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Tax Reform Task Force Hears Argument for ReadyReturn

Chuck O'Toole for Tax Analysts

President Obama's tax reform task force on October 16 heard from a proponent of creating IRS-prepared tentative tax returns, an idea that some say could inexpensively make a significant dent in the tax gap.

Stanford Law School Prof. Joseph Bankman, speaking during a discussion of tax simplification at the task force's second public information-gathering webcast, argued that a federal version of California's ReadyReturn pilot program could target lower-income taxpayers, who tend to file simpler returns.

Any ReadyReturn system is bound to produce mistakes, Bankman said, but at lower income levels, "you can live with the errors you may make." The simplified filing process could encourage significant numbers of nonfilers to submit their tax information.

Bankman said the IRS could create a data retrieval system through which filers could access whatever tax information about them the Service has already collected. That system could drastically reduce errors and streamline compliance for many taxpayers, he said.

"Per dollar spent on compliance, this could well be the cheapest investment you've ever made," Bankman said.

The task force, a subgroup of the President's Economic Recovery Advisory Board (PERAB) headed by former Federal Reserve Chair Paul Volcker, is charged with presenting a set of tax reform proposals to President Obama by December 4.

Members in attendance on October 16 included Austan Goolsbee, the advisory board's chief economic officer and a former Obama campaign official, and TIAA-CREF President and CEO Roger Ferguson Jr. Participating via conference call was Laura Tyson, who chaired the Council of Economic Advisers during the Clinton administration.

Other presenters included Barry Melancon, president and CEO of the American Institute of Certified Public Accountants. Melancon called for tax simplification for small businesses, stressing that simplification should go beyond clearer forms or regulations to include more predictable and more broadly applicable tax laws. Frequently changing and narrowly targeted tax policies, as well as features such as phase-ins and phaseouts, make compliance more challenging for business owners, he said.

Melancon also urged the task force to consider raising and indexing the exemption level for the estate tax in order to focus the tax on only the wealthiest taxpayers.

Robert Greenstein and Chuck Marr of the Center on Budget and Policy Priorities said the administration should cap itemized deductions at the current 35 percent top rate when the 2001 and 2003 tax cuts expire in 2010. Doing so, they said, would accomplish some of the revenue-raising goals of President Obama's controversial plan to freeze those deductions at 28 percent.

Greenstein and Marr also backed a proposal made by President George W. Bush's tax reform panel in 2005 that would consolidate the various low-income tax credits and exemptions into one simplified credit each for families and for workers. Greenstein pointed out that the earned income tax credit instruction booklet has at times been longer than that for the alternative minimum tax, a situation he said underscores the need for EITC simplification.

Marr said policymakers should take advantage of what he called the "built-in process" that occurs every year when lobbyists pressure Congress to renew expiring targeted tax incentives. The annual "extenders" bill could include base-broadening measures as offsets, Marr said, allowing tax simplification to benefit from that political momentum.

PERAB is scheduled to meet next on November 2, according to a White House statement. Video of the October 16 panel is expected to be posted to the White House Web site in the coming days. The White House did not respond to Tax Analysts' queries about the tax task force's coming agenda and schedule

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