President Obama has now added tax reform to his to-do list.

The administration said this week it will form a task force to propose ways to simplify the tax code, reduce evasion, close loopholes and make changes in corporate breaks.

One overarching end-goal: Raise revenue.

Obama isn't setting a revenue target but is placing two constraints on the task force's efforts: Members may not propose tax increases for 2009 and 2010; and beyond 2010, they may not propose tax increases on families making less than $250,000.

A major focus for the task force will be to reduce the estimated $300 billion-a-year tax gap -- the difference between what individual and corporate taxpayers owe and what they actually pay.

"Three hundred billion a year or more is a lot of money, and we are interested in being as aggressive as possible in trying to reduce that number," White House budget director Peter Orszag said.
Closing the gap

Reducing the tax gap is far easier said than done.

"Managing to make headway to reduce that gap often means difficult reforms," said James Poterba, president of the National Bureau of Economic Research and a member of President Bush's tax reform panel created in 2005.

The biggest reason for the gap is underreporting of income. There's a high rate of compliance when it comes to income reported by third parties, such as employers reporting workers' incomes on W-2s.

But the compliance is much lower in cases when there's no third-party reporting, such as with small business owners who do mostly cash transactions. The cash economy may account for over $100 billion of the annual tax gap, according to testimony from Nina Olson, the National Taxpayer Advocate.

The IRS is already working to improve compliance. For instance, starting in 2011, brokerages will be required to report taxpayers' cost basis when they sell a publicly traded security. That will make it easier for the IRS to verify capital gains income.

Boosting third-party reporting in areas where it is lacking means more work and expense for someone and almost certainly "will bump into [resistance] from those required to do the reporting," Poterba said.

Of course, the gap isn't all due to intentional tax avoidance. Some of it comes from honest mistakes by filers confused by a tax code that is almost universally acknowledged to be maddeningly complex.

Simplifying the code may actually help narrow the tax gap since currently "people don't perceive the tax code to be fair and that encourages non-compliance," said Len Burman, co-director of the Tax Policy Center.

The perception is that the code now allows too many people to escape paying their fair share. And where there are popular tax breaks to be had, they often come with Twister-like eligibility requirements that can qualify or disqualify tax filers seemingly arbitrarily. And where different credits or deductions target similar groups -- such as retirement savers or low-income workers with kids -- the rules for each are different.

The task force will be charged with suggesting ways to streamline those types of credits.

But what the task force may find is that behind every Byzantine requirement is a rationale and a group that lobbied for it.

"What looks like simplification to one person looks like a tax increase to another," Poterba said.

So, how much of the $300 billion-a-year tax gap can be recouped realistically?

Poterba says he's not sure. "There's not one magic bullet," he said, noting that it takes serious time and effort to change individual provisions in ways that make sense in the broader scheme of things.
Targeted changes more likely than overhaul

The members of the task force will come from the Presidential Economic Recovery Board, which is headed by former Federal Reserve Chairman Paul Volcker. It will present its proposals to Obama on Dec. 4.

Given the president's mandates and the many urgent priorities facing lawmakers, the task force's recommendations are likely to be less far-reaching than those of President Bush's tax reform panel. The Bush panel proposed ways to change and simplify not only individual tax measures but also considered alternative structures for the tax system.

"To get fundamental tax reform you really need the political stars to line up in just the right way. ... It also requires concentrated attention from the political process. It requires a fair amount of heavy lifting," Poterba said.

Those stars were not aligned when Poterba's panel put forth their proposals in November 2005. Nothing came of their report and Bush made little or no mention of it after the day it was presented. But tax experts praised the group's efforts, and Burman thinks there are a lot of ideas in their work that could serve as good starting-off points for Obama's task force.

Even if the Obama task force recommends only targeted changes to the tax code, the administration will still need to get the House and Senate on board in many cases.

It hasn't gotten off to the most auspicious start. The announcement of the task force appears to have come as a surprise to leading lawmakers, according to Congress Daily.

The top Senate Democratic tax writer indicated that the panel could be constructive, but he would prefer they offer a broad set of principles rather than specific tax changes.

"We'll certainly look at it, but we're the Congress, we'll do what we think makes sense," Senate Finance Chairman Max Baucus, D-Mont., told reporters.

"Springing a tax reform panel without talking to [leading tax writers on the Hill] is not politically astute," said Anne Matthias, director of research at Concept Capital. "But it doesn't mean [the panel's work] won't end up being important."

Is this the worst economy since the Great Depression? And what are the chances of the economy falling into another depression?

The answer to the first question is fairly clear. In most ways that matter to economists and average Americans, this is the worst economic crisis since the Depression.

