Can You Avoid Paying Income Tax?

Elon Musk is depressed from overwork, just like many American his age. This is why your life goal should be to strive for full financial freedom by creating enough income streams such that your needs are fully met without you having to devote your time to it.

If you’ve read my book, you’ll know that I’ve identified being a digital nomad operating your own online business as one of the best ways to achieve that end. While I was pondering this, I wondered if there was a loophole in the system, a backdoor lifehack to circumvent existing laws regarding residence, territoriality, and taxation. That is, can you avoid paying all income tax completely?

As it turns out, others have wondered the same thing. Basically, most countries will not tax you if you haven’t lived in that country for a certain amount of time to qualify for residence. Usually it’s something close to  less than half of the calendar year. By staying below that level,  you avoid being considered a tax resident of that country. The US is a little different, being one of only two countries (along with Eritrea) to tax you on worldwide income regardless of residence, though it does give a foreign earned income exclusion.

The loophole is due to laws regarding residence and taxation that have not yet caught up with modern innovations in travel, communication, and technology. Before with income tied to jobs which were tied to location, countries can get their share of tax from your employer or from you based on your residence (if you operated a small business, for instance). However, now we have online web businesses that we can run from anywhere in the world. If governments can’t tax us at the source of production (because the business is “based” in a tax haven) or by residence (due to the digital nomad being constantly on the roam, never staying long enough in any country to gain residence), we’re free from all income tax.

As an example, let’s take a British citizen who wants to start a web business offering cultural sensitivity consulting to large established companies. This adventurous individual incorporates in Bermuda or the Cayman Islands, and then proceeds to travel the world, never staying long enough in any single place to owe taxes. This is made easy with visa free access to many of the world’s most fun destinations, and eventually our nomad settles on a regular cycle of Ireland -> Thailand -> Singapore -> Australia -> Panama -> Ireland. Meanwhile, all the web income generated from work done remotely is not subject to tax in any of the countries visited, since the corporate income is categorized as earned in the tax haven.

Let’s celebrate this with a Joan Baez song glorifying the joy of avoiding taxes:

 

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Link Roundup: The Value of Hard Work

During times of plenty, when there are more interesting articles than I can do a feature review of, I will combine them into a single post called a link roundup. Here is one such event.

  1. The value of hard work. This reminds me of my time growing up in the crucible of competitiveness that is the Bay Area. Investments made in oneself through education and knowledge pays compound interest down the road, establishing a solid foundation for improved performance and confidence, that feed off each other in a virtuous cycle. Take for example a high school student taking summer classes to prepare for the next quarter’s math and reading classes. That person will get a leg up in results for the rest of his or her life, because of repeated exposure and increased familiarity, not to mention having an easier time in the class. Compared to someone like this, if you’re not working hard every day, you’re falling behind your peers. Just like in athletics, average is over. Every day you’re slacking or doing something else is a day falling behind your peer competitors.
  2. What do future jobs look like? The thinkers of yesterday and today have a vision for how the future looks, and it doesn’t bode well for some. Unskilled work will be replaced by robots. Technical and computer skills will become more valuable. Good future areas to specialize in include AI, robotics, and VR. At the same time, some jobs like in health care that deal with human emotions, where empathy is essential, will be relatively shielded from the effects of technology. But then again, you would know this from reading my book.
  3. As a corollary to the above, university students increasingly recognize the reality of a tough job market for graduates, and are tailoring their studies accordingly. This means fewer liberal arts graduates and more social science, business, engineering, and “trades” graduates. That’s probably a good thing for individual finances but a tragic loss for the country. After all, from their pen would have come art, literature, and poetry – the stuff that gives colour and meaning to life. That’s what separates us from somewhere like Singapore or India, which are
  4. If you have truly niche technical skills, you can make bank. Just look at blockchain developers. Btw, software is one of the fields where if you have the interest and the talent, you can teach yourself and get a great job without having a degree in the field. That’s the path my dad took.
  5. Here’s a great story of a self made web entrepreneur with the vision to establish a business reselling cheap Chinese toys from Alibaba to American consumers willing to pay more. Wait… why don’t Americans just buy directly from Alibaba? Doesn’t sound like a very sustainable business model but somehow it works.
  6. Concierge medicine is taking off, and whispers are that you can have a lucrative practice with low patient volume, if you cater to the rich and treat everyone like a VIP. It’s not my cup of tea, but I see disruptive potential in different delivery methods for health services. Target mini clinics are good, as is the underutilized format of telemedicine.
  7. I can’t harp on the concept of geographic arbitrage enough. By moving to a cheaper location, your dollars stretch so much further. Not only that, but your kids can grow up multicultural with foreign language skills, interesting life experiences, and a great prebuilt application essay for Ivy League schools telling them how unique you are.
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Why Angular Beats Well-Rounded

