Can the U.S. learn from New Zealand when it comes to taxes?

Is it time for the U.S. to consider the value added tax (or VAT)—the consumption tax widely used across the Atlantic? I guarantee, it will be a big debate. The head of President Obama’s Economic Recovery Advisory Board, Paul Volcker, stated in an article on CNN, “If at the end of the day we need to raise taxes, then we need to raise taxes.” So, the United States happens to be the only developed country that does not have this VAT (value-added tax), as it is called. Yet, the United States has a $1.5 trillion federal deficit and a debt of more than $12 trillion. Economist argue this tax would “pack a less potent punch” than a rise in income taxes or corporate taxes.

So, what country does it best? Tax experts and economists point to New Zealand, where a 12.5 percent goods and services tax applies uniformly to nearly everything with very limited exceptions--only rent paid for a private home, charitable contributions and interest earned are exempted. (The government offers clear details, too, on its website). “People think it’s fair because it doesn't exempt some folks and not others."

The VAT is essentially a sales tax, except that it's charged at each stage in the development of a product instead of at the moment when the product is sold.

You can bet that deciding what model to use in the United States, or whether the tax will be imposed at all, “will be a furious political debate in the coming months”. Conservatives and tax opponents hate it of course. "There's nothing to love. It will only lead to bigger government," says Daniel Mitchell of the libertarian Cato Institute.

In New Zealand, the value-added tax contributes about 25 percent to the government's bottom line, and the Tax Policy Center in December projected that a 5 percent VAT tax here would generate over $3 trillion in revenue by 2019. That's not enough to cover America's huge debt obligations, of course, but it could be a start. I feel the VAT would cause business owners to be ultimately “holding the bag”. Other things to ponder are what would be exempt from the tax and how it will affect low income Americans versus the wealthiest.

Read the full article here.

Another CNN article explaining the VAT

Watch my appearance on FOX Business regarding the topic from Monday, April 12, 2010.

What You Can Learn From Your Tax Return

It’s the final stretch of the tax filing season, but before storing away your tax return, take a moment to go over it. Studying your tax return will help you plan for the future. It can help you determine the best use of your money, what investments to make, and whether or not to make portfolio changes. A CNN article, Learn From Your Tax Return, offers tips in what to look for in using your 1040 for financial planning.

Colorado Springs financial planner Allan Roth says that if you have more than $1,000 in taxable interest (on Line 8a) or more than $1,000 in “unqualified” dividends (line 9a minus line 9b), it is a sign that you might want to relocate some holdings into tax-deferred accounts. As is, you might be paying more taxes than you need to on certain assets.

People often keep their fixed-income holdings outside their IRAs and 401(k)s, but tax-wise, that doesn't make sense. Interest from CDs and bonds is taxed at your ordinary income rate, and the same is true for dividends earned on REITs.

So you're better off sheltering these highly taxed investments in tax-advantaged accounts (with the exception of the dough you plan to tap in the short term or have earmarked for emergencies).

As for how to invest taxable money, consider a stock index fund that covers the total U.S. or international markets. Such funds don't trade holdings frequently, so they don't generate many capital gains. While they may pay qualified dividends, those will be taxed by the feds at only 15% for now. And the yields tend to be low. So even with President Obama's proposal to shift dividends to a 20% rate for couples making more than $250,000, a stock index fund would still make sense.

Read more of the article here.