A lesson in minimizing taxes and maximizing income

Mike: Welcome to the program, Mike Consol here, your host. We’re going to talk taxes. A subject most of us are pretty uncomfortable with. Not only because we don’t like being separated for my money, but we have a tax system in this country that’s really deplorably complex. Which is why guys like Toby Mathis who is around, he’s going to be our guest today. We’re going to have a conversation around taxes, and around how the rich get richer, how so many of us may overlook the opportunities to maximize our investments—the return on investments—because we’re not thinking in terms of tax efficiency and what have you.

Toby Mathis is with us. He is a barrister, as the Brits would say. He lives in Las Vegas, Nevada. The kind of the winner-take-all, sort of the house wins. That’s kind of like taxes. It’s almost like you’d expect a tax lawyer to live in Las Vegas because when you walk in the door, the house wins. Basically, the government wins, we collect the taxes. However, as we’ve heard—even President Biden says—there are all these major corporations that pay no taxes at all. There’s a lot of rich people who paid no taxes, even some ex-presidents, or maybe an ex-president we won’t mention.

It’s an interesting subject, one that we’re going to delve into in terms of what’s possible. Let me tell you about Toby Mathis, besides his whereabouts. He is the founder of Infinity Investing Workshop and Anderson Business Advisors. There’s more to say about Toby, but I’ll leave it at that because we want to get right into the subject matter. I should also say he’s on a mission to help investors and business owners keep and grow more of their income. What tax lawyer isn’t trying to do that? But Toby’s quite accomplished at it apparently.

We’re going to start with a question about how the rich get richer and how other investors might be able to do the same. Before we even get to that, first of all, Toby Mathis, welcome to the program.

Toby: Thank you for having me, Mike. Glad to be here.

Mike: The time is right because it’s tax season, and it’s been pushed back one month, as my understanding. Instead of April 15th, tax day is May 15th. The IRS is overwhelmed I guess because of COVID and maybe some other factors. It’s a maxim, Toby, that the rich get richer, the rest of us play by their rules, they kind of protect their territory. And whether intentional or not, it does leave a lot of people on the sidelines wishing we could get the same kind of treatment but don’t.

How does the system work? I mean, give us kind of an overarching view of the tax code in the United States that has the rich getting richer and the people of average means staying right where they are.

Toby: Mike you ask a really good question, and I’ll answer it in two different ways. A, when I was a kid, when Star Wars came out—I don’t know whether you’re one of those people that waited in line when it first came out. But I remember Obi-Wan Kenobi hypnotizing the stormtroopers like, these are not the droids you’re looking for. There’s a lot of that going on in our society where they say, this is an asset. They’re tricking us because it’s not really an asset.

Just at its fundamental foundation, we have a misunderstanding of what assets and liabilities are. We end up buying a lot of liabilities. I basically use a really simple way to calculate it, which is assets put money in your pockets every year. It doesn’t it increase what’s in your bank account that you can buy groceries with, or does it take it away, does it cost you money? If you use that analysis, you won’t get misled.

We go buy a big house and you say, that’s my biggest asset. It’s not an asset, it’s actually taking money out of your bank account. It’s actually a liability. The bigger you go, the more that liability is. They trick us because that liability to us is their asset. You start realizing the banks’ balance sheets have these loans on them, the stock market goes crazy, they make a ton of money.

Even in the pandemic, we’re doing these Paycheck Protection Program loans and all these things. They’re making a killing on those. They’re making billions of dollars just processing these loans and getting them purchased from the government.

That’s a fundamental step that we have to get through that when you make money, you don’t go out and buy a bunch of liabilities. You don’t go out buy the car, you don’t buy the house, you don’t buy all these things right away. You should play it like monopoly where, hey, if I have a little bit of money I should buy something that’s going to produce rents, royalties, dividends, interest—something. It should be producing some sort of income, and then I could use that income to go ahead and build, buy whatever it is that’s going to be my legacy. We have that fundamental misunderstanding.

Then you go to our wonderful tax code, which if you ever go try to read the tax code, it’s 26 USC—United States Code. It’s longer than the Game of Thrones. It is written like poetry. Nobody likes to sit down and read the tax code unless they drink a lot or there’s something wrong with them. It’s not something you read down and say, you know what I’d like to do? Sitting by the beach and reading the tax codes is not something people do.

It’s not something that’s readily understood, it’s really large, it has a ton of interpretation in the regs and in tax-court cases. There are millions of pages of this stuff, and it’s really difficult to get your head around. What you have to do is get highlights.

What you’ll realize when you start looking at the highlights of the tax code is that it’s an incentive-based code. It incentivizes behaviors, and the behavior that it’s incentivizing is investing in specific types of assets. It punishes you if all you do is have income, and I’ll use this as an example. I’ll ask you a question, did you ever work at McDonald’s or a fast food place when you were a kid?