It’s appropriate, especially given that this is the time of the year when high school seniors are opening acceptance packets and rejection letters from universities all around the world, to discuss the age old dilemma that many college applicants face: whether to be angular or well-rounded. Certainly it was the raging debate my high school classmates had when trying to sell themselves to colleges. They competed with each other for the most extracurricular activities (speech and debate, business club, sports, volunteering, music, arts, etc.) It became an arms race so ridiculous that we joked that to get into Stanford or the Ivy League, one had to be the captain of multiple sports teams, in student government, get > 4.0 GPA, have perfect SATs, and possess a “major” life accomplishment such as curing a major disease, starting a philanthropic organization, or winning one of the math/science Olympiads.

While being a modern Renaissance man (or woman) can be great for getting into these schools, and it certainly does make for a more interesting person, it’s not a guarantee for finding employment. Employers are looking more for an expert in a particular area, or at most someone with two related and complementary skills.

Just think of it from this approach. If you’re an employer looking at a candidate who has decent skills in finance, accounting, foreign affairs/diplomacy, programming, and photography, you may actually not want to hire that person. One worry is that by spreading him/her self out too thinly, the applicant may not truly be an “expert” in one particular area. Most jobs are defined by boundaries, specificity, and depth (you’re *just* going to crunch numbers), and while breadth is helpful in the upper echelons of management and for insightful business strategists, very rarely do companies recognize that and actually try to hire for those spots. More likely they luck onto a candidate with that vision from hires for other positions. Furthermore, companies like cheap worker drones that fit into narrow holes. A candidate with a diverse skill set is more likely to get bored, leave, or demand higher pay.

Therefore, it’s ok to have side dalliances and hobbies, but if you want to be a top worker bee and advance in a career, you’d better have a profession. Take for example the story of Urs Holzle. He was a pure computer scientist, and as such was able to push the boundaries of his own field, get hired at Google in a senior scientist position, and make bucketloads of money. If he had spent less time in his craft and more in say learning the violin to become “well-rounded” he may not have been as successful as he was.

As a last counterpoint, for those already on the well-rounded pathway, while you may not be the ideal workers, you are excellent entrepreneurs, possessing as you do the strategic thinking capabilities to integrate multiple fields and sense opportunities. Also important in the early days of a startup with limited manpower is the ability to fill and manage multiple business roles.

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The Trend Towards Minimalism

Feels good to be vindicated, yet again, or perhaps my own behaviour is not so uncommon but merely representative of the prevailing attitude of my generation. After all, it’s “widely known” that Millennials value experiences over things.

As for retail, owners have to adapt or die. Innovative retail stores are experimenting with ways to blend a more experiential type of shopping with brands and goods. As the article recognizes:

“Shoppers are reaching a tipping point around American consumption,” it read. “Feelings of angst about acquiring too much ‘stuff’ is driving a shift toward purchasing experiences rather than things.”

Those of us who are involved in entrepreneurship recognize this. As the older generation dies out, Millennial preferences will increasingly drive profitable product lines. We see this in the traditional media, which initially resisted the move to digital (Napster was merely early) before eventually acquiescing (see: Hulu) to the tidal shift. Those that continue to resist (ESPN, Comcast) face declining revenues from cord cutters.

In general, being “light”, mobile, portable, flexible, and catering to the customer’s preferences for when, where, and how to consume something is the new name of the game. Amazon recognizes this. Old retail still tries to force someone to come into a brick and mortar store and be assailed by rude and unhelpful sales representatives. That’s not a winning approach.

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Millennials Just Hustling to Survive

One big theme in my book is how everyone, especially millennials, have found ways to compensate for the rise in living costs without a corresponding increase in wages. One big way to do this is unfortunately to work a side job. Traditionally, this was limited to low-wage service industry workers. I remember hearing stories from my patients waking up at 4 AM to drive to work in Los Angeles from the outer suburbs, only to return in the evening and work a second shift at a local restaurant. Mind you, all this is to just cover the bills – it isn’t even about making extra spending money.

