Ethics Around Reducing Tax Liability

68 Replies

Hi all, as I've been getting more into real estate investing, it's become quite clear that the US tax code favors business owners and real estate investors rather than W2 employees or self-employed business owners. On a personal level, I'm very excited about the idea of not paying more tax than I need to and creating a financial tailwind by taking advantage of tax breaks. I'm more than willing to continue to legally take as much advantage of the tax code as I can for me and my family. I have no interest in paying more than I need to at the cost of my family's freedom from financial stress. 

Having said that, in the current socio-economic climate where vast inequality and systematic disadvantages are at the forefront of the national conversation, quite frankly I'm feeling guilty about building a business that is reducing my total tax liability because I feel as though I'm taking advantage and participating in a financial system that is causing so much pain for so many. 

So those are the two sides to the coin that I'm debating between. I am a capitalist because I believe it's the only system that works on a large scale (don't want to open that can of worms here) but I don't believe in completely uncontrolled and ungoverned capitalism because it allows for the powerful to retain their power forever at the cost of the many. I believe in creating checks and balances in the system to make sure that as many people as possible have similar opportunities for financial, educational, and spiritual success. 

Would love to hear thoughts from others in the community who also philosophically fall somewhere between Mr. Monopoly and Karl Marx :) 

I was about to leave this alone there is no duty to pay more tax than is necessary.

When it comes to tax avoidance, we have been guided not by the invisible hand or the guilty hand but by Judge Learned Hand, who famously wrote: “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

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@Hank Olken I think about this dilemma as well.

Like you, I love the idea of using the tax code to minimize my tax burden as much as possible, and I see the terrible situations many people are in as a result of a lack of money and truly feel bad for them. I think a lot of the financial problems many in this country face are due to a lack of education.

One way I plan to address it is to use my prosperity to give back and help others! So if I can help teach more people about personal finance, real estate, and smart investing, I see that as a way to give back into society. Many fellow real estate investors have this mindset, because almost no one becomes successful in real estate without the help of others. Individuals much more successful than me have reached down and pulled me up, so I do the same and will continue to do so as long as I am able to. 

@Steven Hamilton II I guess the question is will i as an individual paying more tax than legally necessary actually help my fellow citizens? No it won’t make a difference. But if everyone and especially the most powerful and rich in our society think the same way then we’re not creating an equitable system are we? It’s a collective action problem like voting or bringing a bag to the grocery store: my individual decision won’t change anything at scale but if everyone thinks the same way I do then the larger system will be worse off. So am I right in thinking that this tax situation is a common goods/collective action problem? 

@Doug Spence absolutely, and I commend you for paying it forward and for your service to our country. So you’re saying the ends justify the means. But does that then imply that the means by which I’ve attained that influence are unethical? Every bad actor can justify their actions for some larger greater cause but that doesn’t mean their actions are unethical 

Originally posted by @Hank Olken:

@Steven Hamilton II I guess the question is will i as an individual paying more tax than legally necessary actually help my fellow citizens? No it won’t make a difference. But if everyone and especially the most powerful and rich in our society think the same way then we’re not creating an equitable system are we? It’s a collective action problem like voting or bringing a bag to the grocery store: my individual decision won’t change anything at scale but if everyone thinks the same way I do then the larger system will be worse off. So am I right in thinking that this tax situation is a common goods/collective action problem? 

Framing this as a collective action problem seems like a way to shirk responsible from not following your moral compass. 

If this is something you truly believe in, then it is of no consequence how others act, you should do it simply because it is the right thing to do in your view. Nothing says you can't pay more than your tax bill. 

Now if you want some moral justification for dipping your hands into other people's pockets to accomplish some amorphous goal that you feel strongly about, then by all means go right ahead. 

As any tax payer you should pay what you are legally required to pay.  You did not write the tax code, you merely adhere to it.  

You can be against the tax code as it currently stands, and believe that a different system would be more fair or equitable. That does not change the fact that there is a system in place currently that you are legally bound to follow, even if you are benefiting from the distortions in said system given to real estate investors.

@Hank Olken read Popular Economics by John Tamny. He goes into detail on a micro and macro scale how keeping funds in the private sector is a more efficient way to ha due money and has a larger positive net impact on more people than higher taxes.

Also, there is a difference between tax rates and tax revenue. Often times lower tax rates leads to higher tax revenue. There is no doubt a stronger economy, boosted by the private sector and Entrepreneurs creating jobs has a net benefit for everyone.

Being a responsible landlord, providing safe, comfortable places to live is a service needed. Rich people, middle class people and low income people all need this service. More often than not private land lords take better care of their property than state owned units. Be a good landlord and follow the law, if you still feel guilt after that donate your money to charity.

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Originally posted by @Hank Olken:

@Doug Spence absolutely, and I commend you for paying it forward and for your service to our country. So you’re saying the ends justify the means. But does that then imply that the means by which I’ve attained that influence are unethical? Every bad actor can justify their actions for some larger greater cause but that doesn’t mean their actions are unethical 



The "means" are providing affordable housing at a fair market price for fellow Americans. I don't think that's unethical. My government incentivizes me to do that by giving me a tax break. I think that's both reasonable and ethical.

Most people in America do not have it that bad...

There are people in here who own over 100 homes, and there are people in here who own zero homes and want to get just one.

There are also people who own zero homes and never will (due to their own issues) and they rent (or the government rents for them).

The people in America that are really "down and out" Poverty cases are the Homeless. Sleeping in doorways and on heat grates, and begging change for a living. but not much focus goes to them.

The focus seems to be to get those who get free handouts from the government to believe they should be able to not work and get as much a or more than working people. 