Mike: I did. A warehouse deli in Tempe, Arizona, right next to the Arizona State Campus.

Toby: Yup, all right. I worked at McDonald’s, I made $4.15 an hour. We have a really nasty surprise for anybody who starts off working in this country. It’s called a regressive tax. Regressive taxes are those taxes that hurt the poor, way worse than they hurt the rich. One of those regressive taxes is called Social Security. There’s Medicare, there’s Social Security, which is old age, disability survivors, and hospital insurance.

It’s this 15.3% tax that’s embedded in all of earned income. There’s a phase-out once you hit $147,000 or $140,000 on a portion of it, and then a portion of it continues on forever. But the reason I bring this up is when you first got a paycheck from your deli, you’re working at the deli, you put in 40 hours, you’re making X number of dollars per hour, you multiply it by 40, is that what you received?

Mike: No, my effective tax rate was very high, Toby. Definitely very high, not even close to what I received. I think they took about 40% chunk.

Toby: Yup, that’s the dirty little secret. You and I, when we go out and we work, we get punished. The tax code is telling us something. The tax code is saying, don’t do that. I went to Catholic school, if a nun walked up and whacked you on the knuckles with a ruler, that was a hint to stop doing whatever it is that you’re doing. But our tax code does the same thing. It goes up and gives us a whack and says, stop doing that. Americans, because we’re Americans and we don’t like to take a hint sometimes, we just keep doing it.

We work our katush off and we say, boy, we’re just getting slammed here, this isn’t really fair. You gripe and you moan. The trick is to get away from that regressive tax and say, all right, the tax code’s telling me to go make other types of income. There are types of income that are not subject to that regressive tax, and that’s your unearned income. That’s your passive income or portfolio income. It’s rents, royalties, dividends, interest capital gains, and that’s it.

The only type of income that gets hit with that regressive tax, when you go make a paycheck, or when you’re working and you have active ordinary income. You’re a sole proprietor, you’re going to get hit with the self-employment tax. You’re an employee, you’re going to get hit with the Social Security tax. If I make money from rent, I don’t have to pay it. If I make money from dividends, I don’t have to pay it. If I sell assets like stocks or bonds, I don’t have to pay it.

The code is telling us, don’t do that and we don’t listen. The rich listen, and the rich listen very carefully. You mentioned our ex-president that didn’t pay any taxes. Well, he did pay taxes.

This is what’s interesting. You have a recession going on and the government says, hey, we’re going to incentivize people to build. The way it works is this, if I build a house and I’m a builder, I’m a developer, and I’m going to own it and I’m going to rent it to other people—like I’m going to build Trump Tower. I don’t get to write that off, I don’t get a deduction for it. I have to come up with that money with post tax dollars. Usually, I’m going to borrow it because if I borrow money, I don’t have to pay tax on it.

A business might borrow money so it can lever up, so it can make the numbers work so that it makes sense for them to invest in something really expensive because they don’t get a deduction for it. You write it off over 39 years. They’ll say, over its useful life. If I buy a car, for example, I might get to deduct it over a period of years. If I buy a computer, it might be 5 years. If I buy a building it might be 27 ½ years or 39 years, depending on how long or what type of building it is—if it’s residential or non-residential.

The code basically says, here’s your incentive and you have to work within those parameters. During the recession, congress got together and said, hey, we’re going to accelerate that. You can write off a whole bunch of that building that you built, and not only are we going to give you a deduction this year but if you have too much deduction, we’re going to let you carry it back and get back money you’ve already paid.

We’re going to let you take that loss and carry it back to previous years where you had income. We’re going to let you wipe that out and get paid back any taxes you pay. That’s essentially what happened with the president. He’s building this big tower and they say, not only can you accelerate, instead of writing this off over 39 years, you could take a whole bunch of that building and write it off in one year, even though you borrowed to build it.

You’re going to get, let’s say, a $100 million deduction and you can carry it back. If you paid tax on $30 million 5 years ago, we’re going to let you go back and wipe that out and we’re going to give you back the taxes you pay. That’s the incentive to go out and build a building. The rich folks went out and said, huh, they’re basically saying I can get back the taxes I paid if I do X, Y, and Z. There’s an incentive to do X, Y, and Z.

The same thing we do with charities. Hey, if you give money to your church, if you give money to your charity or 501(c)(3) to help people out, if it’s a charitable donation you get to offset your income with it. As long as it exceeds your standard deduction.