This practice has now slowly but surely engulfed millennials, many of whom are recent graduates from university who can’t find any meaningful well-paying work in their fields. Many of them choose to monetize hobbies. As the article describes:

The 31-year-old Torontonian makes adult Sailor Moon outfits and sells them on Facebook, a gig she estimates brings in about $800 a month on top of what she earns in her full-time position at a mascot manufacturer.

(…)

Covering everything from teaching English over Skype to driving an Uber, the term has even found its way into Urban Dictionary, where it’s defined as “sideline that brings in cash.”

It’s a tough time out there. Regardless of whether extra money is a need or a bonus, you can monetize your talents in one of these ways. See more details on side gigs in my book on wealth, as well as ways to turn your hobbies into highly profitable businesses.

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Disrupt Yourself in a Declining Industry

A friend sent me this article about the plight of the diamond industry, namely that they can’t appeal to millennials.

This is a frequent problem faced by many different industries, who have failed to adjust to changing consumer tastes. This is why a favourite Silicon Valley expression is: “disrupt yourself or be disrupted”. Namely, stay ahead of the curve, innovate, and shape consumer preference rather than be the laggard clinging to a dying product.

One great story of adaptation that I’ve seen is with Nvidia. They saw many years ahead of time that the market for PC graphics cards was in decline (due to consoles and lack of new groundbreaking games). As a result, they leveraged their expertise into the burgeoning field of mobile device SOCs (chips and chipset). This became a smashing success. By licensing the underlying technology and IP from ARM, Nvidia’s top chip engineers (from their graphics side) could fine tune the SOC to be more power-efficient and powerful than the competition’s.

What if you’re in resource extraction like coal or oil, threatened by the next generation of clean energy? Why not disrupt yourself by investing money in those technologies? That way you can dominate the new industry even while your old products become obsolete.

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What is the Goal of Your Business?

A friend sent me this article about the future of entrepreneurism in the world. In short, the central thesis is that the giant companies are entrenched in their industries, and it’s harder to compete with them given their incumbent status. Thus, it’s far better to stay small, keep costs low (the key theme in my book!) and make “subsistence” level wages that replace a day job. For example, a local plumbing business is like this. At most, it may grow into a handful of employees and service the surrounding cities, but it doesn’t want to scale up and become a national presence (is there even a comparable national business that provides plumbing?). That’s too much investment, hassle, work, and time before the eventual payoff. That’s not to mention the bureaucratic headaches in providing benefits to employees, building up marketing, HR, and legal departments. In the face of this, it’s quite logical that many a business owner is quite comfortable pocketing $200,000-$1 million in yearly profits from operating a small business.

Side thought: this is a workable theme for a business concept. Uber’s premise is that it provides a single app that links service providers (taxi) to customers anywhere in the world. One could argue that independent taxi drivers and companies could have preempted Uber’s rise by banding together and making an easy to use and interoperable app. In any case, we can extend this concept by applying it to things like plumbing services. Imagine if you can access a worldwide network of plumbers at your call on the app, without having to fumble through the local Yellow Pages.

Going back to building a successful business these days, the alternative is to be high growth and low profit and eventually cash out in a sale to one of the big boys. Threaten them enough with disruption and then whisper into their ear that it’s better to head off a rival early with a manageable buyout than to face the loss of their entire business. Facebook did this to Instagram, paying a high price but preserving their business model. This is arguably easier to do in the fast-moving world of tech than in other industries.

Ultimately, is it a bad thing that so many businesses are now focused on the modest goals of profitability and sustainability? I’d argue no. For many people, there’s no need to grow big. Having fun, creating something, and being mildly profitable is surely enough to live a comfortable life.

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Should You Consider Uber (As a Gig)?

Of my group of childhood friends growing up in the Bay, all of us went into different careers. Some became bankers, some doctors, and others techies. However, there was one who dropped out of school and worked random retail jobs. That is, until he found Uber. He fell in love with it because it was easier work that paid more than his previous jobs. There’s also a degree of respectability and cachet that comes along with being an Uber driver that’s not there as a waiter or grocery store stocker.

So should you consider a job as an Uber driver? I would argue no. The most in-depth analysis of how much Uber drivers really take home was done here. I paste the kicker here:

Without including other real weekly expenses such as gas, car maintenance (or accounting for depreciation of the car), I found that the average net income per hour for the eight drivers was $21.90, roughly 10 dollars per hour less than the combined hourly wage from the raw Uber data.