The answer to the second question is not as clear. While the National Bureau of Economic Research officially declares the beginning and end of recessions, nobody does that for depressions.

Still, the general consensus of economists is that another depression is not likely. But the risks are greater than they were only a few months ago.
Why this recession is so bad

First things first: Even though it may seem obvious to most that this is the worst downturn since the Great Depression, the economy has experienced other serious recessions in the past, particularly in the mid-1970s and early 1980s.

But this recession dwarfs those two for several reasons.

In terms of length, the longest post-Depression economic decline was 16 months, which occurred in both the 1973-75 and 1981-82 recessions. This recession began in December 2007, which means that it will enter its 17th month next Wednesday.

The current recession is also more widespread than any other since the Depression. The Federal Reserve's readings show that 86% of industries have cut back production since November, the most widespread reduction in the 42 years the Fed has tracked this figure.

What's more, every state reported an increase in unemployment this past December, the first time that has happened in the 32 years that records for unemployment in each state have been kept.
0:00 /3:54Jobless - it feels so bad

"This is important because there's nowhere you can move to find a job," said Gus Faucher, director of macroeconomics for Moody's Economy.com.

Finally, during the past nine months, the drop in household wealth has been larger since anything on record in the post-World War II period.
Why this won't be another depression

So far during this recession, the nation's gross domestic product, the broadest measure of economic activity, has dropped about 1.7%. Forecasts of experts surveyed by the National Association for Business Economics work out to about a 3.4% decline in GDP over the life of this recession.

To be sure, there already have been some quarters where the drop was much more severe. The government will report its final revision of GDP for the fourth quarter of 2008 and economists are expecting that report to show an annual rate of decline of 6.6%. And some economists think the drop in the first quarter could be even greater.

But measuring the drop in economic activity from top to bottom is how economists judge a recession's depth. And a 3.4% drop would be the worst since World War II, and far worse than the average recession in that period.

Still, that's a long way from the 26.5% drop in GDP that took place between 1929 and 1933.

One of the main reasons why economists think another depression could be avoided is that it will take more than just a sharp decline in consumer spending and household wealth to spark a depression.

Even though household net worth has fallen a record $11 trillion, or 18%, during the course of this recession, the broader economy can weather such a shock.

Historically, stock market crashes and bursting housing bubbles haven't necessarily led to depressions. It takes a variety of economic factors and policy decisions to turn a recession into something even more serious.

"I don't know if you can make a causal link between a loss of wealth and a depression," said Lakshman Achuthan, managing director of Economic Cycle Research Institute.
Learning lessons of the 1930s

Significant policy changes since the 1930s will also cushion the blow.

Unemployment insurance, Social Security payments and larger government at the federal, state and local levels keep money flowing into the economy even as consumers and businesses pull back on their own spending.

"There's a lot more safeguards in place," said Keith Hembre, chief economist at First American Funds.

Hembre said the $787 billion stimulus bill passed by Congress in February will also spur more economic activity down the road.

In addition, the Federal Reserve, led by Great Depression expert Ben Bernanke, has pumped trillions of dollars into the economy with new lending programs the central bank has never tried before. That has swelled the supply of money. By way of contrast, the money supply tightened during the Great Depression.

There were many other policy mistakes made in the 1930s that economists say are not being repeated today, including stiff tariffs that killed international trade and government imposed limits on prices and production levels.

Even if Congress imposed "Buy American" provisions in the public works paid for by the stimulus bill, there is no call to move back to the strict protectionism of the 1930s or production and price controls.

"I'd like to think we've learned something, so in terms of policy we're doing better," said Achuthan.

Still, even if the United States does not enter another depression, that doesn't make the current economic crisis any less painful for many Americans. Also, few economists are predicting an end to the recession anytime soon.

Hembre said he is worried that the country could be in a period of prolonged economic stagnation similar so the so-called lost-decade that Japan suffered starting in the 1990s. He said continued weakness in housing and high debt levels by households and governments could hold the economy back for some time.

And some economists aren't completely ruling out another depression.

In a paper for the National Bureau of Economic Research last month, Harvard University professors Robert Barro and Jose Ursua put the chance of a minor depression (which they defined as a GDP decline of at least 10%) at about 20% and a 3% chance of a major depression (defined as a GDP drop of at least 25%). Moody's Economy.com is forecasting a 10% chance of a depression.

Stocks tumbled Tuesday morning as investors showed caution following the best day on Wall Street in four months.

