What Is the Cashflow Quadrant Concept?

The cashflow quadrant is a concept that explains how the American workplace is divided into four groups of people: employees (quadrant E), small-business owners (quadrant S), big business owners (quadrant B) and investors (quadrant I). The concept articulates the differences in perspectives of those in quadrants E and S compared to those in quadrants B and I, and the different ways in which their incomes are taxed.

The cashflow quadrant concept classifies the income that people receive as either passive or active income. Active income is income for which a person has to work and is what employees and small business owners or the self-employed typically earn. Those in quadrants B and I earn passive income, for which they do not have to work. The concept explains how the U.S. tax system favors large business owners and investors who occupy the right side of the cashflow quadrant and earn extremely high incomes but pay less in taxes because of tax loopholes. On the other hand, employees, small business owners and the self-employed, who make up the left side of the quadrant, earn much less than those on the right, but pay more in taxes because most loopholes are not available to them.