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Obama Creates Tax Reform Panel to Reduce Tax Gap

3 min readBy: Matt Moon

Roger Runningen and Ryan Donmoyer of Bloomberg reported yesterday:

“President Barack Obama is putting former Federal Reserve Chairman Paul Volcker in charge of a taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. -code review aimed at closing loopholes, streamlining the law and generating revenue, budget Director Peter Orszag said.

“Volcker, 81, who heads the president’s Economic Recovery Advisory Board, is being asked to take a look at the laws in an effort to rebalance the tax system.

“Orszag said the review, given a deadline of Dec. 4, is being ordered to make recommendations on steps to simplify the code, built over the last 96 years, in ways that would reduce tax evasion and what he called ‘corporate welfare.’

Austan Goolsbee, a senior economic adviser to the president, will be named staff director of the task force, which will report back to Volcker, Orszag said. Members of the panel will include Harvard University’s Martin Feldstein, former chief economic adviser to President Ronald Reagan; Laura D’Andrea Tyson, a professor of economics at the University of California at Berkeley and former economic adviser to President Bill Clinton; Roger Ferguson, chief executive officer of Teachers Insurance & Annuity Association and a former vice chairman of the Federal Reserve; and William Donaldson, a former chairman of the Securities and Exchange Commission.”

This attempt at long-term tax reform isn’t new. In January 2005, then President George W. Bush appointed former Senators Connie Mack (R-FL) and John Breaux (D-LA) to head a similar panel. Since the website for Bush’s panel is no longer up, you can find their full report here on the Tax Foundation’s website.

President Obama’s goal is pretty clear: to raise more revenue. Reducing the tax gapThe tax gap is the difference between taxes legally owed and taxes collected. The gross tax gap in the U.S. accounts for at least 1 billion in lost revenue each year, according to the latest estimate by the IRS (2011 to 2013), suggesting a voluntary taxpayer compliance rate of 83.6 percent. The net tax gap is calculated by subtracting late tax collections from the gross tax gap: from 2011 to 2013, the average net gap was around 1 billion. is not only difficult; it only gets you so much money. There are really only two ways of raising substantially more revenue: (1) broadening the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. (which most tax reform-minded economists and public policy scholars favor, but is seen as politically unpalatable) or (2) raising rates (which Obama has been willing to do, but only on the top income brackets via letting the 2001 and 2003 tax cut provisions expire.)

We know that the amount of spending is central to any sound fiscal policy, and we’ve seen instances where many states that have budget shortfalls have increased spending in recent years beyond the rate of inflation. But assuming a given amount of spending, federal tax code reform should focus on a few key principles: removing distortions, making the code more simple, maintaining a broad base and keeping tax burdens as low as possible at all points.

Our Vice President for Economic Policy Robert Carroll, PhD, has started his own effort with Buck Chapoton and Diane Lim Rogers of the Concord Coalition and Maya MacGuineas of the Committee for a Responsible Federal Budget: a working paper on moving forward with bipartisan tax reform policy. In addition to a more transparent and simpler tax code, the paper also favors promotion of savings through a progressive consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. , rethinking tax expenditures, and updating U.S. business income taxes. (You can listen to a recent podcast between Carroll and Rogers on this paper here.)