The Dow Jones industrial average (INDU) lost 70 points, or 0.9%, in the early going. The S&P 500 (SPX) index lost 10 points, or 1.2%. The Nasdaq composite (COMP) lost 19 points, or 1.2%.

Investors are looking to Washington, where Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner are testifying at a Congressional hearing about the government's intervention at American International Group.

Stocks around the world soared Monday, boosted by the U.S. Treasury's plan to remove toxic assets from the balance sheets of banks. The Dow surged 6.8% while the S&P 500 rallied 7.1%. But investors may be ready for a rest after the dramatic advance. Full story

"It wouldn't be a big surprise if there was a negative hangover in the following session," said Ken Wattret, economist with BNP Paribas in London. "Given the scale of the preceding day, you would expect to see a decline.

But given Wall Street's gains over the last two weeks, Wattret detected a bit of optimism in the air, going forward.

"There's a feeling that we're getting to the end of the worse of the news," he said. But he noted that there's plenty to be pessimistic about, including skepticism over whether the toxic assets at the center of the government's plan - and the inspiration for Monday's rally - will ever rise in value.

Financial shares - leaders of the rally Monday - led the decline Tuesday, with Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) among the losers.
0:00 /01:34AIG back on lawmakers' minds

AIG hearing: Investors will be watching Bernanke and Geithner. Both will testify at a House Financial Services Committee hearing on AIG (AIG, Fortune 500), due to start at 10 a.m. ET. Full story

AIG has been given access to $182 billion in taxpayer funds in the past six months. Recently it paid out $165 million in retention bonuses to employees in the company's financial products division. Those bonuses were written into employee contracts written in early 2008.

But Dan Cook, senior market analyst at IG Markets in Chicago, believes the government has already wasted too much time on the topic of AIG bonuses - and Tuesday's hearing won't help the stock markets.

"We still have an opportunity to wreck the run we've been on with this AIG hearing," he said. "It's such an emotional issue, this AIG thing, but if you look at the [total] cost, it's a drop in the bucket."

World markets: Asian shares extended gains, rising to their highest level in two months. Japan's Nikkei added 3%. Major European markets were mixed in morning trading, with a decline in London's FTSE, but increases in the XETRA-DAX in Hamburg and the CAC in Paris.

Oil and money: Oil prices fell 55 cents a barrel to $53.25. The dollar rose versus the euro and the yen, but fell against the British pound.

The federal government, in its latest effort to prop up the financial system, took over two big wholesale credit unions Friday with combined assets of $57 billion.

U.S. Central Federal Credit Union in Lenexa, Kan., and Western Corporate Federal Credit Union in San Dimas, Calif., were placed under conservatorship "to stabilize the corporate credit union system and resolve balance sheet issues," according to the National Credit Union Administration.

The administration is a federal agency that regulates, charters and supervises federal credit unions.

Neither of the failed institutions serve consumers directly. As corporate credit unions, they service the credit union system. Credit unions count 90 million members nationwide.

Members of the two credit unions will not experience any disruption in service and are free to make deposits and access funds, according to the regulator.

U.S. Central Federal Credit Union has about $34 billion in assets, with 26 retail corporate credit union members. WesCorp has $23 billion in assets and approximately 1,100 retail credit union members.
0:00 /3:41Bypassing the banks

The board of the NCUA analyzed the health of the mortgage and asset backed securities held by all corporate credit unions starting on Jan. 28. The board determined that the two credit unions taken over had "an unacceptably high concentration of risk," according to the statement.

David Friehling, accountant for Bernard Madoff, turned himself in on Wednesday to answer charges that he "rubber stamped" the Ponzi schemer's falsified numbers and lied about it, said federal prosecutors.

Friehling was charged with securities fraud, aiding and abetting investment adviser fraud and four counts of filing false audit reports to the Securities and Exchange Commission, according to the U.S. Attorney for the Southern District and the Federal Bureau of Investigation.

If convicted, Friehling could face a sentence of up to 105 years.
0:00 /1:43Liquidating Madoff's assets

"Mr. Friehling is charged with crimes that represent a serious breach of the investing public's trust," said Acting U.S. Attorney Lev Dassin, in a prepared statement.

"Although Mr. Friehling is not charged with knowledge of the Madoff Ponzi scheme, he is charged with deceiving investors by falsely certifying that he audited the financial statements of Mr. Madoff's business," said Dassin. "Mr. Friehling's deception helped foster the illusion that Mr. Madoff legitimately invested his clients' money."

For his services, Madoff's firm paid Friehling about $12,000 to $14,500 per month between 2004 and 2007, the prosecutors said.

