{"id":77501,"date":"2020-01-09T09:00:56","date_gmt":"2020-01-09T16:00:56","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=77501"},"modified":"2024-02-15T15:52:14","modified_gmt":"2024-02-15T22:52:14","slug":"2016-03-24-debttaxesrich-richer-poor-poorer","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/2016-03-24-debttaxesrich-richer-poor-poorer","title":{"rendered":"How Debt & Taxes Make the Rich Richer and the Poor Poorer"},"content":{"rendered":"

In a previous article, \u201cThe 20-Something\u2019s Guide to Financial Stability<\/a>,\u201d I discussed some of the common financial mistakes that are often made by young folks. But it is true that you can be broke at any age.<\/p>\n

For me personally, I\u2019ve been both rich and poor. I was raised on government assistance by a working, single mom with six kids, and today, I\u2019m considered an accredited investor<\/a>.<\/p>\n

What I didn\u2019t go very far into in the previous article is the impact of debt and taxes, especially on one\u2019s ability to access capital or build wealth.<\/p>\n

Access to Capital<\/h2>\n

One thing that I recognize is that income inequality and the wealth gap between the rich and poor are growing in this country, while the middle class is shrinking. If I were to narrow it down to one of the biggest reasons for this, it would be one\u2019s access to capital<\/em>.<\/p>\n

Related:<\/strong> Americans: If You Can\u2019t Build Wealth Today, You Should Be Scared. Here\u2019s Why.<\/a><\/em><\/p>\n

The difference is that poor folks don\u2019t have very much access. Just think about when you try to get a loan; it\u2019s often based on your credit, income, and assets. Also, the poor often have to work for or earn all of their money, and then they\u2019re usually taxed the most (as a percentage of earned income).<\/p>\n

Maybe the real struggle is getting out ahead of these things. I remember listening to Jim Rohn tell the story about how you can be a good guy, work really hard, and still never get ahead.<\/p>\n

It wasn\u2019t until I understood the different types of money<\/em> and how they\u2019re taxed, along with the various tax breaks available<\/a>, that I realized the true path to wealth.<\/p>\n

As much as debt and taxes made poor folks poorer, it also made rich people wealthier. So, why is that?<\/p>\n

\"male<\/p>\n

How the Rich Utilize Taxes to Build Wealth<\/h2>\n

When I was young, an old real estate developer I was working for pounded into my head, \u201cIt\u2019s not what you make; it\u2019s what you keep.\u201d It\u2019s so true.<\/p>\n

Even if you\u2019re a high income earner, like a doctor, you\u2019re probably taxed the highest. In Pennsylvania, you could be handing over close to half of your earned income, and I\u2019m sure in California it\u2019s much higher.<\/p>\n

But as a real estate investor, if I had $1 million of rental<\/a> income, my taxes would be much lower, especially with all the write-offs made available in the tax code. A wealthy real estate investor could then turn around and use the earned $1 million to purchase a $4 million apartment building (utilizing debt, leverage, and tax breaks).<\/p>\n

This investor would come out much further ahead, especially since passive income (and portfolio income) is much more favorably taxed than earned income.<\/p>\n

Most less well-off individuals just don\u2019t have many deductions, and on top of that, they have the most highly taxed type of income. All the government tax breaks seem to be given to those who benefit society more by providing jobs, housing, or by running things like nonprofits.<\/p>\n

How the Wealthy Use Debt<\/h2>\n

When it comes to using debt, I also see a big difference. Wealthier folks are using things like private equity, government grants, and bank loans. They also have the best attorneys, accountants, and entity structures, as they are always considering the tax implications of everything they do.<\/p>\n

For example, if the $4 million apartment building I mentioned before appreciates in value to $5 million, the investor might borrow against that new equity via an Equity Line of Credit and then use that capital to buy a cash-flowing asset or invest at a higher rate than their interest payment. This access to capital is also tax-free, because it\u2019s a loan.<\/p>\n

The lower income folks often fall prey to using bad types of debt. By this, I mean debt used to purchase something that goes down in value or doesn\u2019t throw off any additional cash flow.<\/p>\n

They often spend more money than they make, and they pay excessive rates and fees for things like insurance, bank loans, and credit cards due to poor credit or because they are considered a higher risk.<\/p>\n

The poor and middle class may need more student loans than wealthier students, too.<\/p>\n

\"woman<\/p>\n

Related:<\/strong> Personal Finance Software: 7 Top-Notch Tools to Help You Grow Wealth<\/a><\/em><\/p>\n

I remember my early struggles when attending a more affordable state college. I was commuting for the first two years since I couldn\u2019t afford to live on campus, and I was working four to five nights a week. While my wealthier friends had more time to study or have fun, most of my free time was spent commuting and working. It was much harder to get good grades with all of the financial stress.<\/p>\n

At the end of the day, it was and still is all about access to capital<\/em>.<\/p>\n

As the wealth gap and income inequality continue to grow, just be sure to think about how you\u2019re making your money, how it\u2019s taxed, how much you get to keep, what your plan for the money is, and how that use of capital will be taxed.<\/p>\n

Today, I\u2019m living proof that it\u2019s not about what you make, but what you keep.<\/em><\/p>\n

\"\"<\/a>
\n
\nWhat do YOU think? Are debt and taxes big contributors to the wealth gap?<\/em>
\n
\nLeave your comments below.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

Income inequality and the wealth gap are growing in the U.S., while the middle class is shrinking. One of the biggest reasons for this is access to capital. This is why it’s more important than ever to assess how you\u2019re making money, how it\u2019s taxed, how much you get to keep, and what your plan for the money is.<\/p>\n","protected":false},"author":807,"featured_media":119358,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7378],"tags":[],"class_list":["post-77501","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-tax-laws"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/77501","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/807"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=77501"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/77501\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/119358"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=77501"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=77501"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=77501"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}