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Billionaire Secrets You Need to Know To Pay Less Tax 

Educational Series Investing

You need to learn how to pay less tax just like the billionaires do.

Because of the government's massive deficits and enormous debt the United States has, taxes will most likely be going way up in the future, even if you’re not rich!

So what can you do? You can start by understanding how billionaires lower theirs by doing tax planning.

Just because you might not have billions of dollars, it doesn’t mean you can’t use the same strategies! It’s all about having the knowledge.

The Reason Why Paying Less Tax Matters

 To explain why this is important, I want to analyze this chart about the United States Federal Government Deficit. 

The chart goes from 1950, all the way to 2020. 

To be very clear, this is the amount of money the federal government spends in excess of the tax receipts it collects. 

The vertical column goes from 1%, all the way up to 10%. So back in 1950, the federal government budget deficit was right around 1%. 

After that, it went down to where they actually had a surplus … Imagine that! The deficit went up a surplus again, and then it kept bouncing back and forth. 

Then, it went way up in the recession after 1980, then it went down to the dot-com bubble when we had a lot of tax revenue coming in. 

But since 2000, it's done nothing but go straight up. You can also see in the last GFC, it went north of 10%, and that's really just a mind-boggling number.

After the GFC, it went back down, but not that much. It bottomed out around 4%, which would have been recession levels prior to 2000. 

This chart also seems funny to me because it was back in 2019, that they were sounding the alarm. Deficits have only been at these levels in or after a recession. 

I know Jeff Gundlach was saying this as well. But look at what has happened since we've had the Covid-19:

  • Deficits were bad, to begin with, and this is just like the economy not having enough savings. 

You can get away with it for a little while. But if we have a recession or a rainy day, and especially if we get a depression, we'll have problems. 

We can see on the same chart, but this time the one I drew, that since the Covid-19 hit, projections now are for the deficit to be $4 trillion. 

And you know as well as I do, if they're projecting a $4 trillion deficit, it'll be a lot higher than that. 

But let's just say it's around 4 trillion. That will take us to infinity and beyond big time! In fact, it goes off the chart. 

If we need to sound the alarm at 4.5% and above, if that's the no bueno zone, where are we now in 2020 when the deficits will most likely be at least 18%? 

Of course, you can't have a conversation about the deficit without talking about the debt to GDP. Which is why we're looking at the chart below: 

The chart starts in 1910 and it goes until 2020. On the left, it goes from 0% up to 110%. – In 1900-1910, look at that, the debt was 10%! 

Boy, wouldn't that be nice? 

  • During World War 1, it spiked up
  • In the 20s it went down
  • It really went up in the 30s
  • During World War 2, it went parabolic, up to 120%. 

A lot of Keynesians look at this to justify our current levels of debt. But what they don't tell you is these were non-recurring costs. We're not in a war continuously.

All the costs that the government has now, or the majority of the cost, are recurring, meaning we can't get rid of them, we're stuck with them. 

It's just like the difference a business has, between marketing spending and their rent or payroll. Going back to the chart, in World War 2, the debt gradually goes down. 

We get rid of that massive burden of debt and it hits a bottom right around 1980- 1981. 

Since then, with the exception of the late 1990s, we've gone straight up. 

And remember, this chart stopped right around 2019. 

So if our deficit is going to 18%, if not higher, where is the debt to GDP going to be? 

The problem is just like the example I mentioned before with the deficit and not having a rainy day fund. Yes. The economy can muddle along at a 100% debt to GDP. It's not ideal, but it’s manageable. 

But, when the debt levels are that high and we go through a recession or a depression, the economy can only get through it by kicking the can further down the road, and directly to a complete debt crisis.

And after the Covid-19, who knows where the debt to GDP will be? 

Obviously north of 120%. 

  • Will we get up to 150%? 

  • 200%? 

  • Will we exceed Japan? 

Only time will tell. 

But what this means for you, is your taxes are most likely going much, much higher. 

As an example, according to Market Watch, California has been in the news recently, for being the first state that is going to have to borrow money from the federal government just to make their unemployment payments. 

I also want to remind you that during a depression, especially a deflationary depression where the government can't inflate away the debt problem, taxes always go up. 

Not only on the rich, but the poor and middle class as well. Look at this chart of the depression in the 1930s. 

We can see that even the lowest income group had their taxes raised. Also, remember there have been some changes to the tax code in 2018, where they stopped using the CPIU and went to the CCPIU. 

