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| Maintaining Wealth: Know the Code |
| Sunday, October 29, 2006 |
If you already "own" or have a controlling interest in some asset, you already have some wealth to protect. The forms that wealth can take very and each individual has to determine what it is that they feel is wealth. A man or woman may look poor to you and appear to be poor on a balance sheet, yet possess incredible resources which he or she may direct as he or she wishes within the law.
Protect your wealth through business structure:
Whatever level of wealth you have, you will be more prepared to protect it if you can create an insulating layer of protections against claims by establishing a sound legal business structure. A competent tax-attorney or accountant should be able to lead you to some convincing conclusion aobut how you should organize your business, and will probably give a number of good reasons to set yourself up and an LLC or S-Corp to protect you assets in the event of a legal or financial claim. It could be that the best arrangement for you business venture is in the not-for-profit class. You can still earn a substantial income so long as your not-for-profit business files the proper paperwork and you work diligently to maitain its tax-exempt status. CEO of big charities are not there just because the get a nice office and good feeling when the go home.
Sound recordkeeping is critical:
In terms of maintaining material wealth on of the keys is to understand accounting procedures or work with a professional accountant who does in order to help you keep your records straight and taxes up to date. Although I have personally, never seen any series of laws that explains to me (without any logical gaps or assumptions based on non-legislative material) why an individual would have to pay taxes as an individual, the matter does seem to be clear in relationship to corporate interests. And, this is important to remember. There are certain times, places, and circumstances that make sleight of hand and cunning a detriment to your long term survival and future well-being. Imagine that you are in a cellar casino and Bluto pats you on the arm and says its time to pay the fee for the padded seat and explains to that the fee is 10% of your earnings. The best idea is to do an accurate accounting and fork it over -before he claims more from you than you are ready to surrender. Taxation is where corporate owners consent that in exchange for the protections of the government they surrender to its authority to milk them. As long as you get along with the tax man, you can stay in the game.
Here an entertaining animation that you can use to remind yourself of this little fact:
Examples of the impact of tax laws and how they have changed:
When you are in business for yourself, however, the terms and the amount you have to pay as a percentage of actual income changes for a number of reasons that a competent tax attorney or accountant can probably best help you to understand.
Even John D. Rockefeller had to pay taxes and you see that he made out pretty good back in 1894:
John D. Rockefeller's first tax return reported a total income of $1,247,252.65 for 1894 — at a time when the annual income of most Americans was less than $1,000. That total included $40,577.51 in ''gross receipts, credits, earnings, and gains from any business''; $30,000 in ''income from any profession, trade, or other employment''; $284,601.67 from interest ''upon all notes, mortgages, or other forms of indebtedness bearing interest''; $739,626.63 ''from interest or coupons paid or accrued on any bonds''; $147,130.07 from dividends and interest ''on the stock, capital, or deposits of any corporation''; and $5,316.77 as the ''income of wife or minor children.''
Rockefeller claimed deductions of $499,183.26 — including a $4,000 standard deduction, $87,171.52 in interest, $20,317.11 in state taxes, $42,679.75 in business expenses, $143,672.75 in business losses and $201,344 in bad debt. The return was filed in March 1895. Taxed at a rate of 2 percent, the richest man in the world paid $14,961.39 in federal income tax. His return totaled four pages in length. (Source: JFK School of Governement - Harvard)
As you are no doubt aware, the level of taxation has increased as can be seen by viewing some more recent publicly available tax information for people who are more visible in our everyday lives.
Tax Return - Dick and Lynne Cheney 2000:
For the year 2000, Dick and Lynne Cheney paid a swimming pools worth of taxes - they really got walloped. The following was obtained from a Whitehouse Press Release avalable at: www.taxhistory.org. Compare to the tax liability rockefeller had in 1894 this is obscene and evidence of a tax system gone mad. It would seem that this level of taxes would serve as a detterent to the creation of wealth. In 2000, prior to the Bush tax cuts, they Cheney's forked over about 37% of their income to the IRS in the form of taxes.
