LET’S THINK BIG PICTURE: Most tax people around D.C. believe the biggest debate over the next three years could end up being, essentially, whether to extend the individual tax cuts from the GOP tax law for everyone or just for those making under $400,000 a year. And with good reason: In all, that debate covers trillions of dollars worth of tax relief. But on some level, it’s also a pretty narrow discussion, because any talk of more fundamentally revamping the U.S. tax system has become secondary since Republicans passed the Tax Cuts and Jobs Act in 2017. Within that context, the conservative-leaning Tax Foundation has released a fully fleshed out tax overhaul based on the system in Estonia, which the group consistently has found to have the most competitive tax code in the industrialized world. The plan would install flat taxes of 20 percent for individuals and the distributed profits of businesses, while scrapping a wide range of tax breaks — including the incentives for mortgage interest and charitable contributions. The Tax Foundation’s revamped system would keep the Child Tax Credit, and the group says the new system would be roughly revenue-neutral, boost long-run economic growth by quite a bit and dramatically reduce the costs of complying with the tax code. William McBride, the Tax Foundation’s vice president of federal tax policy, spoke to Weekly Tax about the plan. The interview has been edited for length and clarity. Why release this now? We’ve seen it ourselves — there’s not nearly the level of emergency in tax that there was in the last Congress, because there was real legislative potential there. It’s also why we’re doing it now, because this is more abstract than the congressional process. This is not likely to be taken up in this Congress. But it’s a way to step outside the day-to-day congressional process, and look at the bigger picture, which includes what worked in other countries. Why is Estonia a good template for the U.S.? It’s much smaller, for instance, and doesn’t have the same size of government to fund. Estonian officials have been told that over the years that this doesn’t translate to bigger economies. And when they ask why not, they’ve never gotten a good answer. There’s no good reason that this doesn’t scale to bigger countries. Estonia has more than a million taxpayers, plus big companies, small companies, all kinds of industries, gig workers. They’re dealing with all the same kinds of things. They’ve got people looking for tax advantages, loopholes. They’ve found that this is a very copacetic system. Much less controversy, much less confusion. It’s a picture of relative peace in tax. Is it realistic to think that Congress would get rid of so many major tax breaks? That’s the hard part — the peas you have to eat. With state and local tax deductions, there was a half measure in 2017. That’s why this stuff is challenging — it was challenging for us to put forward this vision, to create enough benefits to offset those costs. The state and local tax deduction — if it fully goes away, it hurts states with higher income taxes. But the economy is growing at a much higher clip overall and that redounds to all the states. It’s all those benefits that we highlight in the paper. What would you say to critics who’d say this plan doesn’t concern itself enough with tax fairness? I absolutely agree with those who say that fairness should be a very important criteria, if not the most important one in a tax system. The question is, how do you define fairness? Distributionally, we looked at it both in static and dynamically — after economic growth, it does show that the top 1 percent really score big with this tax plan, in part because rates come down to 20 percent. But that’s not the only measure of fairness. Another indicator of fairness is how comprehensible and understandable are our tax laws for the people without the time or resources to deal with the complications in the tax system. Couldn’t you get a lot of the benefits of this plan without going to a full flat tax? The reason that Estonia chose the single rate is because they chose simplicity first. And they wanted, related to that, to avoid gaming of the system — the relabeling of income to get the preferential rate, and to make it fully integrated between the business side and the individual side. The basic issue is you open up Pandora’s box for tax planning opportunities, and then this cat-and-mouse game of administrators trying to close it down.
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