The benefits of simplifying our tax system like Estonia's and the problem with wealth taxes

See Cato Tax Bootcamp: The Quest for Radical Tax Reforms by Adam N. Michel. Excerpts:

"The excessive and overwhelming complexity of the US federal tax system has animated the long-running interest in fundamental tax reforms. However, the very complexity that politicians decry makes reform difficult as vested interests in politics and industry benefit from the myriad special interest loopholes. Simple, efficient tax systems are not just the province of theory; they exist in the real world. The European country of Estonia is a good example.

Estonia ranks first on the Tax Foundation’s annual list of most competitive tax systems. Estonia levies a single-tier flat income tax rate of 20 percent, paired with a distributed profits tax on corporate income. A tax on distributed profits is only assessed when business profits are realized through capital gains or dividend payments. This system eliminates the corporate income tax, removes additional taxes at death, and avoids double-taxing business income. The system is so simple that Estonian taxes are typically filed in about five minutes through an online portal.

The Tax Foundation modeled the economic and budgetary impact of applying the Estonian tax system to the United States. Such a reform would be approximately revenue-neutral, grow the long-run size of the economy by 2.5 percent, raise after-tax incomes by 3.5 percent, and reduce the debt-to-GDP ratio by more than 9 percentage points thanks to the larger economy. The reform could also lead to tax compliance costs falling by more than $100 billion annually."

"Wealth Taxes: Radical in a Different Way

During the 2020 presidential campaign season, Sens. Elizabeth Warren (D‑MA) and Bernie Sanders (I‑VT) proposed wealth taxes, making the policy a central campaign issue. Wealth taxes are neither a feature of income nor consumption taxes, which tax regular economic flows. Instead, wealth taxes are levies on a stock of assets and are intended to be purely redistributive, aiming to reverse a perceived inequality in the distribution of resources. For more on the trends, causes, sources, and benefits of wealth in America, see Chris Edwards and Ryan Bourne’s “Exploring Wealth Inequality.”

Property taxes, such as the ones assessed on your house, are a type of wealth tax, but unlike most other wealth taxes, they don’t subtract liabilities (the mortgage). The United States has the fourth-highest property taxes in the Organisation for Economic Co-operation and Development (OECD) as a share of gross domestic product (GDP). The estate tax on transfers at death is also a wealth tax. 

Net wealth taxes have been tested in other countries and repealed due to high economic costs and administrative burdens. Peaking at 12 in the 1990s, only four OECD countries still impose net wealth taxes today: Colombia, Norway, Spain, and Switzerland."

"Wealth taxes impose an additional layer of tax on the income generated by the underlying asset. Most wealth is made up of productive assets, such as active businesses or other investments. The capital gains, dividends, and other income earned would have already been taxed through the normal tax system. One recent Biden-era Treasury study found that the wealthiest 92 Americans faced total state, local, federal, and international income tax rates of 59 percent.

Because wealth taxes are assessed on a stock, expressing the actual tax rate in equivalent income tax rates is more informative. Unless the taxpayer is expected to slowly sell off their underlying assets, the tax will be paid from annual income."

"At Sander’s top wealth tax rate of 8 percent, any asset earning less than an 8 percent annual pre-tax return would face income tax rates above 100 percent before paying other taxes."

"Such confiscatory tax rates would have myriad negative economic consequences, including disincentivizing entrepreneurship, reducing employment, slowing wage growth, and shrinking domestic output. Wealth taxes also encourage tax planning by highly mobile wealthy individuals who can leave countries with confiscatory tax systems. Before France repealed its net wealth tax in 2018, the government estimated that “some 10,000 people with 35 billion euros worth of assets left in the past 15 years.”

Because of persistent administrative difficulties and taxpayers’ behavioral responses, wealth taxes raise comparatively little revenue. As summarized by Chris Edwards in “Taxing Wealth and Capital Income,” “European wealth taxes typically raised only about 0.2 percent of GDP in revenues. Given the little revenue raised, it is not surprising that they had ‘little effect on wealth distribution,’ as one study noted.”"