Mike: This points to this larger issue of what frustrates people about the whole tax code. That is there are things right in their tax code that are specific to an individual company or there’s an industry that is giving extremely gracious treatment—real estate. I can’t think of an industry that’s given any more tax incentives than real estate. It’s performed very well, maybe not as a consequence. Sometimes investments aren’t made based on fact and reason, they’re made based on tax efficiency or a tax break.

Every once in a while, somebody comes along with the idea. In fact, it happens almost every election cycle. Let’s have a flat tax rate, 22.5%. Everybody pays, there are no deductions, the effective tax rate for everybody is the same. t 1% of your income can be given to charity to lower your taxable income and that’s it. There’s nothing else.

Now we have what? A predictable tax rate so companies know what they’re going to pay, and there’s no gamesmanship about it. But then you have the people on the one side talking regressive tax. For the people who are lower in the income scale, this is a regressive tax.

Then you have a lot of—I don’t know, I would guess, you tell me, check me on this. I think there’s a lot of wealthy people who say they’re in favor of the simplified tax or a flat tax, but the truth is that if it really looked like it was going to pass, they’d flip. Because it’s like hey, look, I’m only paying 9% a year. I’m going to have to pay 22.5% a year if we take all my deductions away.

Toby: It goes like this. If I have an incentive to invest in companies because dividends are tax-favored like right now in the United States, dividends are taxed at your capital gains rates. What a lot of people don’t realize is the poor pay zero. Their tax rate on capital gains is literally zero. If you’re married filing jointly and you make less than $80,000 a year, your long-term capital gains rate is a whopping zero. If you took away that incentive, then you take away the desirability to purchase those companies and you’d see the stock market start to falter.

You’d see less people want those companies because the dividends are not tax-advantaged anymore and you’d see a correction in the market. Rich people hate that because this is what’s crazy, the top 20% owns almost 100% of the stock market. If you look at the top 20% of US earners, it’s more than 90% of that stock market is owned by them. When you start floating the idea of a flat tax and hitting that, and they say, wait a second, you could cause my biggest asset or one of my biggest assets to lose value because it’s less desirable. Yeah, I don’t think that’s going to pass.

Mike: We’re living with the tax code we have, so this could be instructive. Here you are, a tax attorney. I would be curious, I’m sure our listeners would be curious about your portfolio. Without getting into all the specifics, the sorts of things that you’re invested in because I would imagine that your portfolio is tax optimized to the hilt.

What could you say about your portfolio that they can think of in terms of, it would be a good idea for me to take a lesson from this or to replicate it because a tax attorney invests in things that bring home the bacon or keep more bacon in the frying pan rather than going to the government. Talk a little bit about your portfolio just in general terms.

Toby: I can give you very specific rules that I use. I just wrote the book Infinity Investing, and it’s based on thousands upon thousands of annual returns we file here at our company for affluent investors. I just cheat. I just look at whatever the rich people are doing and I’m like, oh, that’s working, I think I’ll do that. There are really five areas they’re in, which are rents, royalties, dividends, interest, and—I’m gonna be very specific here—short-term capital gains on the sale of options. Which some of you guys know what that means. It means covered calls. They’re using compounders.

My portfolio is about ⅓ in dividend-producing stocks. There are companies out there, there are only about 30 or 40 of them that are 50 year plus dividend companies, which means they’ve been increasing the amount of profit they payout for 50 years or more. That’s your Johnson & Johnson, Procter & Gamble, 3M, Coca-Cola, those types of companies. Then you have companies that are 25 years or more like Lowe’s, Walmart, even AT&T.

That just means that if I buy something, it pays me to own it, and that’s a compounder. That works fantastic. With the growth in those companies, my appreciation is not taxed at all. The dividends that it pays out, which I suggest people just reinvest it back in the company, that’s taxed at long-term capital gains rates, which is 0%, 15%, or a maximum of 20%, so you know what your cap is, and most people are cool with that. If I know my aggregate tax bracket is 20% or lower, I’m fine with that, most companies would be fine with that.

What they are scared of is getting hit with a 37% federal tax, plus the self-employment tax, plus their state tax, plus a potential net investment income tax, and the next thing you know they’re getting taxed $0.50 on the dollar. That’s what they’re afraid of, and that’s what they bristle at.

I do 30% in income-producing stocks. I do 30% in the realm of real estate, which you can go Real Estate Investment Trusts or REITs, which you can buy for free, and they pay out 90% of their income every year. You can be a landlord without having to go out and buy a bunch of properties. I do it in private placements where I buy into larger investments, and then I buy a lot of real estate.

My main business partner and I owned hundreds of single-family residences, apartment buildings, little industrial complexes, warehouses, a couple of small office buildings. We own those all over the country because they’re great cash flow producers.

