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Would You Prefer Alternative Taxes To Paying Income Taxes?

April 15th is one of the most dreaded days on the calendar. It is the day when millions of Americans scramble to file their tax returns. You would be hard pressed to find anyone that actually enjoys paying income taxes. It’s not realistic to think that we could entirely abolish taxes and fund many government programs such as defense spending, Social Security, and Medicare. But, could we switch to a system of taxes based on activity and consumption instead of income? There are many other alternatives and ideas out there to abolish the current income tax code, but actually getting Congress to switch to something else will be an ongoing struggle. I just can’t stand the fact that I get taxed more for how successful I am in my career. Doesn’t that seem backwards?

Implementing A National Sales Tax

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A national sales tax is a tax on every product, item, good, or service that is sold to the public. A national sales tax is being considered in the form of a value added tax (VAT), or a Fair Tax.  I previously wrote a post detailing the pros and cons of a value added tax and exactly how a value added tax would affect consumers. A VAT is a tax on a good or service that is added to every stage of production. These taxes are ultimately passed along to the consumer in the form of higher prices. In its simplest form, a value added tax is a tax on consumption. A tax on consumption is a good idea if it would eliminate the need for an income tax. This would give people more control over the taxes that they pay. Consumption taxes give people incentives to limit spending. If you want to lower your taxes, you could just cut your spending.

Higher Energy Taxes

The federal government is considering a cap and trade measure that would place a ceiling on carbon emissions and would require companies to bid for permits to emit greenhouse gases. These permits give companies the right to discharge pollutants into the air. There would be a limited number of permits and the government would gradually reduce the amount of credits that companies have available. Manufacturing companies would either have to reduce their emissions substantially or buy credits from other companies. Instituting a cap and trade system could be described as an energy tax, because it would increase the energy costs for consumers. Companies that buy credits would pass along the costs of these credit purchases to customers in the form of higher utility bills and gasoline prices. Energy costs could rise anywhere from 5 to 15 percent or more. Consumers could save money on their energy costs by becoming more eco-friendly. Individuals that have energy efficient homes and cars would be eligible for tax credits.

Higher Energy Taxes

Higher Capital Gains Taxes

A capital gains tax is a tax on the profit of any asset that is held for at least 365 days. Capital gains tax rates are often lower than ordinary tax rates in order to encourage investment. The current tax rate limits capital gains taxes to 15% on all long-term investments and qualified dividends. For example, let’s say you bought 100 shares of Apple at $150 on January 1, 2008. You then proceeded to sell those same shares for $250 on April 5, 2010. Your total profit would be $10,000, calculated by simply subtracting $15,000 from $25,000. Since capital gains are capped at 15%, your taxes would be limited to just $1,500. After this year however, the long-term capital gains tax rate will rise to a maximum of 20 percent. Although the tax rate will increase, it is still lower than the ordinary tax rate for most Americans.

Would you prefer to pay these taxes instead of an income tax? It’s an interesting idea to think about. I think most of us are so used to the current system that alternatives don’t sound very good. There are pros and cons to every alternative tax, but one thing it WOULD do, is reduce all of the loopholes, paperwork, and confusing tax codes that we currently face every tax season.

Let us know your feelings on this highly debated topic.

(Photo credit: alancleaver_2000)

Mark Riddix
Mark Riddix is the founder and president of an independent investment advisory firm that provides personalized investing and asset management consulting. Mark has written financial columns for Baltimore and Washington, D.C. area newspapers and is the author of the book, "Your Financial Playbook."

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