WASHINGTON — The Obama administration has tapped economic adviser and former Federal Reserve chairman Paul Volcker to lead a task force that will explore how to streamline the tax code, but it’s unclear if the panel’s recommendations will have any impact on the municipal bond market.
The task force, announced by President Obama last week, has been charged with three main responsibilities: simplifying tax laws, closing loopholes and minimizing evasion, and reducing “corporate welfare,” Office of Management and Budget director Peter Orszag told reporters during a conference call.
A top priority for the group will be “examining ways of unifying, streamlining, making more consistent the various credits that are out there,” Orszag added. The group is slated to deliver its recommendations to the president by Dec. 4.
Volcker is chairman of the president’s Economic Recovery Advisory Board and Obama has recommended other economic and financial experts to join him on the panel. They include Laura Tyson, former chair of President Bill Clinton’s Council of Economic Advisers; Roger Ferguson, chief executive officer of the Teachers Insurance and Annuity Association, College Retirement Equities Fund, or TIAA-CREF, and former Federal Reserve Board member; former Securities and Exchange Commission chairman Bill Donaldson; and Harvard economist Martin Feldstein.
However, no one beyond Volcker has been officially named to the task force yet, Orszag said.
If one of the panel’s goals is simplification of the tax code, it could recommend greater use of tax credits or direct subsidies than traditional exempt interest payments, some economists said this week.
The exemption “does complicate the tax system. There are all sorts of things that would be simplified in the tax system by getting rid of it,” said Roberton Williams, a senior fellow at the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution. “It benefits the rich a lot more than the not-rich, and it costs the government money in unexpected ways.”
Under the current system, only individuals in the top tax bracket can take full advantage of the tax exemption, so municipal bonds become inefficient when lower-bracket taxpayers invest, he said. Tax credits or direct subsidies could be equally applied to all taxpayers.
The new stimulus law allows muni issuers to pursue these options. For the first time ever, issuers can offer taxable bonds and receive a cash payment from the federal government under the Build America Bonds program. The stimulus law also authorizes more tax-credit bonds than ever. Williams does not think these programs are necessarily a harbinger of things to come, but are instead are part of the effort to stimulate the economy.
“I think a lot of the stuff in the stimulus program was thrown together ... You try a little of this, you try a little of that,” he said.
Daniel Halperin, a Harvard law professor who specializes in tax policy, does not think tax-exempt bonds are candidates for the chopping block.
“I don’t think there’s any risk the tax exemption will be eliminated,” he said. “We seem to be more interested in expanding [it] … rather than going the other way.”
In fact, it is possible that muni bonds could become more appealing if Congress were to adopt the panel’s ultimate recommendations, Halperin said. One of the few stipulations Obama placed on the panel was that no taxes be increased in 2009 or 2010, and that tax hikes after that only apply to taxpayers making $250,000 or more annually. These high-income earners are often major investors in tax-exempt bonds.
“If tax rates go up, you would expect municipal bonds to be more appealing, especially if you have to market them at the same rate you have to market them today,” Halperin said.
The flat tax — an idea that usually emerges in discussions of tax reform and would have dramatic repercussions for the muni bond market — is likely off the table for the Volcker panel, given Obama’s caveats, Williams said.
“Obama’s constraints ... make any flat tax a non-starter,” he said. “Although it is possible to design a flat tax that would hit only the rich, that would require substantial exemptions and very high rates. Proponents don’t want that kind of flat tax.”
It is also the possible that any recommendations the panel makes are either ignored or are too controversial to become law.
In 2005, President George W. Bush put together a nine-member Advisory Panel on Federal Tax Reform, which included Helen Elizabeth Garrett, Obama’s nominee to become assistant secretary for tax policy.
The panel produced a comprehensive series of recommendations to simplify the tax code, including a repeal of both the corporate and individual alternative minimum tax. But neither the administration nor Congress acted on the panel’s recommendations.