Then the last category and this is what makes people’s heads hurt that love to have control is I say, you got to hire somebody and you have a money manager who’s a fiduciary who manages your stuff. In other words, you make it to where you can’t screw it up, so that your emotion doesn’t screw up your portfolio, and you have 30%.

If you’re adding it up you’re saying, Toby, you said 30%, 30%, 30%. Yes, 10% I keep in cash or cash equivalents. That’s where you put money in your bank account, you have your emergency fund. If you like gold or silver you can have about 3% in gold and silver.

Mike: Or cryptocurrency.

Toby: Cryptocurrency is a great one. That’s where you put your Bitcoin. Those are hedges against inflation, but they’re not an asset because they don’t pay us to own them. An asset puts money in your pocket. I say an asset feeds you and a liability bleeds you. If something costs you money, it’s a liability. When you know that, then you quit buying liabilities.

Mike: Got you. That was a very specific outline of your portfolio. Thank you for that. Let’s imagine for a minute you’re not a tax attorney, but what you are is you’re looking to win a Nobel Prize in economics because you want to create a tax system in the United States as going to supercharge the economy, that’s going to work for everybody (if that’s possible), and is going to get business and investments really running at optimal levels and also that people out there making business decisions and investment decisions are not persuaded by tax incentives necessarily.

It’s a system that says, look, use rational thinking, fact, and reason. You invest in things because they make sense not because there’s a tax incentive. I don’t mean to jaundice the audience in advance, but what kind of tax system would you put in place if you didn’t have to make a living off of it?

Toby: I would do a consumption system. There are two things that I would be focusing on. Right now we have a lot of people that come to this country, enjoy our infrastructure, and enjoy our products. Basically, you can come here and spend a lot of time in the United States and not contribute to our system. You might do it on the state level by paying some state sales tax, but I would have a federal sales tax. I would have a tax that’s based on services and consumption. If you want to hire US companies, you’re going to pay a tax. If you want to buy US products and services, there’s a small tax.

Mike: What percentage?

Toby: And starts generating income that way. By the same token, I’d be scared of people hoarding cash. To a lesser extent, I would still have federal income taxes. What a lot of people don’t realize is that one of the largest revenue generators—I remember looking at the IRS data—is 55% comes in from federal income tax and 33%–38% comes in from self-employment tax or the Social Security taxes.

Those Social Security taxes are a regressive tax. I would change that up, and I would try to spread that out to a lesser amount to put on more types of income and close some of the loopholes. I would have a lesser tax, it’s not as punitive, but make it taxable on all types of income so that you don’t have games being played of people trying to create a so-called passive investment that really isn’t. That’s confusing.

I can explain it this way. If I have company A, they’re a sole proprietor, and they make $100,000, they will pay roughly $7,000–10,000 more per year in taxes than the same company that was set up as an S Corp. It sounds weird but it’s simply the formation of the company and the different disparate tax treatment. I would end that. This isn’t how I made my living. I would look at it and say, that’s not a fair result. In other words, you’re treating two similar companies very differently depending on whether one has an accountant and one doesn’t is really what it comes down to.

Mike: How do you think the tax code is going to change during the Biden administration? I mean, he’s already signaled some things, but there’s an awful lot of people who say, we’re going to end up paying higher taxes. Even if we’re moderate income, the tax increase is going to hit us. It’s supposed to only hit people, and check me on this. I think he said $400,000 household income or higher.

Toby: Correct.

Mike: But it never seems to work out that way. I mean, what’s your expectation of what’s going to happen to the Biden administration?

Toby: Some people say that I look at it a little too pragmatically. I look at it and say, when a politician’s lips move, I assume they’re lying and they’re pandering to somebody. Then what’s the real effect of what they’re saying. It sounds neat, let’s tax the rich. Companies don’t pay taxes, they pass them on. A company is going to adjust its numbers if it has a higher expense. When the wood price doubled during the pandemic, housing went up and builders charged more. If you tax the company more, it just means that the end-users are going to pay more, not the company.

There’s no better example than utilities. Dominion Energy lowered its energy rates by about an average of 5% in South Carolina after the tax cut and Jobs Act passed, which lowered corporate income taxes. It was a direct payment and savings to the poorest in our society. The ones who are suffering to pay an electric bill. You may not care about your electric bill. It’s $200 or $250, it doesn’t make a big difference to you. But to somebody else, that may be whether they’re able to eat. If they’re lower-income, that’s a big difference.

When they increase the corporate tax rate, if they do—which Biden’s proposed to raise it by roughly 30% from 21%–28%—that, your utility bills will increase. As a matter, of course, because utilities are a function of regulation. They’re going to have to increase because their expense just went up, they have to pass that on to the consumer. I think that you’re going to see that widespread. All of a sudden, you’re going to see all those benefits erased. That’s not to say that I wouldn’t necessarily raise it. I would just say, understand walking in that that’s a regressive tax increase. I do not like regressive taxes.