The income tax return shows that for 2000, the Cheneys owe federal taxes of
$14,295,058 on an adjusted gross income of $36,086,635. $9,644,701 had been
previously withheld or otherwise paid, and the Cheneys paid the remaining balance
due of $4,650,357 with their filing. (Source: White House Press Release)
Tax Return - Dick and Lynne Cheney 2005:
Under the present tax code, with the Bush administration tax-cuts, the Cheney's seemed to have done much better or, perhaps, they found a better accountant. you can be sure they did not find their accountant in a booth at Walmart on April 14, they went to Cain, Watters & Associates, P.C. in Dallas, Texas. The are any number of factors could have influenced the results. As you see below, the Cheney's only had to pony up about 5.8 of their adjusted gross income. Surely, one can see how this would incent Americans to want to work harder and earn more. This tax return is available online as well. (If for any reason my figures appear innacurate, please send me a comment and let me know.)
- Adjusted Gross Income: $ 8,824,762
- Itemized Deductions: $ 6,857,849
- Taxable Income (after Itemized Deductions): $1,961,157
- Taxes Paid Prior to Filing: $2,468,566
- Taxes Owed: $529,636 (ACTUAL TAX PAID - see line 63)
- Refund/Payment Amount: $1,798,930 (REFUND !)
- Amount applied in advance to 2006 taxes liabilities (if any): $ 140,000
So, considering the impact that the tax code can have on the amount that you can keep for yourself in any given year as your actual net income, it is a good idea to consult a tax attorney or skilled accountant. The Cheney's were able to reduce their real tax rate by 32% and move much closer to the tax rate paid by Rockefeller. This probably had a great deal to do with asset allocation. This is a key to maitaining wealth. Make sure to have them show you the exact laws and explain to you why you are obligated to pay taxes, it will all make more sense then.
We should look at this as a sign that times are surely getting better and work to understand how we can all experience the same benefits of the system.
What's changed and ways you can tell:
You see under the present system the burden of taxes has shifted tremendously and the balance of payments has tipped in favor of corporate interests and those who derive income from business operations structured as separate entities. Consider these publicly available facts the conclusions reached below are based on analyisis of the budget data provided at GPO Access a goverment website. Feel free to look at the numbers and I would be happy to provide you my Excel spreadsheet analyisis and computed ratios based on this data.
In 1934, the ratio of Individual Income Taxes (IIT) to Corporate Income Taxes (CIT) was 1.15 to 1.0 In 1935, the IIT to CIT ratio was .996 to 1.o. So, back in those day it was relatively even. The corporation and the individual citizens were contributing at about the same rate.
For ease of presentation, the following ratios will be provided in list format as Year : Ratio, occasionally there will be a comment.
- 1934: Ratio (IIT/CIT) = 1.15
- 1935: Ratio (IIT/CIT) = 1.00
- 1938: Ratio (IIT/CIT) = 1.00
- 1942: Ratio (IIT/CIT) = 0.69 (Corpporation provide most of the tax reciepts)
- 1943: Ratio (IIT/CIT) = 0.68 (Corporations provide most of tax reciepts for the last time in the 20th Century.)
- 1944: Ratio (IIT/CIT) = 1.32 (Trend reversal -Individuals pay most of tax reciepts)
- 1946: Ratio (IIT/CIT) = 1.35
- 1947: Ratio (IIT/CIT) = 2.08
- 1954: Ratio (IIT/CIT) = 1.40
- 1959: Ratio (IIT/CIT) = 2.12
- 1972: Ratio (IIT/CIT) = 3.21
- 1981: Ratio (IIT/CIT) = 4.68
- 1983: Ratio (IIT/CIT) = 7.80
- 1989: Ratio (IIT/CIT) = 4.31
- 1996: Ratio (IIT/CIT) = 3.82
- 2000: Ratio (IIT/CIT) = 4.84
- 2001: Ratio (IIT/CIT) = 6.58
- 2002: Ratio (ITT/CIT) = 5.80
- 2003: Ratio (IIT/CIT) = 6.02 (Individual pay in at a dollar for dollar rate three time greater than the contribution made to government by corporations)
The data availabe in that particular table ran through 2009 with estimates and 2003 was the last year for which the totals were based on actual figures. The projected distibution of reciepts in 2009 is an IIT/CIT ratio of 4.7. I have no idea how they arrive at this estimate, but that is what the GPO finds.