Friehling could not immediately be contacted by CNNMoney.com. A spokesman for the U.S. Attorney's office said he was unable to identify Friehling's lawyer.

Friehling is the first person after Madoff charged with having some connection to the world's biggest Ponzi scheme.

He was also an investor with Madoff's firm, according to prosecutors. They say Friehling and his wife had an account of more than $500,000.
Madoff appeals for bail

Bernard Madoff is trying to get out of jail again. He has been locked up since March 12, when he pleaded guilty in U.S. District Court to all 11 criminal counts related to his long-running, multi-billion dollar scheme. He has spent the entire time at the Metropolitan Correctional Center in lower Manhattan.

But Madoff believes he should get out of jail until June 16, when he faces sentencing of up to 150 years. On Thursday morning, he is scheduled to appear in the U.S. Court of Appeals for the 2nd Circuit to appeal the revoking of his $10 million bail.

The bail was taken out against his $7 million Manhattan apartment, as well as his wife's properties in Montauk, N.Y. and Palm Beach, Fla. Madoff had lived in luxury with his wife Ruth in the Manhattan apartment since his December arrest, avoiding jail even after investigators caught him mailing more than $1 million worth of diamond-studded jewelry to relatives.

Now, investigators are tallying up Madoff's assets, valued at well over $800 million, so they can be liquidated and allocated to the thousands of victims who entrusted his firm with their money. Investigators are still trying to determine how many people were victimized and how much money was stolen.

In court, Madoff confessed to running a Ponzi-style scheme, where he used fresh investments to pay off his more mature investors, while creating the appearance of legitimate returns. These investors received statements claiming that their accounts had grown in value. But in reality, Madoff said he never bought securities, and therefore never invested his clients' money.

Under pressure from the Treasury, insurance giant AIG - a recipient of at least $170 billion in federal bailout money - is scaling back bonuses and compensation for some of its top-earning employees.

CNN on Saturday obtained a letter from AIG Chairman and CEO Edward Liddy to Treasury Secretary Timothy Geithner, in which Liddy pledges to reduce 2009 bonus payments - which AIG refers to as "retention payments" - by at least 30 percent.

He also addresses steps to limit compensation in AIG Financial Products, the London-based unit responsible for issuing the risky credit default swaps - basically insurance against losses from bad loans - which on several occasions has brought the company to the brink of collapse.

In the letter, Liddy says the unit's 25 highest-paid contract employees will reduce their salaries to $1 this year and all other officers in the unit will reduce their salaries by 10 percent. Other "non-cash compensation" will be reduced or eliminated.

Liddy, who took the helm of the company in September after it had nearly failed, also refers to a conversation he had with Geithner last week, which the AIG chief describes as "a difficult one for me."

Liddy says in the letter that he personally does not receive a bonus, but that some bonus payments are unavoidable, because they are binding legal obligations of the company, and "there are serious legal, as well as business consequences for not paying."

Some of the bonus payments are due on Sunday, according to the letter.

During the conversation Wednesday, Geithner told Liddy that millions of dollars in bonuses to senior employees were unacceptable and needed to be renegotiated, according to a senior administration official.

While the bonuses were never a secret, the official told CNN, Geithner felt giving them "was still inappropriate, given the state of the economy and the recent restructuring of the AIG agreement."

Liddy, however, makes clear that he made the changes with trepidation, saying in the letter: "I would not be doing my job if I did not directly advise you of my grave concern about the long-term consequences of the actions we are taking today," specifying that the company will have trouble attracting and retaining "the best and the brightest ... if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury."

The company, which lost a record $62 billion dollars in the fourth quarter of 2008, has more than 74 million insurance policies issued in 130 countries around the world.

Conglomerate General Electric Co. lost its perfect credit rating Thursday when rating agency Standard & Poor's downgraded the company.

S&P said it lowered the company's rating to "AA+" from "AAA," because it expects the worsening economy to cause GE's holdings to deteriorate in value. GE's finance arm GE Capital Corp. (GECC) also received a one-notch downgrade to AA+.

"We believe that GECC is under increasing earnings pressure, due to the recent sharp deterioration in general economic conditions around the globe," said Standard & Poor's credit analyst Robert Schulz. "This will result, in our opinion, in rising credit losses across key segments of finance portfolio."

The rating agency said that it still believes that GE is on solid footing, predicting that the multinational company will be able to generate about $2 billion in cash flow due to its huge reduction of its dividend to 10 cents from 31 cents late last month.

"We expect GE's commitment to maintaining very high credit quality, the still-solid prospects for many of its business segments (despite economic weakness), and the company's ample financial flexibility should continue to support the ratings at the current level and the stable outlook," added Schulz.