As a tax professional there’s a lot I can do for my clients to lessen the burden on certain types of income like real estate. I have three or four choices of how I could avoid taxes with real estate. I have nothing I can do with a regressive tax. I could just say, don’t work as much or don’t use as much energy.

Mike: Don’t run the electricity as much. David Cay Johnston, the New York Times tax reporter who is not in the New York Times anymore. He runs some organization now, but he made the argument. He actually said there is a real argument to be made about zero corporate taxes and instead you tax people. The executives of the company pay a fair rate, a higher rate. They get a lot of income, they’re going to pay a lot in taxes. Don’t tax corporations at all for exactly the reason you said. Do you think that’s workable, potentially?

Toby: I think it’s somewhere in between. I think the 21, what you saw is—this is not something we spend a lot of time in the United States focusing on, but you look at the rest of the world. The United States tax system—before the Tax Cuts and Jobs Act, before they lower the corporate tax—was not competitive. We were at the top end of the highest taxation on corporations. Nobody really wanted to come here, unless they were going to avail themselves to our public markets.

You had Amazon and you had Apple, you have these companies going offshore,] and pushing most of their assets and other jurisdictions that taxed it less. In the US, you never got a tax at all on it.

The Tax Cuts and Jobs Act lowered the worldwide income tax. They started talking about having an alternative tax. All these things were being floated out there. But what happened in the meantime over the last three, four years is other countries mirrored and lowered their corporate tax rates to be competitive with the United States. What we were seeing is exactly what was intended, which was to make the United States more competitive on a worldwide scale by lowering our corporate tax.

If we lowered it further, I would just want to see what the effect is. I would say, I don’t know. Nobody has a crystal ball, nobody’s that smart to be able to say this is exactly what’s going to happen with certainty. But you could look at it and say, I know what happened when we lowered it to 21%, the stock market loved it, other countries started mirroring it. I think we had nine of the largest economies lower their corporate tax rates, as a result, to keep up with the United States. You saw a lot of growth worldwide. I don’t think that’s a bad thing. I look at that and say that’s a pretty good thing.

Now, it did push a lot of wealth into the hands of very few. You have a big problem in this country with the rich getting richer. I look at it, and I’m a proponent of the Carnegie Method. If you’ve ever read The Gospel of Wealth from Andrew Carnegie, it’s a great read, but it talks about, “a man who dies wealthy, dies thus disgraced.”

In other words, your giving should take place during your lifetime. Perhaps we should have a penalty for misers—people that keep too much of their wealth in their personal realm—to disincentivize that behavior. Put it into charities during your lifetime, that should benefit society. He also coined the phrase, “Millionaires are trustees of the poor.” There should not be class warfare, there should be incentives for people who are very wealthy to interject that money back into society.

The only way I know to get them to do that is either to incentivize them, which under the CARES Act we have this 100% adjusted gross income deduction for charitable giving. In other words, I could eliminate my tax just by giving away my taxable income, I should be very specific. It doesn’t mean all your money is gone. It just means that your taxable income, which we have a lot of control over with certain types of assets. You could give that away on an annual basis and not pay tax if you don’t want to.

I see that as being a great thing. I look at that and say, yes, that’s what you want more. If you want more giving, you can incentivize it, and then you could punish just the raw accumulation of wealth where you have billions of dollars. You could punish it by assessing a very large tax on it, if somebody keeps it until they die.

Mike: And just passes along as generational wealth, which we have seen as oftentimes has a corrosive effect on families. When the money is just simply passed along to a generation, they never actually earned it. Not that you wouldn’t pass some along. To begin with, Andrew Carnegie gave 90% of his wealth away. One of the greatest—I mean, until Bill Gates came along, I suppose he probably would be ranked as the greatest philanthropist of all time. I think Bill Gates will even exceed him.

Come to the current day and what do you have? Business people are like celebrities these days. I mean the biggest business people, if you take Warren Buffett or Bill Gates and you tell me if you agree with this. It seems to me that nowadays, there’s so much more focus on legacy. That more of these wealthy people—the super-rich are—thinking in terms of how they want to be remembered. They’re actually thinking more in terms of creating foundations, endowments, and putting their wealth to work.

There’s one of the super-rich who’s been getting pledges from other billionaires that […]. 50% of our wealth away I think.

Toby: I think it’s Bill Gates and I think Zuckerberg signed on, Buffett signed on and they’re giving least half of their wealth to charity. They’re putting it to good use. I would just like to see us accelerate that and say, hey, there should be a big enough stick at the end of the day that incentivizes you to get rid of your wealth. It doesn’t mean that you don’t have control over either, you can set up your own nonprofit and control either through a private foundation or a public charity. You can control and still receive benefits.

