A VAT Tax?

A recent Boone County Journal editorial considered replacing the personal income tax with a 17%, flat-rate, Value Added Tax (VAT). According to the editorial, the major advantage would be to spare Americans the need to file a tax return. The editorial suggested that the tax regime would be similar to taxes in place in Canada and Australia.

VAT is essentially a national sales tax. Such a tax would not help most people in Boone County.

1. Starting up a national sales tax by itself will not eliminate tax returns. Canada and Australia both have a Goods and Services Tax (GST) that is a VAT. In Canada, it's extremely unpopular, and often called the "Gouge and Screw Tax." It even applies to postage stamps. Provincial sales taxes are also collected in Canada.

Both countries still have income taxes that are just as high as the US. Canadians "file" and Australians "lodge" tax forms that are every bit as complicated as Form 1040. This in addition to sales tax and GST in the 10-15% range.

How the tax system is structured is what determines whether a complicated tax return must be filed. The United Kingdom has both a VAT and an income tax. But, because of the way the UK system is designed, many Britons do not have to complete a tax return. New Zealand works similarly.

2. Most Americans pay federal income taxes of less than 17%. But they also pay an additional social security tax of just over 15% of their wages.

Social security taxes are cleverly disguised. Unless you are self employed, they don't show up on Form 1040: On your paycheck, you'll see a deduction, sometimes labeled "FICA." Double that amount is paid in social security taxes on your wages.

Most people also pay state income taxes and state sales taxes. Remember, none of those taxes would go away if the federal income tax was replaced with a 17% national sales tax.

For most people, it would be a significant tax increase.

3. In most states and the federal system, it's rightly assumed that the well-off can pay a bigger percentage of their incomes than those with more modest means. Yet a flat tax (whether income or VAT) is often called a "fair" tax, because everybody pays the same rate. This presumes that Fred Factoryworker, with a family to support, can just as easily and should pay the same 17% of his income as Milton Millionaire.

4. To see just how "fair" a flat-tax system is, look no further than Illinois.

Millionaires in Lake Forest, Illinois have one of the lowest tax state income tax rates in the US. Just 3.75%. But a poor, struggling family in Belvidere pays that same rate, too. If you're trying to support a child on $20,000 per year, a 3.75% state income tax rate doesn't help. Nor does a sales tax of 10.25% on diapers in Chicago.

Illinois' flat income tax is embedded in its Constitution. Large Illinois corporations get a break because the Constitution caps the corporate tax rate as a function of the flat, personal income tax rate. Then factor in a "flat-rate" toll for every car on Northern Illinois expressways, and a flat-rate license plate fee (Late-model BMW owners pay the same as a 1999 Chevy).

With our flat, "fair" taxes, despite having one of the highest tax burdens in the US for the poor and middle class, Illinois is flat broke!

5. VAT is ultimately paid by consumers. A VAT in the US would not affect the bottom line of a corporation considering a move overseas. For a VAT to influence that decision, we would have to give a corporate tax break and ask working families to pay more of the burden (either as VAT or income tax). There are better ways to stop basis and income shifting to tax haven countries than giving into the demands of greedy companies that don't want to pay their fair share.

The income tax is too complicated. Lobbyists and others have contributed millions to politicians to keep the current system in place. The tax should be simpler, as well as fairer.

The solution is real reform, not gimmicks like VAT or flat-rate taxes.

Isn't sales tax on Internet services against federal law?

Generally it is, and has been for many years. Recently Congress made the law prohibiting a sales tax on Internet service permanent. A few states had a sales tax (including Wisconsin) on Internet services that were exempt from the ban because these taxes were already in place when the ban took effect. These exemptions will be phased out soon (unless Congress decides to renew them and let those states continue to charge).

Has the deductible IRA and Roth Contribution Limit been increased for 2016?

No, same amount as last year. You can contribute $5,500 to a deductible IRA or a Roth IRA for 2015 and 2016. But if you are at least 50, you can contribute an additional $1,000 per year as a catch-up contribution. So, if you are over 49, you can contribute $6,500 for each year.

Generally, contributions must be made by the tax filing deadline. That means you have until April 18, 2016 to make your 2015 contribution. For example, on March 1st, 2016, you could contribute $10,000: $5,000 for 2015 and $5,000 for 2016.

Your IRA or Roth contribution is also limited by the amount of compensation income you earned. If you only made $2,000 last year, you could only contribute $2,000 for that year. And for higher income filers, if you are covered by your employer's retirement plan, you may not be able to deduct your IRA contribution.

If you are of modest means, don't forget there is an up-to-$1,000 retirement savings credit available. This comes directly off your tax bill and makes it easier to save. It applies if your single adjusted gross income is under $30,000, $45,000 if you are a head of household, or $60,000 if you are married filing jointly.

Retirement accounts represent an excellent planning opportunity to lower your tax bite either currently or over time. But remember, there are a number of important rules dealing with IRAs and Roth IRAs. And you can lose money if you do not invest wisely. This discussion only deals with the contribution limit. Be sure you are well-advised on the rules relating to retirement accounts and have the right plan before taking the plunge.