GE was one of only six American companies to hold AAA status. The five remaining are Berkshire Hathaway Inc. (BRK.A), Automatic Data Processing (ADP, Fortune 500), Exxon Mobil Corp. (XOM, Fortune 500), Johnson & Johnson (JNJ, Fortune 500) and Microsoft Corp (MSFT, Fortune 500).

An AAA credit rating allows a company to borrow at cheaper rates, but it also requires a significant amount of cash on hand, which GE was unable to maintain with its escalating debt.

GE said it will not change its business practices despite the downgrade, noting that it has taken steps to ensure that its balance sheet and liquidity position were bolstered.

"As we have previously said, we are prepared to fund the company as a double-A, but we will continue to run GE with the disciplines of a triple-A company, which means low leverage, high liquidity and strong risk disciplines," said Jeff Immelt, GE chief executive. "While no one likes a downgrade, this review and rating reaffirm the relative strength of the company."

John Bergenson, portfolio manager of Albion Management Group, said GE's downgrade was expected.

"It's not that much of surprise, because of their debt situation and the amount of fear that's out there," said Bergenson, who runs a mutual fund with GE as its top holding. "In the current environment, with that amount of debt, it's probably been due for a while."

Shares of GE (GE, Fortune 500) soared more than 11% in early trading. Bergenson said investors felt relief after worrying GE would be downgraded by several notches instead of just one.
Trouble with AAA rating

To maintain the rare AAA rating, experts say GE had to exert extra caution, costing the company billions of dollars in security measures.

"AAA has a sort-of saintly symbolism, -- usually only governments have AAA ratings," said Sylvain Raynes, principal of R&R Consulting, a company that helps clients value its securities. "A company that wants to be AAA is giving up on things that are important to most companies, like leverage and experimenting with new systems that could be fly-by-night."

Ann Rutledge, also of R&R Consulting, called the downgrade "a defining moment for GE," expecting more downgrades from other agencies to come, followed by GE's credit rating slipping even further in the future.

"No one is going to panic here," said Rutledge. "GE will have to pay a little more for capital, and the transcendental feeling of comfort and security is gone, but the impact is more qualitative and quantitative."

Still, when insurer American International Group (AIG, Fortune 500) lost its AAA rating in 2005, the company started on a downward spiral that forced it to raise more and more capital. Bond insurer Ambac Financial Group (ABK) lost its AAA rating in January of 2008, and its stock is currently trading at less than $1 a share.

"No one believed in AIG or Ambac, because they were houses of cards," said Rutledge. "But GE is so far away from not paying its bills, it's ridiculous. GE already began taking measures since it was put on credit-watch negative."

Bergenson thinks that GE needs to focus on finding a way to spin off its ailing GE Capital wing before it attempts to reclaim its AAA rating.

"The unfortunate situation GE is in is they bet too big on the AAA rating," he said. "I'm hoping that they just deal with what they need to within the company and forget about the AAA for the short-term. But it wouldn't surprise me if they break their back to get the AAA back."

Chief executives of leading Japanese, European and U.S. banks will meet in London to discuss the future of the financial system, the Nikkei newspaper reported Sunday, as the global financial crisis prompts a barrage of new regulatory proposals for the sector.

The Japanese business daily said the British government would host the meeting on March 24, after a Group of 20 (G20) finance ministers meeting in London next weekend and ahead of a summit of G20 leaders there on April 2.

The G20 summit of big developed and developing countries in London aims to put the world economy on a path to recovery, with banks facing strong calls for new regulations ranging from increased supervision of the financial sector to limits on executive bonuses.

Invitations to the meeting of bankers had been sent to leading institutions including JPMorgan Chase (JPM, Fortune 500) and HSBC (HBC), the newspaper said, without naming any sources.

Mitsubishi UFJ Financial Group president Nobuo Kuroyanagi would attend the meeting, which the paper said would discuss regulations to prevent further crises similar to the meltdown of the subprime mortgage market.

The London summit will follow last November's G20 crisis meeting in Washington, and aims to agree on coordinated actions to revive the global economy, regulate the financial sector and principles for reforming international financial institutions.

In the lead up to the summit, European leaders have called for tighter global banking supervision while President Obama has urged a sweeping overhaul of Wall Street regulations.

The European Commission's proposals range from tougher bank capital rules to streamlining supervision, more transparency in derivatives markets and proposals to penalize banks whose remuneration policies encourage excessive risk-taking.

China said Saturday it wanted a major say in talks about reworking the global financial order and there should be more power for developing countries in the International Monetary Fund and World Bank.