A new twist to your tax bill?
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Even he concedes that the really rich - those making more than $200,000 a year - usually spend a smaller proportion of their income on goods and services than do the middle class. So they might see their tax burden decline. "But their heirs don't escape," Wright adds.Skip to next paragraph
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The Bush tax-reform commission will likely look at other measures. One could be a "flat tax," advocated by Steve Forbes, the magazine owner who sought the Republican nomination for president four years ago.
Another possibility could be a value added tax, such as those imposed by most European nations. The VAT is a cascading tax, collected at each stage of production and distribution and embedded in prices that consumers or other final users pay. By increasing revenues, a VAT would help solve the problems of a large federal deficit combined with rising entitlement spending as baby boomers retire, argues Bruce Bartlett, a former Treasury official under the first President Bush and now a fellow at the National Center for Policy Analysis in Washington. In a new 27-page paper for the Ripon Society, a Republican research and policy group, he argues that the extra revenues would smooth the way for fixing problems in today's tax code.
There's some suspicion in Washington that the presidential commission is merely a way for Bush to impress his more conservative backers that he hates the complex federal tax code with its 45,000 pages as much as they do.
Advocates of a sales tax, such as Rep. Jim DeMint (R) of South Carolina, noticed a damaging assault on the issue from Democratic opponents in the November election. Nonetheless, Mr. DeMint did win a Senate seat.
A national sales tax, in particular, would involve wrenching change. By taxing the services and purchases of states and municipalities, it would require the transfer of $300 billion a year in new taxes to the federal government, maintains John Buckley, an author of the House Ways and Means Committee study. It would clobber state income-tax systems, since most are based on the federal income-tax system. The result would be higher property and state sales taxes.
Also, replacing income taxes with a sales tax would make tax-exempt bonds issued by municipalities less attractive, and thus require higher interest rates. It would take away any tax advantage of life insurance, or of various types of pension savings, such as 401(k)s. Senior citizens would be subject to the tax on their spending from pensions or accumulated wealth after a lifetime of paying payroll taxes.
Americans know what an income tax does. They usually pay a state sales tax when they shop. But as the nation embarks on a debate over tax reform, other terms are likely to come to the fore. Among them:
Value added tax: This European staple is a cascading sales tax. Each enterprise along the production and distribution chain pays, including the retailer or final seller. They calculate the tax on the basis of sales revenue minus the cost of purchased inputs (labor not included). An advantage: The VAT can be rebated on exports, giving exporters an advantage in world trade. Europe's VATs average around 13 percent.
National sales tax: Imposed on the final sale of a product or service, this tax is similar to a state sales tax but applies to transactions nationwide. One proposal would substitute it for the entire current federal system, which taxes personal and corporate income.
Flat tax: This is a system that taxes all individuals at the same rate, no matter how much they make. But the flat tax pushed in the House by majority leader Richard Armey (R) in 1995 was actually a VAT in disguise. It allowed firms to deduct wages and salaries when calculating the tax owed. The tax gained fame when its creators said individuals could fit their tax returns on a postcard.