complain.

00:43:01.600 Are there going to be fancy ways to deal with that?

00:43:04.340 Yeah, of course, you got the money.

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.

00:43:46.860 He has more influence 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.

00:43:59.940 But you're talking to your clients.

00:44:02.280 Your client asks you, hey, Tom, man, what do I do?

00:44:05.680 Do I sell my business?

00:44:07.080 What recommendation are you giving?

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?

00:44:15.600 Who cares?

00:44:16.460 Hang on to it.

00:44:17.160 What kind of feedback are you giving?

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.

00:44:30.320 There are a lot of different ways to go.

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.

00:44:38.520 That's my job.

00:44:39.240 And so, there are ways, there are always going to be ways to deal with this, okay?

00:44:45.380 We can deal with the capital gains tax.

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?

00:45:02.300 Could they do it?

00:45:03.460 Maybe.

00:45:04.120 I don't know.

00:45:04.800 I mean, I'm not sure that that's legal to go back.

00:45:08.420 Could they go back to today?

00:45:10.300 Yeah.

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.

00:45:25.840 And so, that's not unusual.

00:45:28.280 Now, we don't yet have legislation actually proposed.

00:45:30.960 We just have Biden's ideas.

00:45:32.660 We don't have actual legislation yet.

00:45:34.500 So, what we're hopeful at, that we have this small window of opportunity right now to do

00:45:40.720 some good estate and income tax planning.

00:45:43.280 And they always go together, by the way.

00:45:44.800 You never do estate planning without doing income tax planning.

00:45:47.240 You have to do them together.

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

00:46:00.460 know, you're going to be stuck.

00:46:04.500 States, a lot of people are looking into moving to different states, okay?

00:46:08.300 A lot of people.

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.

00:46:14.300 And he's not from Nashville, Tennessee.

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,

00:46:29.120 that state, and this state?

00:46:31.240 Well, first of all, look at all the taxes.

00:46:33.360 Don't just look at income tax, okay?

00:46:35.580 Because every state has to have money.

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?

00:46:45.240 The income stool for a state.

00:46:47.960 Texas, obviously, is winning.

00:46:49.420 Florida is winning.

00:46:50.600 Those are the two big winners right now.

00:46:54.660 South Dakota should be winning, right?

00:46:56.980 It doesn't have a tax.

00:46:58.820 And like you say, Tennessee has a low personal income tax, but they actually have a pretty high

00:47:06.160 business income tax.

00:47:08.540 So Tennessee probably would not be my first choice.

00:47:12.180 I would probably choose a Texas.

00:47:14.160 And Texas is even better than Florida because Florida does have a corporate income tax.

00:47:18.480 They just don't have a personal income tax.

00:47:20.840 Wyoming, Nevada, no income taxes.

00:47:23.500 So I think those are kind of the winners.

00:47:26.260 Of course, you have to look at, you know, where do you want to live?

00:47:29.580 I think that's more important.

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?

00:47:37.860 And do I even care, right?

00:47:41.100 But it is those states with low income tax or no income tax that are really the big winners

00:47:47.260 right now.

00:47:47.840 I mean, even like, I mean, take, I'm in Arizona and the surrounding states, not Arizona itself,

00:47:54.980 because we just increased our taxes by 80%.

00:47:57.900 It's just lovely what we did.

00:48:00.380 So now what we have is we have Utah, New Mexico, Colorado, all with much lower tax rates

00:48:08.540 than Arizona.

00:48:09.100 So I don't think Arizona is going to be the big growth state if this Prop 208 stands up

00:48:15.740 in court.

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

00:48:26.780 much toast.

00:48:27.940 People are just going to keep moving out unless they want to pay the high, what I call a beach

00:48:31.960 tax, you know, to live in those states.

00:48:35.460 But the middle America, I think, is winning.

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.

00:48:46.240 They are more conservative governments.

00:48:47.940 And people are moving there in the droves.

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.

00:48:56.460 First time in 127 years, 172 years.

00:48:58.960 Well, and what did they do?

00:49:00.840 They suggest we ought to have a 16.9% tax.

00:49:04.580 That's that's.

00:49:05.320 So why are you still in Arizona?

00:49:07.040 Why are you still in Arizona?

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.

00:49:22.380 We'll wrap up with your book.

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.

00:49:29.160 An article came out from CNBC today.

00:49:31.180 Record breaking.

00:49:31.940 The average home stays on the market for eight days before selling right now.

00:49:36.420 That's insane.

00:49:38.040 We put our house on a market 24 hours, two offers done cash deals.

