THE HISTORY OF TAXES AND THE POWER OF CORPORATIONS

My rich dad just played the game smart,

and he did it through corporations—

the biggest secret of the rich.

I remember in school being told the story of Robin Hood and

his Merry Men. My teacher thought it was a wonderful story of a

romantic hero who robbed from the rich and gave to the poor. My rich

dad did not see Robin Hood as a hero. He called Robin Hood a crook.

Robin Hood may be long gone, but his followers live on. I often

still hear people say, “Why don’t the rich pay for it?” or “The rich

should pay more in taxes and give it to the poor.”

It is this Robin Hood fantasy, or taking from the rich to give to

the poor, that has caused the most pain for the poor and the middle

class. The reason the middle class is so heavily taxed is because of the

Robin Hood ideal. The reality is that the rich are not taxed. It’s the

middle class, especially the educated upper-income middle class, who

pays for the poor.

Again, to understand fully how things happen, we need to look

at the history of taxes. Although my highly educated dad was an

expert on the history of education, my rich dad fashioned himself as

an expert on the history of taxes.Rich dad explained to Mike and me that originally, in England

and America, there were no taxes. Occasionally, there were temporary

taxes levied in order to pay for wars. The king or the president would

put the word out and ask everyone to “chip in.” Taxes were levied in

Britain for the fight against Napoleon from 1799 to 1816, and in

America to pay for the Civil War from 1861 to 1865.

In 1874, England made income tax a permanent levy on its citizens.

In 1913, an income tax became permanent in the United States with

the adoption of the 16th Amendment to the U.S. Constitution. At one

time, Americans were anti-tax. It had been the tax on tea that led to the

famous Tea Party in Boston Harbor, an incident that helped ignite the

Revolutionary War. It took approximately 50 years in both England and

the United States to sell the idea of a regular income tax.

What these historical dates fail to reveal is that both of these taxes

were initially levied against only the rich. It was this point that rich dad

wanted Mike and me to understand. He explained that the idea of taxes

was made popular, and accepted by the majority, by telling the poor and

the middle class that taxes were created only to punish the rich. This is

how the masses voted for the law, and it became constitutionally legal.

Although it was intended to punish the rich, in reality it wound up

punishing the very people who voted for it, the poor and middle class.

“Once government got a taste of money, its appetite grew,” said rich

dad. “Your dad and I are exactly opposite. He’s a government bureaucrat,

and I am a capitalist. We get paid, and our success is measured on

opposite behaviors. He gets paid to spend money and hire people. The

more he spends and the more people he hires, the larger his organization

becomes. In the government, a large organization is a respected

organization. On the other hand, within my organization, the fewer

people I hire and the less money I spend, the more I am respected by my

investors. That’s why I don’t like government people. They have different

objectives than most business people. As the government grows, more

and more tax dollars are needed to support it.”

My educated dad sincerely believed that government should help

people. He loved John F. Kennedy and especially the idea of the PeaceCorps. He loved the idea so much that both he and my mom worked

for the Peace Corps, training volunteers to go to Malaysia, Thailand,

and the Philippines. He always strived for additional grants and budget

increases so he could hire more people, both in his job with the

Education Department and in the Peace Corps.

From the time I was about 10 years old, I would hear from my rich

dad that government workers were a pack of lazy thieves, and from

my poor dad I would hear how the

rich were greedy crooks who should be

made to pay more taxes. Both sides had

valid points. It was difficult to go to

work for one of the biggest capitalists in

town and come home to a father who

was a prominent government leader. It was not easy to know which dad

to believe.

Yet when you study the history of taxes, an interesting perspective

emerges. As I said, the passage of taxes was only possible because the

masses believed in the Robin Hood theory of economics: Take from the

rich, and give to everyone else. The problem was that the government’s

appetite for money was so great that taxes soon needed to be levied on

the middle class, and from there it kept trickling down.