You could control where it goes, and you could still have the security of knowing that you’ll always have a paycheck from your own company. If that’s actually something somebody needs to be worried about if they have billions of dollars. I would say they don’t need to be worried about that. But people are interesting creatures. They have a lot of fear, a lot of scarcity mentality is stuck in our heads, as opposed to hey, you could get by with that. You don’t need to have 20 cars and 3 houses.

Mike: Tell that to Jay Leno.

Toby: There’s a really good proverb out there that I heard. This is not mine, it’s a Scottish proverb but it says, “A father buys, the son builds, the grandchild sells, and his son begs.”

Mike: There you go. That’s that corrosive effect. By the time you get to the third generation, it’s well in deterioration or gone.

Toby: It’s gone. Less than a 20% chance it’s going to make it that far. When I do legacy planning to do with the clients I always say, think out 200–300 years, and what’s your legacy? There are really only two ways to do it. You either create a trust where nobody has the right to massive distributions. It’s for something like health, education, maintenance, and support. It’s there if you need it, but it’s not there to buy a Lamborghini. It’s there. I always tell people they can have a Kia, they can’t have a Lambo.

There’s a safety net and/or you put it in conjunction with creating your own foundation. A memorial foundation where your kids can work for it, they can always get a paycheck. Some people are like, well, I made all this money, It’s mine, I get to choose what to do with it. And I look at it and say, you didn’t make all that money. There was a system that allowed you to benefit. You didn’t manufacture it, you don’t have a printing press. You used a system, you worked your katush off, and you’re going to get a lot of benefit for that. You’re going to be entrusted with control over that money. That doesn’t mean you just give it to your kids.

It’s usually one of the worst things you could do to people is give them money when they’re ill-prepared to handle it and don’t respect it. Then you see these entitled rich kids that do horrible things. It’s because they never learned their lessons. They didn’t have to do it themselves, and I think they never truly appreciate it. That’s not a good steward. Some of them, I don’t want to paint them all with the same brush, but I’d say that’s an issue. As a society, we should decide whether we even want that issue to exist.

Mike: Right. There’s also the proverb about there’s nothing worth having that you didn’t earn. That basically, you don’t really feel good about anything if you haven’t worked for it in some fashion, if it’s just handed off to you.

Toby: Total different topic, Mike, but I worked in the Academic Research Center at Seattle University School when I was going through there. It’s one of those things that we have going on in our society where you have these social programs, everything from affirmative action, et cetera. I’m not going to get controversial on this. I’ll just say that one of the biggest problems of giving something to somebody who feels they did not earn it is that they feel they didn’t earn it.

Mike: […] at people.

Toby: You could have somebody who’s a perfect SAT score and their dropout rate is twice that of another ethnicity. Part of it is because there’s a perception that they didn’t earn their spot in the university they’re at or something like that.

Mike: Exactly.

Toby: I’m not going to get controversial on this. I’ll just say that there’s a reality of the numbers, and numbers don’t lie. You look at it and you say, why is this going on? And are there things we can combat? I believe you hit the nail on the head that when somebody does not feel like they worked for it, they oftentimes don’t feel entitled to it, and almost like they resent it. It creates a corrosive effect where they treat the money with disrespect, they treat the wealth with disrespect, and they’re not a good steward of.

What you really want is to make sure that money is put to good use. If somebody is good at making money, there’s somebody who’s equally not good at making money that’s going to need help. That’s why I always say, Carnegie was right on when he said millionaires are trustees of the poor. I always say because some people can’t make money. It just flows right through their hands no matter what. We’ve all met them.

Mike: Yeah. Warren Buffett’s one. He says, I just love making money, I have a knack for it. I love making money. He’s also a guy who said, another hundred million dollars to me isn’t going to really change in my life, but that hundred million dollars can significantly improve the lives of a lot of other people if I handle it properly.

Toby: Yes.

Mike: Along with being this, as Carnegie said stewards of the poor, there’s also—I don’t remember that guy but he basically just said, we don’t take money with us in the end. But he said it never really belongs to us. It’s like the bloodstream in the body, it circulates. It never really belongs to any of us. We have possession of it temporarily.

But that poverty mentality that you talked about, I don’t know if you use that exact phrase, but an awful lot of people this is kind of disaster day mentality, the same thing that encourages people to have an entire shed full of weaponry because when you know what hits-the-fan, I’m going to be here with my military assault rifle. It plays out in a different fashion with people who accumulate and hoard money because they’re just convinced that the system is going to collapse and I have to have something hidden somewhere.

