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Interesting. Am I right in assuming that if you replace income taxes with a national sales tax or VAT system, then tax-sheltering options like IRAs and tax-free bonds become obsolete (at least from a tax-shelter standpoint).

IRAs and TAX free bonds could still exist, you would be charged no sales tax on the amount you earned (the interest). Wouldn't NEED an irs for this either, because the bond seller is paying that tax, not the bond holder. So the tax exempt status of bonds need not be affected, but why go there. Just tax it at the normal rate and forget the exemptions. Every exemption costs someone else more. Thats why we are in this mess. We could see tax rates as low as 8% and still fund everything we do now if a vat were used.

And what happens with unearned income, like interest, dividends, and capital gains? Would they be tax-free? Wouldn't that be lovely!

We wouldnt care how you GOT the money. Its taxed only when you SPEND it.

On the other hand, from articles I've read about VAT systems in Europe, the tax code can get pretty ridiculous. My favorite: an undecorated cookie sold in a bakery was exempt from the last VAT tack-on, but the same cookie decorated with an icing "face" was not exempt.

Thats no different than our silly tax rules, and there would be no reason we would have to go that way. The simplest VAT is If you buy something for $100, and sell it for $110, Vat is calculated on the diffrerence between the $100 you paid and the $110 you sold it for. It makes the caluclation fairly easy. You set your prices to cover your costs, and your profit, and then add vat.

The hard part will be convinvcing the government to LEAVE it that simple. I think we should enact some Death Panalty clauses for any congressman who wants to propose complications. ;-)