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Making sense of tough tax terminology

Changes to the way Americans are taxed are now under consideration. CNBC's Maria Bartiromo explains.
/ Source: TODAY

How does America feel about its civic duty to pay taxes? According to a new NBC News poll, Americans don’t feel too bad about paying taxes, and even feel the IRS has been fair to them. New tax proposals are now floating through the government. and CNBC’s Maria Bartiromo was invited on “Today” to help make sense of these possible changes.

Definitions of tax terms Flat tax:  An income tax with a single rate for all taxpayers regardless of income level.

National sales tax:  A tax that consumers pay when they buy new goods and services. If enacted the sales tax could replace the income tax.

Alternative minimum tax:  An IRS mechanism passed in 1969 to ensure that high-income individuals, corporations, trusts and estates pay at least some minimum amount of tax, regardless of deductions, credits or exemptions. In other words, the AMT is designed to prevent taxpayers from escaping their fair share of tax liability by using certain tax breaks and managing to avoid paying any income taxes.

What taxpayers are sayingAccording to the NBC News poll, taxpayers do not seem angry when asked about paying their taxes.  Rather, 61 percent of people, across all demographics, generally feel they are paying their fair share of taxes. Most people understand the need to pay taxes and are fine with it. They understand the government needs to be funded. What gets them upset is when they feel they are paying and others aren't. They feel the tax system is unfair because some people skirt it, not because they have to pay taxes.

In 2004 the federal government collected over $1.7 trillion in taxes, according to Ernst and Young's Barbara Raasch.  About 45 percent of that came from individual income taxes. Though most people think they are paying their fair share of taxes, more than 54 percent of the people NBC News polled still feel that the system is unfair.  However, the group that bears the biggest brunt of the tax burden are those making at least $80,000 a year. That group alone — the top 20 percent of earners — paid more than 80 percent of all individual taxes last year.

Possible changes
President Bush and Congress have talked a lot about tax reform and are considering a range of changes. One of the appointees on the president’s tax reform commission told me they are going to revive the option of a flat tax and seriously consider it at their next meeting, on April 18. The flat tax is used internationally and has been very successful. They are looking at whether it’s viable to eliminate all deductions and have a flat tax at something around 18 percent, for example. The upside would be that you eliminate millions of dollars in extra expenses for taxpayers, such as lawyer fees and accountant fees, because it would simplify it so much.

There is also a proposal of a partial flat tax, where you have a one-time choice to go flat or not, and then going forward, any new workers coming into the system will have a flat tax, so eventually everyone is there.

Another proposal out there is the national sales tax, similar to the European Union's value added tax, and it appears that some form of a consumption tax is probable. What they are looking at is where to put that tax. In other words, do you insert that tax at the end sale when you go to purchase something at the register, or do you insert that tax all the way up the production or distribution channel?

What is the alternative minimum tax?The reason the AMT was implemented in the first place was to target the extreme wealthy to make sure they weren't skirting the system. They have the money to afford tax attorneys and lawyers who come up with tax shelters. The government enacted the alternative minimum tax so that everyone was sure to pay something. The problem is, it starts to creep down the spectrum; many income levels are now paying it, and more will as the workforce grows and people make more money. This is one area I think will definitely be changed.

If the AMT stays, President Bush and Congress will have to adjust it to inflation. What they are working on is how to eliminate it without impacting the revenue going to the government.  As long as they can keep that revenue coming in another form of tax, there is a potential that the AMT goes away.