Why The Rich Don’t Pay Taxes

Follow me


Follow me
Photo credit: Fortune Live Media @ Flickr


Once upon a time there were 3 sisters—Sally, Susan, and Sarah—who lived in a suburb far far away. They had normal lives, a normal upbringing, and kind, supportive parents.

But they made very different choices.

static (2)

Sally is a freelance writer and makes $20,000/year, working 25 hours per week.

static (3)

Susan is a software developer and makes $70,000/year, working 50 hours per week.

static (1)

Sarah makes $57,000/year, working 0 hours/week. She’s a retired lawyer with a $950,000 portfolio generating 6% return a year.

Who makes the most money?

Well, at first glance, Susan does, at $70,000/year. But what happens when we take taxes into account?

Assuming that all 3 sisters live in Ontario, here’s what happens to their salaries after taxes:

  • Sally makes $18,359.03/year. At a 8.2% tax.
  • Susan makes $54,770.61/year. At a 22% tax rate.
  • Sarah makes $55,399.05/year. At a 2.8% tax rate.

As it turns out, Sarah, the retiree, actually makes the MOST money because she pays the LEAST tax.

static (1)

Why? Because investment income is more favourably taxed than employee income.

That’s why, as an employee, Susan pays a WHOPPING 22% in taxes whereas Sarah pays only 2.8%. YEESH! No wonder Warren Buffet says his secretary pays more tax than he does.

As a retiree and investor, Sarah not only has the most freedom, she pays the least taxes. And unlike Sally and Susan, who are trading hours for dollars, her investments continue paying her even in her sleep.

If you’ve ever read Robert Kiyosaki’s “Cash Flow Quadrant” you’ll know what I mean. (Full disclosure: this is an affiliate link. But if you’d rather get it from the library, I won’t judge)

Now, you might be wondering, why the HELL are you promoting Robert Kiyosaki? Isn’t he the “Rich Dad Poor Dad” con man who sells bogus “get rich quick” courses?

And yes, you are right. His courses are complete bullshit and most of his books are crap (borrow them from the library, don’t buy them), but this book is the exception. I’m not a fan of Robert, but I LOVED this particular book. And the part that struck me the most and stayed with me was:

The Cash Flow Quadrant


To give you a bit of background, the Cash Flow Quadrant is the idea that we all fall into 1 of 4 categories:

  • Employee (E)
  • Self-Employed (S)
  • Business Owner (B)
  • Investor (I)

The people on the LEFT side (E and S) work the longest. This is because they trade hours for dollars. If they decided to NOT show up for work, the money STOPS coming in. 95% of people are in these quadrants, generating 5% of the income. I was one of them.

The people on the RIGHT side (B and I) work the least for the most gain. This is because these people have invested in assets that continue working even when they don’t.

The business owners (B) have invested in staff, machines, etc, that make money for them. The investors (I) have invested in assets (stocks, real-estate, etc) that pay them to own them. This is why B’s and I’s say they make money in their sleep, because they really do! 5% of people are in these quadrants, generating 95% of the income. I am now one of the 5%.

When you are in the LEFT side, as an employee or self-employed person, you are either poor or middle class, because your hours are limited, and you can’t scale your time to get rich.

BUT, if you were to become Financially Independent, and move from the E or S quadrant to the I quadrant, you’ve moved from being a poor/middle-class employee—who works the longest and pays the most taxes—to a rich investor, working the least and paying the least taxes.

Which brings me to my favorite Robert Kiyosaki quote:

“Poor people buy things, middle-class buy houses, and rich people buy assets.”

People who buy things are poor because all their net worth is in depreciating assets such as clothes, gadgets, and cars. Sometimes this is out of necessity and totally not their fault.

People who buy houses are middle class because all their net worth is locked in 1 asset and they can only cash out if they sell. While they own the house, they must continue working because they can’t just sell a brick or a window to pay their bills.

People who buy assets are rich, because they pay the least taxes while enjoying the most freedom.

And I know because I have been in all 3 at various points in my life. Growing up, I was poor. My parents could only afford a tiny 1-bedroom rental apartment for all three of us, so I lived in the closet (but I did have all the moth balls my little heart desired, so there’s that.). Back then, my parents had so little money that when I got a present from a friend, they took it and re-gifted it to other kids because they couldn’t afford to buy presents themselves. Those were good times.

And then when I started working, I became middle-class. Only I refused to buy into the housing mania out of sheer stubbornness.

And now, somehow by stumbling into Financial Independence, I became rich. I pay almost no taxes and make money in my sleep.

Going from poor to middle class is REALLY hard. But going from middle class to rich is surprisingly easy. Just copy our moves and you can do it too.