Toby: That’s because they don’t trust it. You have the shed full of weapons because you don’t trust your government, you don’t trust your neighbor. You have your mattress filled with gold bars and cash. Actually, I’ve had this.

I have a church that’s a client, a minister that’s a client and he said, a gentleman passed away and the church went to help clean out his house for the family and they volunteered. He goes, the mattress he had was so heavy. There are four guys trying to carry this mattress and they go, this is not normal. They put it down and it goes clink. The mattress was stuffed with cash and gold bars. And I said, did you have a moment of thinking that they had donated everything to the church. Did you just for a second think wow, we just hit it rich.

Mike: Yeah, there you go.

Toby: He goes, no. They told the family but it was hundreds of thousands of dollars in this mattress and this guy was sleeping on it. He just lived in a small house, he didn’t live largely. He definitely had a fear of running out, and there is that scarcity thing going on.

Mike: And the government is going to complicate it, right? I mean, why would you keep it outside of a bank that’s ensured? the government is going to confiscate it from me eventually. This paranoia, I mean it runs rampant. We see that more maybe today than ever with all the conspiracy theories and such. Let’s talk about your latest book though. You have a book titled Infinity Investing, this is your latest. What’s behind the title? What is Infinity Investing?

Toby: That’s a really neat question. It’s actually off the idea of Infinity Net Worth. A lot of times, one of the ways we get misled is we start doing this net worth or we’re saying, here’s how much my house is worth, here’s how much my car is worth, here’s how much my RV is worth, my boat. I add up all that stuff and it says a million dollars and I say, I’m a millionaire. I would last about two months if I lost my job. That’s the recession in a nutshell.

Everybody was real estate rich and cash-poor. They couldn’t pay their mortgage if they lost their job, but they had a million-dollar house. They are all millionaires, but they weren’t. I changed the way you think of net worth as how many days you could survive without working.

The easiest way to explain this is if you had a jar of M&M’s. You lived off of one M&M a day that you could survive. They are magic M&M’s, they actually have nutritional value, and every day you could just eat an M&M and it provided you clothing, housing, and food. Pretend it’s a magic M&M. Every day I would have to pull an M&M out of that jar. It doesn’t matter how big that jar is, at some point I’m going to run out of M&M’s if I live long enough. If I live 300 years for some of you guys, maybe if I live for 30 days for some of you guys, I’m eating one M&M.

Instead, I look at passive income sources, which are rents, royalties, dividends, interest, and short-term capital gains. I just look at those five income types, and those are income types that come in whether you’re working or not. If I buy a rental house and I have a renter in it, whether I’m in Fiji, whether I’m working, or whether I’m in any place, I could even be sitting in my pool, that rent comes in because I’m not doing anything to earn it. The house or the property is earning the money, that’s a passive income source.

I just say, how much of that M&M on a daily basis is being provided by those income sources? The day I hit one M&M a day that’s being provided from my rents, my royalties, my dividends, my covered calls, short-term capital gains on my stock portfolio. The day I hit that and I have one M&M coming in a day from passive income sources is the day I no longer have to dip into my jar of M&M’s. I could live an infinite number of days now without working.

Infinity investing is building yourself to where you never have to work again by replacing your expenses, by paying for your expenses with passive income sources. I just want enough money coming in so I don’t have to work.

Mike: Is the Infinity Investing—the book itself—about how to invest, is it about taxes, or is it both?

Toby: It’s really how to invest and how to build up that net worth. I built it by looking at the tax returns of all my Richie rich clients. I look at the people that are successful. Just keep in mind, I’m sure you were busy during the 90s, we were busy during the 90s. We were there when the tech bubble burst, we’re there with 9/11, we’re there for the recession. There are some people that didn’t miss a beat through any of those. During the pandemic their wealth increased, they were never sweating it. They all do the same things, and it’s that diversification.

I actually stole that diversification model from the Yale model, which is used under the Yale endowment—a very famous model. Where you’re diversifying out into different areas so that if the real estate market crashes it doesn’t hurt you that much, you can wait it out.

Mike: Do you like the Yale endowment? Now, it’s different when you’re an individual, but would you say 50% of your portfolio is illiquid?

Toby: I would say that probably less than that. Again, it’s a ⅓ in the real estate side, but a lot of that is still liquid. In my portfolio, my personal portfolio, I would say it’s probably, yeah, you’re probably around the 50% is a little bit illiquid, but it’s compounding. It has compounders.

Compounders are the secret to Buffett’s success, by the way. Because he was smart enough to figure out that you don’t buy a house and just hope it goes up in value and just leave it sitting there. You generate income off of it by renting it.