00:49:42.000 It was sold.

00:49:43.000 I in two years prior to that, I put in a market one year.

00:49:45.920 I can sell it.

00:49:46.720 I put in a market six months ago.

00:49:49.300 It just goes away within a couple of days.

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.

00:50:01.420 I'm sitting on 17 million dollars of money.

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.

00:50:11.580 I got 17 million bucks.

00:50:13.320 I'll move to California.

00:50:14.640 I don't care about what's going to happen.

00:50:16.000 I don't need to accumulate wealth anymore.

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?

00:50:31.580 What would you say to both of those audiences?

00:50:34.080 Well, I'll tell you, my clients, I mean, I just had a note from a client this morning

00:50:37.720 and he is moving to Florida from California.

00:50:41.000 Why?

00:50:41.840 Taxes, pure and simple.

00:50:44.880 My wife's also a CPA.

00:50:47.240 She has a CPA firm.

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

00:51:07.360 you're about to sell your business?

00:51:09.720 Get out of Dodge, okay?

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

00:51:35.560 that it's because they're cheating.

00:51:36.820 But what I find is, is that they just have better tax advice.

00:51:40.320 I mean, that's all it is.

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.

00:51:45.900 And so they pay less tax.

00:51:49.120 I don't think I have a big problem with that.

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.

00:51:56.760 What would you recommend?

00:51:58.420 You're one.

00:51:59.100 You've been in it.

00:51:59.760 You've trained many.

00:52:00.540 You've been around the block for a while.

00:52:02.480 What should somebody consider?

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.

00:52:09.460 He's like, oh, you know what?

00:52:10.480 It's just, oh, I'm so busy.

00:52:11.640 I'm like, what?

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.

00:52:33.020 And I've had my own firms for 25 years.

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.

00:53:00.100 Are they deductible?

00:53:01.880 And it's the wrong question.

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?

00:53:12.460 Not how do I 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.

00:53:24.040 Look at the estate plan.

00:53:25.380 Look at legacy.

00:53:26.720 Look at the income tax plan.

00:53:28.540 Look at what they, what do you want to do?

00:53:31.700 You know, where are you in your life?

00:53:33.200 You mentioned it.

00:53:34.520 Are you in the high earning years?

00:53:36.440 Have you made your money?

00:53:38.020 Do you want to even leave money to your kids?

00:53:39.740 I mean, my mother just wanted to break even. 1.00

00:53:41.420 She didn't want to leave us any money. 1.00

00:53:42.600 So she was fine just spending that.

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.

00:53:54.200 I mean, that's the question.

00:53:55.440 How do you tell apart?

00:53:56.160 But how do you tell apart a CPA?

00:53:57.540 Like, you can't really find that out in day one.

00:53:59.580 You almost have to go in bed.

00:54:00.700 So what is the process of saying, dude, is this a good guy, bad guy?

00:54:05.320 Do I go through referrals?

00:54:07.040 What are five questions I should ask the CPA when I'm hiring them?

00:54:10.820 What should that relationship look like?

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.

00:54:18.260 Perfect.

00:54:19.320 But nevertheless, I actually think it's more important the questions that they ask you than the questions,

00:54:24.040 than the answers they give you.

00:54:25.120 So I think it's far less important.

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?

00:54:54.100 Take this, do this, do this.

00:54:56.100 One minute out of 15.

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.

00:55:16.380 Phenomenal feedback right there.

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.

00:55:32.280 You talked about that earlier.

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.

00:55:51.300 Well, first of all, it's really easy.

00:55:53.080 I mean, best review I ever got was that it was a great beach read.

00:55:58.220 One person said that.

00:56:01.520 Another person said it read like a spy novel.

00:56:03.820 So those are my two favorite reviews.

00:56:07.540 It's not meant for a tax advisor, okay?

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.

00:56:39.240 Just take a business deduction.

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.

00:57:12.080 I like it.

00:57:12.920 Makes a lot of sense.

00:57:13.860 We're going to put the link to the book below.

00:57:15.560 Tom, thank you so much for being a guest on Valley Tainment.

00:57:17.460 Thank you, Patrick.

00:57:18.920 It's been a pleasure.

00:57:20.320 Taxes.

00:57:20.860 Boring, but very important.

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.

00:57:40.920 If you've never seen it, click over here.

00:57:42.240 And if you missed my interview with Arthur Laffer, which was four or five years ago, click over here.

00:57:46.980 Take care, everybody.

00:57:47.660 Bye-bye.

Valuetainment - June 02, 2021

Why Wealthy People Pay Less Taxes Legally

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