And this is why I know what Robert is saying is true. The rich don’t buy things or own houses. The buy assets and as a result, pay the least taxes and enjoy the most freedom.

What do you think? Do you agree?







27 thoughts on “Why The Rich Don’t Pay Taxes”

  1. For comparison’s sake could you provide an example with each individual earning $100,000 and assuming that the employed person maximizes there RRSP contribution?

    1. For an individual earning $100,000:

      RRSP: $18,000
      Taxes: $19,302.22 (assuming they live in Ontario)
      After-tax income: $80,697.78

      Now if you compare this with a portfolio of $1.67 Million, generating $100K/year at 6%:

      Taxes: $9,686.33 (assuming they live in Ontario)
      After-tax income: $90,313.67

      So you’re paying 19.3% tax as an employee and 9.6% tax as an investor. The benefits of the dividend tax credit are highest in the 50K investment income range. Within this range, you pay essentially no tax (the only tax is the 600 Ontario health premium).

        1. Looking at the our Part 4 post, you can see that by investing with Garth, our 60/40 portfolio has generated on avg 5.82% return in the past 4 years. That’s INCLUDING the oil crash last year that caused TSX to drop by -12%. So I would recommend talking to Garth.

          That being said, there is no investment that will GUARANTEE a 6% return every year. That’s why many retirees use a 3% or 4% SWR to be safe. And what we found is that, after you retire, we didn’t need 6% at all. Our costs dropped so much from not having to work, that we can live on the yield of 3-4% per year. Which eliminates the need to worry about wild swings in the capital value.

          I’m using 6% in the above example for illustrative purposes.

          1. I read the other day in the media that inflation will be 3% this year. With that in mind, the numbers you provide, are they gains on top of inflation ? If you aim for a 3% increase of your portfolio per year and inflation is actually 3% you basically made zero for the year. Please explain where you account for the inflation. Thanks, Adrian – Kitchener.

  2. I remember my mom buying into all his stuff when I was young and believe it or not I still remember many of his ideas today.

    It would be super helpful if you could put together a reading list of some of the books that helped you get to where you are. I’m not sure I could read my way into modern portfolio theory, but I’d love to try!

  3. While I too have mixed feelings about Robert Kiyosaki, his non-accounting definition of assets and liabilities is a really good guideline, i.e assets pay you money (often stocks, bonds, rental properties etc) and liabilities cost you money. I think he stated that the poor and middle class buy liabilities while the rich focus on buying enough assets to cover off their desired liabilities.

    Under accounting definitions, cars, houses, furniture etc would all be considered assets (and I’ll concede in some very specific situations each can be), but unfortunately those that feel they are getting ahead by buying these assets are really just becoming more and more entrapped by ‘the man’

    1. I think it’s because “things” give you an immediate high. It’s the part of our brains wanting that immediate shot of dopamine, and another part wanting acceptance from others. We want them to think we are special based on what we own. Getting out of that mindset is simple, but not easy. Growing up poor actually helped me because I didn’t have the luxury to care about what other people thought.

  4. Cool concept. I read Rich Dad Poor Dad years ago — there’s some interesting stuff in there.

    I like to think of ourselves as having our feet in a few of the quadrants. Sure, we’re workers earning salaries and paying high taxes. But we’re also investors, right now, earning dividends and paying lower tax rates in that area of our lives. We have a couple rentals, so in that way we are business owners, too, enjoying the tax benefits of depreciation and deductions straight from rental income. It’s all a continuum.

    Like the post, and the focus on taxes is something not written about enough. For people approaching FI very quickly, you’re likely earning a good bit and paying a ton in taxes while doing it.

    1. It’s interesting that you straddle multiple quadrants. We were also investing while we were working, so probably what’s most feasible is to gradually move from the left side to the right side over time. Doesn’t happen overnight. I’m definitely liking the right side better 🙂

  5. Great article! It’s all about priorities and what people are willing to trade for tangible items versus financial independence. One of these posts asked for reading material on this approach. I found a great resource for this approach is Jim Collins’ new book, The Simple Path to Wealth. He extols this approach in plain and simple terms so all can understand. I bought the book and found it to be great resource on this approach. Here is the link on Amazon:


      1. You will love it! I prefer the simple method like he recommends. Plain common sense without the high commissions. 😉

    1. Pension income is taxed like employment income. However, it does have the advantage of allowing income-splitting between spouses. Once the Liberals took power, that is no longer allowed for employment income.

  6. Great article!
    Would you ever consider leveraged investments? Using magin accounts or borrowing money for less than 5.82%?
    Also I know you are against investing in a house to live in. But do you feel the same way with buying a house with only 5-20% down payment as a leveraged investment on rental properties? Assuming it can pay for it self with the rental income.