(…)

However, if we assume an average weighted driver wage of $21.90 per hour, which factors in just a fraction of driver expenses, and assume drivers work 30 hours a week (again, not necessarily typical, but a middle range of the hours worked by the eight drivers we spoke to), we can assume a rough projected yearly driver salary of $34,164.

That $21.90 figure may even be undercounting the true cost of gas and maintenance. You see, sharing platforms like Uber are inherently exploitative. By counting all drivers as independent contractors and issuing them 1099s, Uber is not responsible for payroll tax, benefits, and other hard-won legal protection that apply to ordinary employees. By being self-employed, Uber drivers have to pay both the employer and employee sides of Social Security payroll tax. That’s a whopping 15.3% on the first $100k or so of income. Then factor in paying for health insurance out of pocket and you can see how the same $50k in gross income from Uber isn’t the same as $50k from a W-2 job, much less than $50k from qualified stock dividends.

Then there’s the unreliability of cash flow. As a business, the Uber driver can easily have days or months with low utilization and income that’s not enough to pay the bills.

We haven’t even gotten to the subject of tips, which Uber recently begrudgingly legitimized in a settlement with its drivers, in exchange for being able to keep them as independent contractors. Unfortunately, we don’t know how this change will turn out. Uber riders loved the hassle-free nature of payment, so adding the uncertainty of whether and how much to tip will definitely degrade that experience. As a driver, it’s an anxiety-inducing dilemma. Should you set a low rate and hope to rake in tips, at the cost of potentially bad reviews, or try to stand out by advertising yourself as a more expensive but hassle and tip-free experience? What’s worse is that Uber hasn’t taken an official stance on tips, preferring instead to slide it under the table by allowing it but still discouraging it as routine policy.

If driving for Uber really were an attractive gig, we should expect to find many workers flocking there, which would increase competition and drive down the wage for everyone. No wonder that Uber is aggressively promoting itself… as a place to work. This commentator from Naked Capitalism notes anecdotally:

There’s something very curious going on with Uber, apart from the obvious, well-publicized weirdness: they’re advertising like crazy on the radio, both national and locally here in San Francisco (I don’t know if they advertise in other local markets). That in itself is hardly remarkable. What is remarkable is what they’re advertising. They’re not advertising their service. They’re advertising for drivers. Think about it. When has a company ever paid to advertise in mass media for workers? I think the reason is obvious. If the gig was profitable to the drivers, and there was a reasonable retention rate, they would have no need to advertise in mass media. But as we know, the pay sucks, especially when vehicle costs are factored in, and the attrition rate is atrocious.

Rather than think about working for Uber as a contractor, we should strive to understand the fundamentals of its success and how we can apply the same lessons to our own business ventures. As I wrote in my book, a good modern business in the internet age is capital-light. Uber checks this box for sure. Part of its genius is that all it really is is a low-cost platform for the exchange of goods and services. It takes a small cut and provides nothing more than a matchmaking service and slick UI. It’s ingenious as a business plan – almost foolproof due to its simplicity and lack of capital expenditures.

Uber is also insanely scalable. That is, they don’t need to change their core business model or significantly increase expenses just because they’re growing larger. By leveraging contractors anywhere in the world, they just need to keep the central platform running and fresh-looking. Contractors will automatically do all the hard work and make business decisions appropriate for local markets, laws, and customs. It’s capitalism broken down to the microscopic level.

The dark side of Uber, which may very well be its downfall, is that it outsources safety standards and consumer protection/insurance requirements to its contracted drivers, most of whom do *not* comply with minimum regulations that apply to taxi drivers. Of course, actual enforcement of local state and county laws is impossible given how many small fry drivers there are. How can taxis compete trying to play by the rules?

Think about it this way. If Uber were subject to the same standards that apply to taxis, in terms of insurance and safety standards, they would probably be just as expensive. Otherwise, Uber is really not all that innovative. A large taxi company could just as easily put together an easy to use app for mobile devices and mimic the same function.

Sooner or later, the law will catch up and start regulating Uber. All it takes is a major accident leading to death or disability and a major lawsuit. Perhaps Uber’s true business model should be to rake in money and plan on cashing out and shutting the service down while the going is still good.

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Inspiring Business Ideas – Etiquette Classes

This post is part of a series of business ideas that come to me in the course of everyday life. Some of them are in areas I have experience and expertise in, while others will be more off-the-wall. I will comment briefly on the skeleton structure, how to get started, overall viability, and projected payoff. If you like it, feel free to take it and run with it.