This distribution of tax burden would seem to indicate, considering the size of coporation and the sheer volume of assets that are in corporate control, that it is best to be incorporated in some fashion or to use corporations as a means of protecting existing wealth. Business is projected to continue growing yet the rate of contribution of those businesses seem to grow at a slower rate relative to the contributions of individuals. Please review the other tables at the GPO Access website to see, if you reach similar conclusions, but that is what it indicates to me at present.
This seems odd because corporate income is clearly defined as taxable is cited in the law as a mandatory tax and the law seems to indicate that individual federal income taxes are voluntary compliance taxes. Yet, the individual American citizen, has consistently stepped up to the plate to pay for the public good when corporations have not and have utilized accountants and lobbyists to keep them from doing so.
Lesson, think like a corporation and you can live like one. Learn what taxes do or in many case do not apply to you and see an accountant if you would like to file a return and take all of the available itemized deductions. |
posted by Domesticated Dog @ 7:44 PM  |
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| Getting to Business |
| Friday, October 13, 2006 |
We are all businessman:
We are all in business for ourselves. It does not matter if you are recognized as a self-employed business owner on your IRS return or not. You are self-employed. Even those of who are work for large employers or participate in union are self employed and need to recognize the ways that their decisions influence their future cash flows and give strong consideration to their personal goals in order to properly market their identity and get the highest rate of return from their activities.
Who this blog for?
This blog is for people who agree with or want to consider the following:
- Success is there for anyone who has the tenactity and entreprenuerial spirit to find and utilize the tools necessary to create it.
- Cyclical economics dictate that there will be prolonged periods during which investment prices rices fall and pessimism ensues.
- Cycles economics creates opportunities for the well-informed, forward thinking individual.
- Bear Markets and Bull Markets represent opportunities.
- Self-education is one of the most fulfilling pursuit a human can engage.
And, this blog is for everyone else, too. I look at it this way. Just about every rich family you look at today at one time in its generational history was a poor family and quite possibly dirt poor within the last 3 or four generations. When you examine the histories of individual's who were able to overcome the odds, it is easy to note that there are common threads in many of these stories. Most of them do no include passages that say, "...and then, after we won the lottery, everything got better." Very little new wealth is created using the sit and wait method or the don't rock the boat approach.
How do you get rich?
The best way to get rich as an individual is to marry a rich person. as silly as that sounds, that is what the sociological data will tell you when examined - and it can also be noted this works better for women than men. Women, generaly speaking, are less likely to marry down and more likely to marry up. It is a strange economy, but it is a fact.
There are plenty of other ways to strike it big and each requires a different type of savvy and the proper employment of a well configured asset and resource system. If you consider, real estate, manufacturing, sales, marketing, management, energy production, transportation, and other entreprenuerial activities, you will see that each category of activity comes with its own specific demands and requiriments. To understand the specfic requirements and assess opportunities as well as obstacles, we need to find and develop sources of information. The business of learning must start today and continue everyday.
Can anyone develop wealth?
Yes, anyone can develop wealth. However, it is important to note that it is not true everyone can be rich. The unavoidable distribution of assets will cause there to be a economic class structure and I am of the belief that efforts to use assets transfers to level the economic playing field are generally a harmful intervention and leads to ineffeciencies of the subsequent asset allocations. Welfare programs and inefficient, and often wasteful, spending go hand-in-hand. Nonetheless, when a benefit program exists that works in your favor, use it to the extent that it is within the law. Along the path to "the good life" be sure to make time to sit down with an accountant, an attorney, and specialists in each of the fields that you business enterprise interacts with to understand how the law and its changes affect you, you customers, you suppliers, your prospects. This knowledge is especially useful in managing risk as you proceed.
What should each of us do?
Make good choices. The choices that we make will determine our financial future and it is important to recognize the economic traps that exist, so we we can avoid altogether or escape from them when we realized that we have been snared. This does not imply that you should be afraid of making a mistake or a poor choice, it simply means that each of us has to decide how we will change and what we will change in our environments to cause our goals to become achievements. |
| posted by Domesticated Dog @ 5:04 PM |
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