While the passage of the American Taxpayer Relief Act of 2012 offered some certainty in the final hour, the headache is not over, according to George K. Yin, Professor of Law and Taxation at the University of Virginia School of Law. Yin, who served as the chief of staff of the U.S. Congress's Joint Committee on Taxation from 2003 to 2005, shares his thoughts with Associate Editor Mason Braswell on what the deal means for the economy and how the tax debate could play out in 2013
1. How do you define the two sides of this debate?
The most recent fiscal cliff deal may reflect the fact that there is precious little difference in the views of the administration on one hand and the Republicans in Congress on the other. If you believe the rhetoric and the reality, both sides agree on the need for the reduced income tax rates that were first initiated by the second President Bush in 2001. Those were extended and now have been made permanent going forward. The only difference is for a very tiny sliver of the upper-income population—less than the top 1%—where the rates will go up almost a minimal amount of three to four percentage points. That was the basic debate between these two sides, and ultimately the President's side prevailed. And the President did compromise by allowing the rates to go up for a smaller sliver than he campaigned on.
2. Why was a consensus so difficult?
It took so long partly because that one little sliver became a symbolic sticking point. Neither side wanted to give in even a little bit. There was also debate because there are larger issues. Many people feel the tax side is just one part of a larger issue, which includes spending and the general fiscal situation of the country. On those points, all of the leaders in both parties disappointed the country because they made no inroads.
3. What's left to address down the road?
They left a big deadline that is going to recur in less than two months, both in terms of the delayed spending cuts and the deficit. They're going to have to reconsider those cuts and what they want to go into effect. That debate will roughly coincide with the expiration of the debt ceiling. Actually, we've already hit the debt ceiling, but that's when the government will run out of any ability to pay its bills. Those two things are coming up immediately. Beyond that, by not doing anything to address the larger problem of the fiscal imbalance in the country, they've left everything up in the air. If, as projected, we can't pay the bills in the coming years, then something's got to give.
4. How could taxes re-enter that conversation later this year?
Unfortunately, the government lost its best chance to get it done. There are any number of ways to raise revenue, but all of them are going to require an affirmative vote on the part of enough members of Congress. It's hard to envision that happening any time soon given what we've just seen. There has to be some activity or action in the country that forces their hand, some kind of crisis coming out of the markets or world economy. There has to be something that instills such a sense of fear into our political leaders that they decide it's time to act in an affirmative way. Obviously there's going to be a fight. The Democrats are saying the tax issue is not completely resolved and want more revenue going forward. The Republicans are saying, "You already had your chance. We did what we're going to do, and we're not going do any more." A lot is simply going to be how the politics play out. It may be we get through 2013 and the next few years without any changes. But if you take a look at the larger picture, you realize that as the President said during the campaign, the arithmetic doesn't work.
5. What were some positives from the deal for the U.S. economy?
First, they did settle on a so-called permanent basis for the lingering tax uncertainty—and one hopes that provides some greater assurance to the country and businesses so that they will be productive from an economic standpoint. The cloud that was hanging over the country for so long has been lifted, which might help to spur economic growth. That's obviously a hope, but a very optimistic one. Second, they did maintain parity in the taxation of capital gains and dividends. When they are different, you create inefficiencies and distortions. The tax lawyers and tax advisors are very smart, and all you do then is generate a certain amount of wasteful activity to try to make sure that the income of your client is characterized in one way or the other depending on which one is taxed more favorably. You want to benefit the country, not the lawyers.