According to some estimates, Americans shell out $265 billion every year — more than $900 for every citizen — to comply with the current tax code. That hardly sounds like an efficient system!
The good news is that there’s no reason we have to accept token changes or the status quo. There are at least two other proposed tax systems out there that make a heck of a lot more sense than what we have now.
One alternative is a simple, flat income tax. Steve Forbes and Dick Armey have been two big proponents of this system.
Basically, the approach would mean we all pay a set percentage of our income to the government (17% under Forbes’ plan). The only exception would be a certain initial amount of income — somewhere around $40,000 perhaps, which would allow low earners to keep enough money to cover their basic living costs before taxation.
No doubt, the flat tax proposed by Forbes is not 100% flat. Some credits and exemptions would remain, and the income exclusion would effectively mean we’d still have brackets of some sort. But proponents argue that this system would be far less susceptible to lobbying or other forms of political manipulation. And according to advocates, all it would require is a simple postcard-sized form.
Sound completely ludicrous? Well, it’s worth noting that a handful of U.S. states, such as Pennsylvania, are currently using a flat tax system.
The other major alternative tax system is the idea of a national sales tax, known by its advocates as a “fair tax.” Recently, the idea has been gaining steam in Washington, too.
In one of its most popular incarnations, as espoused by www.fairtax.org, U.S. citizens would pay 23% on all new goods and services for personal consumption. Used goods and business-to-business purchases would be exempted.
This national sales tax would replace federal income taxes, including personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes.
Wouldn’t that hurt low-income consumers who spend more of their money on life’s necessities? Well, proponents of the fair tax propose a monthly prebate that would ensure all U.S. citizens receive enough money to cover essential goods and services (known as poverty level expenditures).
In terms of numbers, fairtax.org estimates that a couple with two children would receive a family consumption allowance of $20,800 a year, which amounts to an annual rebate of $4,784 or $399 monthly. In other words, it would be assumed that a family of four spends $20,800 a year on necessities and should be excluded from paying a 23% tax on those goods and services.
And so that we don’t end up with a national sales tax PLUS a federal income tax, FairTax advocates are seeking to repeal the 16th Amendment, which allows income taxation, should our country adopt their plan.
As with the flat tax system, some states already have this basic “fair tax” arrangement right now. Florida is a good example. Residents don’t have to bother filling out state income tax forms at all! Learn more about dividend investing and other tax system alternatives.
To your dividend investing success,
InvestingInDividends.com
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