  7. I have just become addicted to your blog and am binging on all of your articles; so inspiring! Next up for me: trying to convince my husband he doesn’t need need that car lease and get him to read your blog (bigger challenge).

    On a personal note, I am relatively new to stock investing — while i have a brokerage account and am invested in a couple of stocks, i want to learn more about ETF Index investing but am not sure where to start. Do you have any resources you can recommend? I’m also wondering about whether you would recommend any podcasts that follow your investment strategy that I can take on the go in between reading your site. Thanks guys for all that you do!

  8. What how is Canada so much better than America in every way? Your capital gains is 2.4%?! In America we pay 20% capital gains! I pay 50% taxes on my income (state/federal/local). How are taxes so low in Canada and you still get free healthcare!

  9. Sally and Susan are contributing members of society. They may not be doing what they really want to and are really getting taxed heavily too but they are giving back and not living a life of pure leisure and luxury after only 5-10 years of work. They end up being two small parts of a working class of people that do pay taxes that do pay for a variety of luxuries and privileges that we are all just damn lucky to have even if life is really hard with these things. They may even indulge in making their money go to work because fuck it this system is fucked up, but at the end of the day, they show up for this world in the best way they can right now and continue to trudge forward helping all of those they attempt to serve. If everyone acted like their friend Sarah, there would be nothing to share around the campfire and society would not be constructive and supportive the way it is now. Realistically, not everyone would do what Sarah is doing but if enough people follow suit with Sarah’s inspirational path, the tragedy of the commons may rear its head at the detriment of those who put people like Sarah on their head for now so she can live her ‘dream life’. And what a dream it is. Sarah is extremely fortunate to let a corrupt monetary system go to work for her in a strange time that may never exist in the future. She knows how to cheat the system and many others do and call themselves intelligent and inspiring. And while this reader agrees in the level of cleverness, Sarah’s decisions are based on far more than cleverness. Selfishness and self-indulgence comes to mind and this reader hopes that people own their responsibility to themselves and our society to give back with their gifts and moral convictions instead of relying on loopholes that fund a free pass on a life and socioeconomic and cultural value system that has invariably benefited Sarah in many ways. Even if it did require some work and intelligence. This reader thinks there is a grave danger of despair in the last psychological development stage of life for Sarah and her followers when they are much older and when they would usually retire due to looking back on a selfish life. In the end, they may have been too clever for their own good. And the knots and flashing despair and sorrow are constant reminders that decisions with just the mind are doomed to fail because the mind was a trickster after all. Maybe this reader is wrong… and I really sure hope so.

    1. Hey Sideways,
      You have an interesting perspective!
      There’s nothing wrong with staying in the E and S quadrants, AND there’s nothing wrong with being in B and I quadrants. However, don’t judge others for wanting to move to the right side.
      In your view, the system is messed up, but how can you make the best of it?
      Choose the quadrant that’s right for you and lead your own life! 🙂

  10. Sideways, it’s called personal choice. Everyone does not make the same choice but everyone has the potential to. You can’t or shouldn’t be angry at those who made a different choice and followed a different path. Why do you describe them as “selfish” and “self-indulgent?” The path that the majority of people follow or are taught to follow is the one that does not benefit those who want more out of life, those who do not want to simply work all their lives waiting to retire and die especially after paying ALL those taxes. Often, there is nothing left to help future generations along. You can not “inherit” a job and even if you could who would really want to?

  11. Sideways…OMG I think you’re crazy (would like to say liberal or socialist, but let’s not make this political)…I for one am tired of paying “for society”. My job is not to take care of my neighbor, my job is to take care of myself, as best as possible and that means making money and investing it. People need to start being responsible for themselves. If the tax laws allow you to be able to take advantage of them then do it, that’s why the wealthy made the laws that way. My taxes are not meant to supplement people who keep having kids and go on welfare (Medicaid), they have NO income, no investments, etc and don’t want to work, they want everything free and everything to be “given” to them. Sarah is not being “selfish”, she did her time and was just very smart in how she did it. Maybe you’re just jealous? Sideways, you need to move to China, where you will be told how to live, how much money you will get and not use your brains to enhance your life. Or go back to the University from where you came and keep trying to justify your ridiculous reasoning.

  12. It seems like you’re getting great advice from Garth. I spoke to him around 10 years ago when we were considering buying a house but ended up getting the mortgage and investing on our own. We recently paid off our mortgage and we do have a large portfolio that has done very well (but who hasn’t this past 10 years) but more and more I wonder whether we would have been better off renting and putting all that extra money into investments.

    I bought and read your book and I really enjoyed it.

Leave a Reply


Social Media Auto Publish Powered By : XYZScripts.com