It's cold out tonight, while most people sleep indoors with a meal in their stomach, the homeless are outside (like animals) many cold and many hungry.

If you want to make things better in your town, maybe donate cash to the Homeless shelters and Homeless feeding charities.

It might give you more bang for your buck.

Just my 2 cents.

Is it the same amount "equitable" for a person who believes they should pay less than legally required, for them to do so, than for you to pay more than you are legally required to? If the gov't wanted everyone to pay the same amount, they'd institute a flat tax. Until then, pay what you owe. Its not "taking advantage" of anything to claim deductions - these are legally allowable. The only "take advantage" of type hyperbole is because so many people don't understand the tax code and/or the need to hire a CPA, or they are upset they themselves cannot take a certain deduction. Just like hiring a lawyer to argue a field sobriety test was improperly performed or a contract had a certain out in your favor isn't "taking advantage of" criminal or contract law.

If you are feeling guilty about not contributing "enough" to society based upon your own arbitrary standard, donate what you think you should pay to whatever causes you support and where you'd like that tax money to go. All the way to offering to pay $X towards X # of peoples' tax liabilities if necessary.

I am very similar to you in thought - I am a capitalist, but I dont believe in unfettered capitalism.  I believe we all should pay our share to help maintain our beautiful country and the citizens within it. 

I dont go out of my way to find tax loop holes, nor do I hire aggressive tax attorneys or CPAs.   I also make sure I pay my fare share in employment taxes by employing myself and contributing that way. 

I honestly feel that for most middle income folks as long as we pay our taxes and try not to dodge them we are paying our share - it is those that hide income or earners that pay no tax that really should be looking at themselves. 

I dont know the answer -  but putting your money in a mattress benefits no one :) 


@Hank Olken

Taxation is theft. Only unfettered capitalism is capitalism. I do recommend following the tax code to avoid prison, but beyond that keep what is yours. No one's being kept down by you keeping what is yours. Be as charitable as you wish. But guilt should be reserved for the guilty.

Taxation is much more about control than generating funds. The government has no problem printing all the currency they want, with no apparent guilt for the consequences. Real estate investment and business creation are incentivized because the government wants people to provide housing, products, services and jobs.

The REI savings are peanuts in comparison to the current corporate welfare system. There is no such thing as tax loopholes, they exist by design. Keep that in mind. No need to sweat it.

REI has benefits, but are exaggerated. For instance, imagine a rental unit $27,500 kitchen renovation that will be depreciated over 27.5 years, $1K per year. Well, your savings are a whopping 14% (this is the typical effective tax bracket for most Americans). Will you feel guilty for $140 savings per year? These "juicy savings" are destroyed by inflation at 2.5% per year (unless is this crazy year). So, your savings over 27.5 years are peanuts. Then, unless you die, you will face recapture tax at 25% flat and this does not account for inflation over your cost basis. Finally, you always have property taxes, maintenance, interest on your loans, etc.

Read NOLO Tax Law & Deductions for Landlords a few times, then you will truly realize that the savings are not as they advertise.  The savings are good, but with many limitations.   You won't see incredible savings unless you are mega rich.

Finding financial freedom through REI, is likely a fallacy unless your are aiming to lower income. REI is a business. It is still a job. It will consume your time. As you can see through this platform, creating a successful blog, selling tons of books and advertising is more profitable than REI.

You can always volunteer your time for not for profits if that makes you feel better. However, your immediate group of people will benefit the most,  Focus on your family, kids, and friends.

Update: read Capital in the Twenty-First Century

@Hank Olken Prior to understanding money, personal finances, business, and investing, I had no idea how much the government taxed regular W-2 employees compared to others. As I have grown as an investor and entrepreneur, I have began to understand why the tax code benefits us more than others.  As business owners we are rewarded for creating goods or services that meet market demands, the more we meet, the more revenue we generate, by generating this revenue we employee people, large companies employ tens of thousands of people. We are rewarded in the marketplace by being efficient, innovative, and meeting needs. This is why Amazon is valued at 1.75T dollars as of today. It solves a lot of problems, it has innovated in unimaginable ways, and it employs nearly 1 million people. Hate it or love it, those are facts. With that all in mind, the government rewards companies like these with incredible tax incentives (at least for the past 40 years, it could change soon). Those tax incentives should be used for continuing to grow a business with new development, more employees, and solving more problems in the marketplace. 

As for investors, we are rewarded by taking risks. Any form of investment has associated risks, stocks, crypto, real estate, other assets, etc. By putting capital to work in the market we are risking it in hopes of a return on that investment. Without investors putting money into the marketplace, our economy would not function, grow, or innovate. We are rewarded by taking calculated risk based on good research and understanding, when our investments grow, we are rewarded with capital gains. If the government takes a large % of those gains (which could happen soon), investors are much less motivated to to risk the capital in the marketplace. 

The bottom line is this, the tax code incentives things that are good for our economy and for America in general. By playing within those guidelines legally, and taking advantage of the incentives allowed, we are doing exactly what our country and government has deemed important to our growth and healthy operation. Such as benefitting homeowners and married couples, because it creates stability and community. The reason W-2 employees pay the largest % of taxes is because they are not taking any risks, they are not adding innovation, or capital to the market, they are completing a task as required for pay. Not to say this is unimportant at all, but it has an inverse relationship with the tax code incentives. Not to mention, W-2 workers are the vast majority of Americans and the middle class, which is where the IRS gets the vast majority of its tax revenue from. 

Not even touching on the fact that our collected tax revenue is largely mismanaged, by understanding the basic principals of our economy and tax code, there is zero reason to feel guilty or immoral about using the tax code as it was written for our benefit. How you use those benefits is what I would be more concerned with.