In 2007, Warren Buffet was asked how much taxes did his employees pay in a financial year.
To which he replied, 33%.
And how much taxes did Warren Buffet pay himself in a financial year?
Someone working for Buffet was paying 2X the taxes compared to what Buffet paid.
Why was this happening?
Here is where we need to understand the difference between wealth and income.
Thomas Piketty, a French economist, speaks a lot about why people should be taxed more on their wealth than their income.
This is precisely what we are going to try and understand in this article.
Here are 5 simple examples which will almost convince you to start a business.
- Difference between me buying something on Amazon vs you buying something.
Let’s say we both want to buy an Apple MacBook Air.
For you, a normal retail consumer, it would cost Rs. 87,900 inc. GST.
Since I use an Amazon Business account, I will be paying Rs. 74,491.53 excl. GST.
Basically, I will be getting a GST rebate on it. And no, this doesn’t work only for expensive products.
So, if you own a business which is GST registered, you will get a lot of tax rebate in terms of GST credit inputs.
If you compute all the items that you’d be buying in a year on Amazon, and take approximately a 10% savings rate, it will come out to be a lot of money you can save in a year.
Now, I am not a CA. I just want to just give you a super simple explanation on how owning a business can allow you to save taxes legally. Please do your due diligence to understand how this works in its entirety.
2. Buying a car
Here is a small clip around buying a car. It came out in Economic Times last year.
It gives you an essence of how much you’re actually spending when you buy a car worth 15L with your savings :
If you would have owned a business, there are a bunch of savings you could foster.
Owning a business would allow you to depreciate some of that income out in terms of expenses. That will save you a lot of money.
When you fill your petrol tank, undertake maintenance or repair charges, you can expense that out to your business.
Do check with your CA if your business would qualify for that.
What you need to understand is that owning a business does allow you the option of doing so. If you are a salaried employee, this is something you cannot claim.
Now one might ask- Is it not evil to save taxes through building businesses?
There are two counter arguments to it.
- If you are building a business, you are creating more jobs in the economy.
Any nation would want to foster a more entrepreneurial culture.
But what if the government pushes a lot of taxes on businesses?
A lot of countries like Estonia and Portugal are giving visas to entrepreneurs to come and work there. This could be a big brain drain problem.
Thus, the government needs to ensure an effective mechanism for entrepreneurs to keep on engaging with the economy and start creating more jobs.
So this is the first qualitative argument as to why businesses are not taxed as high as individuals.
- It comes down to the risk reward equation.
When one decides to start a new business, they have to put in a lot of capital to go to a certain scale. Only then it starts becoming profitable. This is how the majority of businesses function.
Entrepreneurs are taking a greater risk. Hence once they are successful, they are rewarded more.
Now one might have a lot of counter arguments to this statement, but the idea here is that building a business might be a worthwhile exercise after all.
3. Difference in taxation structure on income and wealth.
Many times you must have heard the news headlines saying that Jeff Bezos and Elon Musk are paying close to 0% tax. On the other hand, an average American pays close to 35-40% tax. Is this not unfair?
Let us understand the semantics behind it by taking the example of Tesla and Elon Musk.
Assume that in 2020, the value of Tesla was 800 billion USD. In 2021, the evaluation became even bigger. It became 1 trillion USD worth of business.
Now, the 200 billion USD was the additional wealth that was generated.
This money is still logged into Tesla. It is not as if Elon Musk has taken this 200 billion USD. Hence the money is not taxed from that perspective.
If you compare this with income, it is a slightly different concept.
If your income is 1L rupees, you have to pay a certain amount of tax because the money is going into your pocket.
Hence the tax structure on wealth is very different to when income generation is happening.
Very recently, Elon Musk decided to sell a certain bit of stake in Tesla.
Whatever sale he made, he will have to pay tax on that, a much higher rate of tax compared to wealth building.
So when you read the news that says billionaires pay close to zero tax, that might not be the complete truth.
- Build wealth
- Invest it in different businesses.
- Use that money to off-set it.
4) Billionaires exploit certain loop-holes to make more money.
Let’s take the example of Jared Kushner, the son in law of Donald Trump.
He goes and buys an entire block of high end properties in New York.
How does he do it? He buys this on debt.
Since he is extremely rich, the bank will not hesitate to give him money as loan.
Let us assume this debt is 1 billion USD and he has to pay a yearly interest of 60 million USD.
This interest can now be offset against business revenue.
If he makes 100 million USD out of his business, but he is paying a loan of 60 million USD, his profit becomes 40 million USD. So, he has to pay tax only on this amount.
This type of system is rigged because the lower middle class, middle class, even rich people cannot get access to such large hoards of money to exploit tax loopholes.
So our goal in life should be to be so rich that banks give us cash literally for free. 🙂
Watch these macroeconomic videos to understand why due to high inflation the cost of capital is extremely low-
Whenever the cost of capital is very low, rich people can go and take bulk loans and literally do this exercise and keep on getting richer and richer.
5) The Scenario in India.
Now, this is all about American society, do people in India also do this?
The answer is yes.
In India, you have agricultural income. The revenue from agricultural income is not taxed. So if you own 50 hectares of land, and grow potatoes on it, the profit you make will not be taxed.
A few years back, as funny as it sounds, Amitabh Bachan legally saved taxes by showing himself to be a farmer.
Now, what can you do to save taxes?
- Claim your deductions.
Watch YouTube videos to learn which sections you can explore to learn what you one must do to claim deductions.
If you have taken a house loan, you can off-set that.
You can off-set some of your taxes by taking an education loan.
Should you be taking a loan? That is a different argument.
But if you have taken a loan, at least take tax rebates on it.
Also, if you have donated to a non-profit organisation, you can claim tax inputs on that. This can help you save money, even when you are in a job.
And finally, try to think how you can start a business.
It is the most effective way to save taxes.
Remember, the more you earn, the more power you get to save taxes.