Basically what the government did was implement a different system of measuring inflation, which keeps tax brackets artificially low. 

If tax brackets stay too low, if they don't keep up with inflation, that means the government takes a bigger and bigger portion of your paycheck. 

And of course, the low lying fruit for politicians is always property taxes. Here's a quote from the Chicago mayor, which outlines this beautifully. 

We're looking at a range of potential revenue-generating options. Look, the reality is, I don't think there's any city budget across the country, that is not going to have to take a look at one-time measures … 

Yeah, one-time measures! Sure! 

“… To put yourself back on track.” 

Meaning she thinks every single city in the entire United States is going to have to jack taxes. 

She said:

Increasing property taxes is always the last choice …

But get this:

… even though it's the most reliable source of revenue.

Now, when we look at the deflationists versus the inflationist argument, one thing is always left out of the discussion. 

They never talk about taxes! If you're someone that believes the United States is going into proper deflation where all prices are going down, that means the government cannot create inflation. 

  • How is the government going to service their debt?

  • Not only at a national level, but also at a local level? 

The answer, of course, is to increase taxes. The inflationist tend to forget that all prices are going up, including asset prices, like the stock market or their homes. 

Let's say you have a home right now that's worth $100,000 and it doubles in price, it goes up to $200,000. But it only goes up with the rate of inflation. 

If you sell your home, you're going to be taxed on the $100,000 gain. 

But keep in mind, you didn't increase your purchasing power. So the government is taxing you for no reason. You can't buy any more goods and services, but you have to pay more tax.

The bottom line is regardless of whether you're rich, middle-class, or poor, your taxes in the future are definitely going up. Whether directly, through just an increase of your tax rate or indirectly through inflation.

The Kiyosaki Method To Pay Less Tax

This method consists of using real estate depreciation to your advantage. Robert Kiyosaki is a buddy of mine who wrote Rich Dad Poor Dad, among other books. 

This was the book that made him famous, and a lot of people buy it at the grocery store, or on Amazon. 

But what does Robert do with the money he gets from selling his books? 

Well, he goes straight to the bank and says, “Listen, I need to get a loan because I want to buy an apartment building.” 

So he takes some of his money and a lot of the bank's money and buys an apartment complex.

Then he takes the cash flow from the apartment complex, and what he told me is he likes to buy a lot of gold and silver with the cashflow. 

So how does this keep him from paying taxes? 

Well, let's say the original amount he got from the people buying Rich Dad Poor Dad was one million dollars. 

So he goes to the bank, borrows another 4 million dollars to buy the apartment complex for a total of 5 million dollars. 

Let's assume the cashflow from the apartment building is $150,000 a year. This is a 15% return on his investment, his out of pocket costs. Not too bad. 

But the depreciation, from the 5 million dollar property is $166,000 a year. 

So he's paying negative taxes! He gets an additional tax benefit that he can use to offset other income. 

This is the way it works, conceptually. 

So how does this beautiful thing called depreciation actually work? 

You need to think about the value of the asset or the cost basis, and have a depreciation schedule.

That's what the IRS calls it. Typical depreciation on residential is 27.5 years, but just to keep things simple, I used 30 years. 

So we take 5 million dollars, which is how much Robert bought the apartment complex for, and divide it by 30. 

That gives us a result of $166,000 a year that you can reduce your taxable income by. 

So on all that cashflow Kiyosaki gets from the apartment complex, and that he uses to buy gold, silver, Bitcoin, maybe more real estate, stocks, you name it, he is paying zero taxes. I recently interviewed him, and we talked about this:

George Gammon: You see a book as an asset that produces cash flow… 

And I think that if people could see the internet and their cell phones as a vehicle that they could use to produce assets that produce cash flow, the same way you did with Rich Dad Poor Dad, it would change their mindset.

Robert Kiyosaki: Right. So I publish a book. I sell a license to 50 publishers throughout the world. Day one, I'm positive. It might take me two years to write a book, let's say. 

It costs me $50,000, but I sell 50 licenses for $10,000 each. I'm in the money. I have my cashflow game and our cashflow games are blowing out. 

That's a 25-year-old game and It's just blowing out the door and all this. I'm up here in my mountain cabin thinking about the next entrepreneurial venture. 

But with that cashflow from my IP, I levered up with debt to buy RP real estate. 

So let's say I make a million in IP, so then I have to find a property that's worth 5 million. That means I'm going to borrow four. 

