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Wednesday, March 25, 2009

President Obama's Task Force on Tax Reform to be Formed

On 3/25/09, Peter Orszag, Director of the White House Office of Management & Budget announced that the President's Economic Recovery Advisory Board (PERAB), chaired by Paul Volcker, will form a Task Force on Tax Reform with a report due 12/4/09. Per Orszag, PERAB's tax group will have 3 tasks:

"one is tax simplification; the second is closing tax loopholes and reducing tax evasion; and the third is reducing corporate welfare. And it's worth noting that with regard to that first category, one of the key things that the Volcker board will be examining is ways of unifying, streamlining, making more consistent the various credits that are out there: Making Work Pay, the Earned Income Tax Credit, the Child Tax Credit, and what have you. And in addition, with regard to the tax gap, there are hundreds of billions of dollars in uncollected taxes each year."

Further, "The Task Force on Tax Reform that will be formed by the Volcker board will be examining ways of being even more aggressive on reducing the tax gap, which could provide funding for tax provisions, including an extension of the Making Work Pay tax credit."

Orszag also noted that President Obama viewed these PERAB members are suitable for the task force: Laura Tyson, Bill Donaldson, and Marty Feldstein.

Well, certainly, the federal tax system is in need of reform - it is too complicated, has a large tax gap and does not necessarily tie to some of our nation's goals such as reducing GHG emissions and improving international competitiveness of US companies.

What can a task force do? Hopefully they will spend time with the thousands of pages of analyses and reports that have been created in recent years - much of it from government agencies, such as CBO, GAO and Joint Committee on Taxation. President Bush had his Federal Tax Advisory Panel - it's report, which is really quite good in the background data on the problems and bold solutions - but was shelved soon after issuance. They can get a good sense of the problems and proposed solutions from these reports to derive what is hopefully a cohesive set of proposals that meet the principles of good tax policy.

Comments on the 3 areas to be addressed:

  • In 2001, at the request of Congress, the Joint Committee on Taxation released a simplification study that examined every Code section and made recommendations.
  • The AICPA and ABA and others have offered many simplification proposals.
  • The current budget proposals from the White House and Congress, as well as current tax proposals should be evaluated to be sure the law isn't made more even more complex while a task force attempts to craft proposals to simplify the tax law.
  • How many different energy deductions and credits do we need? Same for education incentives. The desire to solve every problem with a tax provision needs to end or simplification is unlikely to be achieved.
Tax Gap:
  • The IRS and GAO has done and continue to do extensive studies on reducing the tax gap. Just do a search at the GAO website on tax gap and you'll find about 3 decades of reports and recommendations. The GAO's January 2009 tax gap report focused on 1009-MISC.
  • Information from the IRS can be found here.
  • Recent efforts to address the tax gap, such as requiring basis reporting by securities dealers, are good steps, but they avoid the bigger aspects of the tax gap such as the 20% attributable to sole proprietorships (see data and links here). Here is a link to a short piece I wrote recently on the "slow pace" in closing the tax gap and reasons for that slow pace.
"Corporate Welfare":
  • I use quotes because I find this term troublesome. Usually it prefers to provisions purposefully added to the tax law to provide a benefit or incentive. Many companies that legally use these rules also pay lots of taxes. If these provisions were not enacted as giveaways to corporations, they should not be labelled that way later when they might get repealed. Many of these provisions were enacted as permanent provisions and may no longer be appropriate. Or perhaps a majority have come to view a lower tax rate as a better (simpler and usually more efficient way), to reduce corporate taxes.
  • Reform of the corporate tax rules including provisions pertaining to international transactions and entities sounds like a better label for this third area.
  • Another matter to address in corporate tax reform is how other business entities should be taxed - should they all be taxed the same?

While the three areas identified for review are important - particularly simplification and the tax gap (it is hard to know what "corporate welfare" is), so are some additional areas, such as:

  • Efforts to have a tax system that supports economic growth, a clean environment and social welfare - rather than running counter to these goals. Some provisions today do run counter to these goals, such as a gasoline excise tax that is too low, education tax incentives that don't help those most in need because they may not owe income tax, and that encourage savings.
  • Corporate integration (for more info - click here)
  • Improving worker classification rules

The Task Force has big job before it. They will need good ideas. What would you tell them?

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