It’s been said that a good entrepreneur meets needs, but a great one anticipates them. Indeed, being the first to exploit (or perhaps start) a trend is a great way to get a jump on becoming the big fish in a new market. Such was the approach of a certain Sara Jane Ho.

She certainly has an impeccable resume, having graduated from Harvard Business School and working a few years as an investment banker (one of the featured “good jobs” in my book). But suppose that she realized along the way that working for someone else would never make her rich, and that the long hours would ruin her health and sanity before long. Thus, she looked inwards trying to think of what she could do with her skills.

Mainland Chinese, thanks the the conditioning after the Cultural Revolution, have two distinct traits. Having lost their distinct culture, they came to worship money, especially after the country opened up to foreign investment and started adopting capitalist ways. They also have an inferiority complex, having been under the thumb of foreign oppressors for the past 400 years in recent history (until after WWII). It’s no wonder that they are aspirational, trying to adopt the ways and mannerisms of their previous overlords.

Taking advantage of this yearning, Sara Jane Ho started a business teaching culture and class to the nouveau riche of China. This includes social graces, table manners, and being a consummate host.

Let’s count the number of reasons why this is a great business idea, using principles from my book.

  1. The business combines her unique skills. She’s fluent in Chinese, understands Chinese needs, but has also grown up and gone to school in America. She’s therefore the perfect credible intermediary to bring western mores to Chinese.
  2. Startup costs are low. It doesn’t cost much to run a series of seminars and workshops. Most of her costs are probably related to advertising, and even those will recede as her business becomes more popular through word of mouth.
  3. She can charge premium dollars to a captive audience. This is one of the big advantages of creating a business that caters to the rich.

 

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Jobs That Pay – Dog Walking

Hey, not all traditional jobs are poorly-paid and overworked. As I mentioned in my book on wealth, there are under-exploited niches where one can be successful as an entrepreneur. Marketwatch today ran an interesting article on a dog walker(!!!) who is raking in 6 figures working the equivalent of part-time.

Stewart says he could have grown his business into “a dog walking empire.” But he says “there’s a tipping point — where you manage people more and dogs less — and that’s not what I signed up for.”

He now has three employees who walk dogs for him, and he doesn’t plan to hire any more. He pays them a salary instead of an hourly wage and often works with them.

He charges customers $15 per walk — the going rate in Long Island City — and walks between 40 and 50 dogs every Monday through Friday, mostly between 11:30 a.m. and 3:30 p.m.

He knows a solo dog walker in his neighborhood who makes $2,000 a week by working 35 to 40 hours a week. And he knows a dog walker with employees who makes $150,000 after paying his employees.

And Stewart says he makes about $110,000 a year — after paying his expenses and employees — while working 25 hours a week. “It’s full-time time pay for part-time work. I think everyone would want that,” he says, adding, “I’m doing something that I love and I have time to go to school at night.”

I’ve bolded key points of emphasis. This guy has done a great job following the rules in my book for starting up successful businesses.

  1. He understood the market. NYC folks are busy and are willing to hire nannies, dog walkers, etc. to take care of their personal lives.
  2. This is a small enough market (not a lot of prestige for dog-walkers) that someone can easily become super specialized and command top dollar (big fish in a small pond).
  3. He figured out how to stand out as elite, by promoting his expertise and experience with dogs of all kinds.
  4. His work was still paid on an hourly basis, but he removed part of those constraints by hiring others for some jobs and moving to more of a higher level coordinating, marketing, and managing role.
  5. He had limited ambitions. He kept his business small-scale enough to be adequately profitable, rather than investing tons of money to become a commercial empire, with a higher chance of losing money and even failing.
  6. He worked on what he knew and loved.
  7. At least initially, he didn’t depend on his job for money (he worked as a bartender and waiter for a while).
  8. He knew himself and had an endgame plan. He had an income level in mind at which he would be satisfied and spend extra hours on other pursuits.

One natural wacky extension of this principle that comes to mind is being a niche nanny-tutor combo to the very wealthy. Someone can bill himself as an Aristotle-like individual able to give kids the extra boost needed to get into the most elite schools, become well-rounded, and achieve success in life. For a high retainer of course! If you’re gunning for this position from early on in life, you can build a sample CV with a PhD in early childhood development, a bachelors or masters in education, empathy and skill with children (being female helps in this regard, for perception if nothing else), aptitude in art and music, and a track record of success (by babysitting and caring for family friends’ kids).

You can read about of other successful entrepreneurs and more tips on how to identify your strengths and build your own business with my book on wealth.

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