Volcker Panel Offers Lots of Pages, but Nothing New

Amid no fan fare at all on Friday, the Administration released the report from its Economic Recovery Advisory Board, headed by former Fed Chairman Paul Volcker, “The Report on Tax Reform Options: Simplification, Compliance, and Corporate Taxation”. The 126 page report is primarily comprised of a long list of suggestions to simplify the tax code or improve compliance, most of which we’ve seen before. In the end, the report offers little that is new.

Howard Gleckman at the Tax Policy Center put it more bluntly, “The paper, approved by the panel this afternoon, is filled with lots of useful information about our flawed tax system but leads nowhere. There are no recommendations. No revenue estimates. And no ownership by President Obama, even though he picked the panel’s members and staffed it with White House aides.”

The group was formed by the Administration in March 2009, with the mission of examining the current tax code and recommending reforms. That timeline was designed to coincide with the expiration of the 2001 and 2003 tax cuts at the end of 2010 in order to give the Administration options in proposing an overhaul of the tax code. As we have noted previously, that debate is already well under way and the usual mudslinging has begun. But the group has been overshadowed by the creation of the bipartisan fiscal commission created by executive order this spring. It is expected that the fiscal commission will offer more detailed suggestions after the November elections, and that Friday’s report may become part of that larger discussion.

As CQ noted, “Many of the proposals will be familiar to tax experts and lobbyists, because they have been debated for years in policy circles and included in previous tax overhaul proposals, such as the 2005 recommendations of a panel created by President George W.Bush.”

For instance, the bulk of the simplification proposals focus on consolidating the child tax credit, the dependent exemption, the child and dependent care tax credit, the earned income tax credit and tax breaks for education expenses into a more streamlined system that would featured a “work credit” and a “family credit”. We've seen this general idea before.  The various and overlapping exemptions and deductions for family, education, and low income taxpayers lead to an overly complicated web of provisions which can be very burdensome to navigate correctly.  The report rightly points out that for better or worse, streamlining these credits would lead to simplification but would also reduce the ability of the tax code to target specific demographics to receive these credits. Of course, it is this specific targeting that has led to the overly complicated nature of the tax code in the first place.

One original proposal that did catch our eye was the simplification proposal to send taxpayers a pre-filled return prepared by the IRS. Under the proposal, the IRS would send taxpayers with relatively simple returns a pre-populated tax form based on information taken directly from employers and from last year’s return. Taxpayers who opted against preparing the return themselves could update the pre-filled tax return as needed –for example changing the number of dependents –and would only have to sign the form and mail it back.

Simplification proposals that would allow taxpayers to file on single forms (or even a postcard) have been common in the last several years, so we’ve seen this part before. However, we haven’t seen one where the IRS essentially does your taxes for you. Many are already skeptical of the IRS’s ability to proactively calculate the tax burden for so many Americans, even those with relatively simple returns. Given the compliance gap the IRS already faces, this proposal may cause more problems than it solves. And of course, it would do little to alleviate the compliance burdens for those with more complicated tax returns –the population most in need of simplification.

Gleckman summed the report up nicely, “While there is almost nothing in this paper that has not been hashed over by prior studies, including the Bush commission, the PERAB report does a nice job describing what is wrong with the current tax code….But, in the end, it does little to advance a debate the nation desperately needs to have.”