However, the rich saw an opportunity because they don’t play by

the same set of rules. The rich knew about corporations, which became

popular in the days of sailing ships. The rich created the corporation

as a vehicle to limit their risk to the assets of each voyage. The rich put

their money into a corporation to finance the voyage. The corporation

would then hire a crew to sail to the New World to look for treasure. If

the ship was lost, the crew lost their lives, but the loss to the rich would

be limited only to the money they invested for that particular voyage.

My rich dad did not see

Robin Hood as a hero.

He called Robin Hood

a crook.

It is the knowledge of the legal corporate structure that really gives

the rich a vast advantage over the poor and the middle class. Having two

fathers teaching me, one a socialist and the other a capitalist, I quickly

began to realize that the philosophy of the capitalist made more financial

sense to me. It seemed to me that the socialists ultimately penalized

themselves due to their lack of financial education. No matter what the

“take-from-the-rich” crowd came up with, the rich always found a way to

outsmart them. That is how taxes were eventually levied on the middle

class. The rich outsmarted the intellectuals solely because they understood

the power of money, a subject not taught in schools.

How did the rich outsmart the intellectuals? Once the “take-fromthe-

rich” tax was passed, cash started flowing into government coffers.

Initially, people were happy. Money was handed out to government

workers and the rich. It went to government workers in the form of

jobs and pensions, and it went to the rich via their factories receiving

government contracts. The government received a large pool of money,

but the problem was the fiscal management of that money. The

government ideal is to avoid having excess money. If you fail to spend

your allotted funds, you risk losing it in the next budget. You would

certainly not be recognized for being efficient. Business people, on the

other hand, are rewarded for having excess money and are applauded for

their efficiency. As this cycle of growing government spending continued,

the demand for money increased, and the “tax-the-rich” idea was adjusted

to include lower-income levels, down to the very people who voted it in,

the poor and the middle class.

True capitalists used their financial knowledge to simply find an

escape. They headed back to the protection of a corporation. But

what many people who have never formed a corporation don’t know

is that a corporation is not really a thing. A corporation is merely a

file folder with some legal documents in it, sitting in some attorney’s

office and registered with a state government agency. It’s not a big

building or a factory or a group of people. A corporation is merely a

legal document that creates a legal body without a soul. Using it, the

wealth of the rich was once again protected. It was popular because

the income-tax rate of a corporation is less than the individual income-tax rates. In addition, certain expenses could be paid by a

corporation with pre-tax dollars.

This war between the haves and have-nots has raged for hundreds

of years. The battle is waged whenever and wherever laws are made, and

it will go on forever. The problem is that the people who lose are the

uninformed: the ones who get up every day and diligently go to work

and pay taxes. If they only understood the way the rich play

the game, they could play it too. Then they would be on their way

to their own financial independence. This is why I cringe every time

I hear a parent advise their children to go to school so they can find

a safe, secure job. An employee with a safe, secure job, without financial

aptitude, has no escape.

Average Americans today work four to five months for the

government just to cover their taxes. In my opinion, that is simply too

long. The harder you work, the more you pay the government. That is

why I believe that the idea of “take-from-the-rich” backfired on the very

people who voted it in.

Every time people try to punish the rich, the rich don’t simply

comply. They react. They have the money, power, and intent to change

things. They don’t just sit there and voluntarily pay more taxes. Instead,

they search for ways to minimize their tax burden. They hire smart

attorneys and accountants, and persuade politicians to change laws or

create legal loopholes. They use their resources to effect change.

The Tax Code of the United States also allows other ways to reduce

taxes. Most of these vehicles are available to anyone, but it is the rich

who find them because they are minding their own business. For

example, “1031” is jargon for Section 1031 of the Internal Revenue

Code which allows a seller to delay paying taxes on a piece of real estate

that is sold for a capital gain through an exchange for a more expensive

piece of real estate. Real estate is one investment vehicle that has a great

tax advantage. As long as you keep trading up in value, you will not be

taxed on the gains until you liquidate. People who don’t take advantage

of these legal tax savings are missing a great opportunity to build their

asset columns.