So I've now stepped up my depreciable basis to $5 million. So I'm depreciating 5 million instead of 1 million. I'm paying no taxes on the 1 million, I'm getting cashflow, and with the extra income I'm buying gold and silver.

Bonus: Billionaire Tax Strategy Revealed 

This is something many have been doing since forever! Good old fashion money laundering. That's right. Now, I'm not suggesting you do anything illegal! But the concept is pretty much the same. 

Its taking money from a dangerous area, and moving it through a specific entity where it's a lot safer. 

So how could you apply that to your own tax strategy? 

I'll pretend you're in Chicago right now. You're planning on buying a house, and you know darn well, you're going to have a target on your back. They're going to be raising property taxes.

Why not consider taking that money out of the state of Illinois, maybe to someplace a little more friendly like Texas, Florida, Nevada? 

Or to take it a step further, and move it outside the country to a place where you like going to and spending time. 

A place where you trust the jurisdiction, and you know that they're going to be a lot more friendly to property taxes or property owners in the next 10 years, 20 years, even 30 years.

The Elon Musk Method To Pay Less Tax 

Pretty much all the guys, whether it's Bezos, Musk, any of the big CEOs, Jamie Dimon, they're pretty much all going to use this strategy. 

I summarize the strategy by saying, spend equity, don't sell equity.

So how does that work? 

Well, of course, it starts with you, the taxpayer who pays all of the hard-earned money, right to the government. 

The government takes that money and it gives that right to Elon Musk to build the Tesla factory.

So Elon takes some of your tax dollars and some investor money. He builds himself a factory to pump out beautiful cars. 

As you can see in my drawing below, we have a Tesla Model S on the left, looking extremely fast, and a milk truck looking thing with a broken window, we'll assume that is a Tesla truck. 

So the Tesla factory builds and sells all of these amazing vehicles, but it costs them a lot of money to do so. 

You can see the expenses on their P and L, on the right, are very high, but their revenues are very small. They lose a lot more money than they make. 

The stock market sees this, and for whatever reason, they love it. 

Any company that's run by Elon Musk that can incinerate capital has to be worth billions and billions of dollars. 

And who knows, if he comes out with a strategy to call an EIS Pluto, Tesla could be worth trillions of dollars. Regardless, the stock market loves Tesla.

So the share price goes buzz light year to infinity and beyond. 

Tesla's two favorite people in the world are the fed and the government. They are Tesla's BFFs.

Why? Because the fed drops interest rates down to zero for almost a decade

So it allows Tesla to get all this super cheap money from investors who have to go further and further out the risk curve, because they can't get returns from treasuries. 

As usual, it goes right back to the fed. Of course, the government is grabbing and picking the pockets of all the average taxpayers, just like you. 

So they can give that money to Elon to start his factory, or buy failing solar company to bail out his cousins, either-or, the net result is the same. 

So Elon looks at this and says, okay, this is a pretty good system, but I've got bills.

It's not cheap to be Elon Musk. He has this Echo Jet he needs to fly all around the world and is very green in the sense that it produces just slightly more pollution than a 1970s Peterbilt. 

So what on earth is Elon going to do? Well, he needs to really think. He has to concentrate. So he takes his right hand, looks like he just got done with the Joe Rogan show, bloodshot eyes. 

But this is when Elon gets into the zone. He looks at his Twitter account, and he tweets out something completely ridiculous. 

That gets him in trouble with the SEC, and he says, “Aha, I've got a plan. I could sell some shares to get money to pay for the Echo Jet, but then I'd have to pay taxes. Just like those sucker taxpayers. There's no way I'm going to do that.

So I'll go to the bank and all use my billions of dollars worth of stock as collateral. The bank will give me a loan and I'll buy a bunch of million-dollar mansions.” 

So Elon says, “Why don't you give me another loan against my properties? And I'll use that money to go ahead and pay for my lavish lifestyle?” The bank says, “Elon, no problem, here is all the money you need. You're a great credit risk. In fact, we'll give you an even lower interest rate than we give to those suckers, that average Joe and Jane.” 

So Elon gets all this money completely tax free because he didn't sell his equity. He borrowed against his equity.

Now, assuming the fed continues to print trillions of dollars worth of funny money, keep interest rates artificially low, backstop the market, who knows, they might even start buying shares of Tesla.

This just increases the amount of equity Elon Musk has, because the value of his shares continues to increase. So if he has more equity, that means he can take more and more loans from the bank. 

Do you see how this works? 

As long as his equity continues to increase, he can live the lifestyle of a billionaire and never pay one dime in taxes.