In the stock market, you don’t just buy a stock and hope it goes up, you want to be paid profits while you’re holding it, and then you can compound that by selling the right to somebody else to buy it from you at a higher price. You could do that on a weekly, or monthly, or quarterly basis and generate additional income. You do those things and you have a nice income stream coming in regardless of whether the company goes up, down, or sideways.

Mike: You brought up Andrew Carnegie, you’ve talked about legacy, and so on. What will your legacy be? What’s your game plan for your legacy? Where do you want to make an impact after retirement or after you enter immortality?

Toby: I’m doing it right now. It’s kind of funny, I talked about this with my wife and quite often with one of my business partners too. We always talk about we have more coming in off of just our rentals than we need. We are a company. We have 350 employees, we want to be at a certain level, but it’s a profitable company, we have more than we need.

We always talk about blending in our families, my daughter’s going to med school now, or she will be in the fall. I always look at it saying, kiddo, you never have to worry about money. I never want you to worry about money. What I want you to worry about is helping people and finding out what brings you happiness. It’s really hard to be miserable when you’re helping other people.

My legacy would be to encourage people to step outside that comfort zone, take that leap, build wealth, and create family legacies. It’s not this greedy, I can’t wait for grandma or grandpa to die because I’m going to get an inheritance, but it’s a well-thought-out legacy. I’ll use a great example.

I was creating an estate plan for a couple and they said, we love traveling outside the United States because it gives us such a different perspective. It’s hard to be greedy. We don’t find ourselves getting into the arguments with people that we normally see with Americans when you go to other countries constantly. They said, it just gives you a different perspective on things, so we want to give that to our family.

We created a legacy for them, and they’re not hugely rich. What they do is they got some life insurance so that when they pass it’s going to help fund this. They have some assets too, and hopefully, they’re going to keep building them. All they wanted was to sponsor their family members, their descendants, to leave the country on a vacation to go to visit a different country every year for at least a week.

Any of their descendants would have the ability to travel if they wanted courtesy of their trust, and I like things like that. I look at that and I say, yeah, I get it. How are they going to remember their great-great-great-grandparents? They’re gonna remember these are world travelers. These are people that appreciate other cultures. They want you to go do other cultures and appreciate other cultures. That’s a heck of a legacy. If someone had done that for me I know I would have been flabbergasted.

Mike: And there is no better education than traveling and seeing how other people live. And also, you have done enough to where we see that people are people wherever you go. You also get a new appreciation for the society you live in, depending on where you’re traveling. I mean, if you go to Western Europe, they have a great lifestyle. But if you go to South America, Central America, or I remember a friend in college.

He had traveled in Germany and he actually got to cross over into East Germany. He wasn’t this kind of guy but he said, boy, it really makes you more patriotic when you see something like that. It just reinforced for him that we have a system that for all its flaws, it works. Certainly in comparison to a communist-type system where people are really oppressed.

We’re running along here, Toby, but I wanted to ask you about are you in Nevada because it’s the optimal tax state, is that why you’re in Nevada? I know it’s very low on taxes. Is it the best state in the country? Say you were advising somebody’s going to retire, you want the best tax situation possible, is it in Nevada? Or for an example is Nevada?

Toby: It’s probably Florida or Texas, honestly. Neither one has an income tax. They both have an unlimited homestead exclusion. For seniors, they never want to lose their house, they never want to have to worry about the medical bills running up so high that they lose where they’re living, and both of those places have unlimited homesteads.

I’m actually in Vegas, this is going to sound horrible. We bought a company down here in ‘99, and I lived in Seattle. We sent down a really great couple, a very conservative couple, that’ what’s funny. They came down here and the gentleman turned to the dark side pretty quickly. He got hooked on gambling, alcohol, and all the vices that are here in Vegas. We sent another attorney down to help, and he did the exact same thing.

Clint and I were looking at each other and I said, well, I don’t gamble and I don’t drink. I’ll have a glass of wine once in a while, I’m not one of those people that thinks it’s evil. I just don’t enjoy it. I was like, I’m pretty much immune to whatever Vegas throws at you.

But it was such a bustling state because of its corporate laws. It had an anonymous ownership way before everybody else kind of figured out that business owners don’t want everybody to know everything they owned. It was a big part of our business back in the late ‘90s and early 2000s, and I’ve just never left.

Mike: There you go. Our guest has been Toby Mathis, tax attorney, and obviously investor. A lot of good investment advice from Mr. Mathis. He’s also the author of Infinity Investing, that’s his latest book. You can find it—everybody knows where to find books these days.

Toby, who says taxes have to be boring? They’re not boring when you talk to Toby Mathis, anyway. I really appreciate the time and your straightforwardness. This was really interesting. Thank you for spending time with us.

Toby: Mike, it was a blast. Anytime.

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