Obama Creates Tax Reform Panel to Reduce Tax Gap

March 26, 2009

Roger Runningen and Ryan Donmoyer of Bloomberg reported yesterday:

“President Barack Obama is putting former Federal Reserve Chairman Paul Volcker in charge of a tax-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 gap 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 base (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 tax, 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.)

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