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Tax Day 101: The tax code needs a fix – but exactly how?

Almost everyone agrees that the US tax code needs fixing, but people don't agree on how to do it.

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Value-added tax. This tax, like a national sales tax, draws its name from the concept of taxing goods and services as they are produced (as value is being added at various stages of production). Proponents say its relatively simple to administer. Adjustments, such as rebates for low-income families, can prevent it from falling disproportionately on the bottom end of the income scale. Where some fans see the VAT as a substitute for the income tax, many Democrats view it as a possible add-on to the existing system -- a new source of revenue without raising income-tax rates.

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FairTax. The so-called FairTax would replace the income tax with a national sales tax on goods and services. The government would pay monthly rebates -- based on family size, not income -- to cover the cost of the tax up to the poverty level. Proponents say it would be fairer, less complicated, and better for the economy. As one proponent (author Ken Hoagland) puts it, instead of taxing "what goes into our economy -- work, savings, and investment" – taxes are taken from what comes out, consumption.

Fundamental reform of the existing system. This could include eliminating many deductions from taxable income, even ones that millions of people may consider as American as apple pie (the deductions for mortgage interest and charitable giving, for instance).

One final thought: Whatever the answer on taxes, America also has to address the other side of the fiscal-policy coin: spending. Democrats as well as Republicans agree that some curbs on the growth of spending will be needed. Various groups differ mainly on how to do it, and on whether more tax revenue is also needed.


Also in Tax Day 101:

Part 1: Top mistakes to avoid on your tax return

Part 2: Who pays no income taxes on April 15?

Part 3: How to file a tax extension form to the IRS

Part 4: How is the tax code changing under Obama?

Part 5: Are some states driving people out with high state taxes?

Part 6: How some millionaires can owe no taxes

Part 7: The tax code needs a fix – but exactly how?

Part 8: 42 excuses you can't use to avoid filing IRS forms

Part 9: OK, now it's time to plan for next April 15