As elected officials continue to debate how to fix the tax code, we all know that what is best is often not what gets put onto the books by Washington. All too often bills and ideas start with the greatest of intention – but the end product is not what was planned.

So how do we fix what many Americans think is a broken tax system? A lot of people have ideas that have been presented. Does the European nation have a better plan? Is a national sales tax (or VAT style tax) the answer?

Based on the most recent published annual date, the Internal Revenue Service collected $1.8217 trillion in income taxes, and state and local governments collected another $7.783 billion. Let’s say our country takes a bold leap out of the current taxation world and completely scraps the existing income tax system. Most Americans are heavily opposed to a VAT (and maybe it’s just because we don’t want the system we currently see as a double tax). What about a hybrid or a national sales tax? Could that be the answer?

The current US GDP (Gross Domestic Product) was $13.619 trillion. If we levied a flat tax on the entire GDP, the rate would need to be 13.38% – which sounds like a pretty good deal for most of us. So let’s dig a bit deeper. Of the $13.619 trillion in GDP, about $1.208 billion is from government spending, which would most likely need to be exempted from tax. That brings the rate up to 14.68% – still a pretty good deal. But what about health care? We all know that health care costs are high, so how can we justify taxing those necessities? So we pull out the healthcare GDP of $9.89 billion, and the new sales tax rate is now at 15.95% – still good, right? Now consider housing – how can we charge sales tax on a house? Who could afford a new house with an added 15.95% tax? The crushing housing sales would definitely drive us into recession. So if we pull out construction GDP of $6.49 billion, our new rate is 16.91%. That’s a single sales tax (well only a few exemptions) of just under 17% (on top of state and local sales taxes) on basically everything we buy. Assuming you – like most Americans – are not a saver, you can consider this your effective tax rate. But what about non-profit organizations? They are exempt from tax so do we pull them out? What about food, clothing and other necessities? How fair is a 16.91% national sales tax on the poor who currently don’t pay ANY income taxes? Do we just exclude certain foods and clothing, and who gets to decide that? The more items we exclude, the higher the rate goes, and the more red tape we fall into.

Our current income tax system began with a three-page form and a 1% base tax rate and has expanded into the millions of pages of code and the 43.4% present-day top tax rate. The average European VAT began with a base 8% rate and has since risen to nearly 25% with layers and layers of code. It seems that no matter where a tax code starts, it inevitably ends being nothing what it was originally planned.

What will become of our current system? What will happen with state and local income taxes if the Federal system is scrapped? Only time will tell, but one thing is for sure – RPB will be there to help guide you through the changes to make sure you are in the best situation possible. Contact Reilly, Penner & Benton to help with all of your tax and accounting needs. We pride ourselves on being long-term partners with our clients, and we value your information as if it were our own personal information.


Article by: Brad Voght