Book Review: The Pale King by David Foster Wallace

The_Pale_KingI bought this book a few years ago but delayed reading it until this Spring. Maybe I was afraid of thinking about the trauma of his suicide while reading it. I shouldn’t have worried. There are autobiographical elements in here I assume…He has a semi-absurd character with a dramatic sweating disorder, which I’m guessing from the opening line of his Kenyon graduation speech he sometimes also suffered from. But he’s not dwelling in an obvious way on suicidal ideation. On the contrary he seems to be mulling cures for depression, through a kind of learned meditative technique for life.

The recurring theme of The Pale King is boredom, and maintaining a kind of alert concentration throughout that boredom.

My guess is he picked the location of an IRS examination office in flat, empty, off-the-highway Peoria, Illinois as an extreme setting for testing his ideas, but also for testing himself. Is he a good enough writer to make even that topic (boredom) and that setting (an IRS examiner’s office) still scintillating writing? Of course he can. He’s freaking David Foster Wallace. During the week of filing another year’s worth of taxes, I recommend reading a great novel about IRS examiners.

David Foster Wallace is among my top three all time favorite authors,1 so I’m not surprised I enjoyed The Pale King  so much.

On one page Wallace plays the straight man, describing incredibly detailed inner thoughts of a character, or the minutiae of a scene in hyper-realism. And in the next page he switches it up by introducing an absurdity, like a tax reviewer who levitates right out of his chair when concentrating hard enough, or an IRS building with an entire front-entrance facade designed to look like a 1040 tax form.

David_Foster_WallaceJust like with Infinite Jest, he fractures the narrative – jumping time, location, perspective, and characters without warning. If you link Wallace’s fractal together to figure out who all the narrators and character are, that’s fine, but not necessary to enjoy this on your first read-through. A few essays ran earlier in the New Yorker and stand alone as individual chapters.

Some of his chapters are unforgettable. The nerd examiner and the unbearably pretty girl at the post-work bar, she with the tragic love story and he with the levitating powers of concentration. The absurd goody two-shoes who as a child drove everyone completely bonkers. The centerfold chapter with the never-ending “how I became an IRS examiner” childhood story of trauma and slackerism, nearly a complete novel in itself full of family psychological drama and insights. The sweating man trying to avoid triggering his sweat response. The infinite-mirror-meta-story of an IRS trainee named “David Foster Wallace” who arrives at the Peoria office, only to suffer a mixed up-identity with another more senior IRS examiner David Wallace, blended with an “author’s forward” by “David Foster Wallace” to claim all of the story is “true.” Typical post-post-post-modern DFW bullshit but totally enjoyable from my perspective, complete with diversionary and diverting footnotes as rabbit-holes.

That famous graduation speech in fact from 2005 captures some of what I think he’s trying to do in The Pale King. How do we maintain a meditative (Buddhist?) attentiveness, even while surrounded by deadening bureaucracy or deadening inputs from normal adult life?

Clearly he didn’t have answers in his own life. But he suggested a sort of path for us to try to follow. He couldn’t do it. But we can keep trying.

Please see related posts:

All Bankers Anonymous Book Review In One Place

 

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  1. Peter Matthiessen and Nabokov thanks for asking

Where Are The Fiscal Conservatives On War Costs?

Where is the fiscal conservative voice to cut federal defense spending?

war_costsI’m on the fiscal conservative team. By that, I mean that I believe responsible government expenditure includes a plan for paying government obligations. Sometimes that means cutting spending. Sometimes that means raising taxes.

If you’re a fiscal conservative in Congress and you voted this month to increase the federal debt by “only” $1 trillion over the next ten years through tax cuts targeted to business owners, you’re not playing for my team this year. You’re benched.

But more importantly, if you cut taxes to increase the deficit and you don’t even consider cutting our massive defense spending, then I’m sorry, you’re not a fiscal conservative. You’re off my team permanently. Hit the showers. Just leave your uniform by your locker, you won’t need it anymore.

The problem is nobody even shows up for my team anymore, Democrat or Republican.

Ryan_McConnell
You guys are off the team, hit the showers.

Where is the anti defense-spending wing of Congress? Does it even exist? Ever since 9/11, Democrats and Republicans have fallen all over themselves to shovel money at our military. I wrote recently about the waste, fraud, and abuse of our unending commitment to rebuilding Afghanistan. The bigger fiscal issue is our extraordinary commitment to wars since 9/11.

Here are some facts that matter for a discussion on federal fiscal responsibility.

Net federal debt stands at about $14.8 trillion.

Only 3 big areas really count when it comes to controlling federal spending. One is “discretionary,” and two are “non-discretionary,” otherwise known as “entitlements.” These two latter categories are made up largely of Social Security/Welfare and Medicare/Health Care costs.

The US spends roughly $600 billion per year directly on our Department of Defense, a larger amount than the next 8 countries combined: China, Russia, Saudi Arabia, UK, India, France, Japan, and Germany.

The Department of Defense budget makes up 54 percent of “discretionary” spending in the federal budget, meaning Congress has a choice of what to spend each year. If fiscal conservatives aren’t talking about this spending, they’re not addressing the single biggest use of resources over which Congress has control.

Some of you paying very close attention now want to talk to me about entitlements spending. Fine. Just gimme a second to finish some thoughts on defense spending and I’ll get back to entitlements in a moment. I promise.

Leaders in our discussion about the impending tax breaks like to talk about the theoretical average savings for a middle class family after tax cuts. We hear a number like $1,182 (from House Speaker Paul Ryan). While overly simple, perhaps we should understand our wars since 2001 in such basic per-household terms as well.

There’s both the narrow view and there’s the more complete view of what these wars cost each household.

The Department of Defense (DoD) takes a narrow view of accounting for the cost of spending on Iraq/Syria and Afghanistan/Pakistan – what are called Overseas Contingency Operations (OCO). This cost totals $1.75 trillion between 2001 and 2018, according to the DoD. The DoD then breaks down that $1.75 trillion into “cost per taxpayer,” at $7,740.

We don’t normally think of reducing military expenses as the way to make every taxpayer $7,740 richer, but it’s a legitimate a way to think of it, in my view.

Probably, however, the DoD’s estimates of war-cost-per-taxpayer come in way too low, according to Boston University professor Neta Crawford, author of the recently updated article “The Costs of War.”

Taking into fuller consideration the increased State, Homeland Security, and Veteran Administration’s costs, plus the increase in a baseline budget for the DoD on a war footing, Crawford estimates the Global War on Terror since 2001 has cost the country approximately $5 trillion.

As Crawford argues, this $5 trillion price tag actually skews conservative, as it does not include huge categories of costs such as state and local expenditures, many non-federal forms of veteran’s care, and costs externalized to families. Crawford’s conservative estimate means the wars since 9/11 have cost $23,386 per taxpayer. Personally, I’d like to be $23,386 richer.

I’m not mentioning the even more important human costs of war like death and injury and misery, since this is a financial column, but yes, those are even more important than the dollars and cents. I’m also not saying, obviously, that we need to eliminate the military. I’m saying that if you’re a real fiscal conservative, you have to be talking about winding down the wars and cutting military spending to a more sustainable level.


Now you want to talk about entitlements spending on Social Security, welfare, Medicare. Ok fine, let’s do that.

“Entitlements” is an apparently confusing word that sounds either moralistic, or somehow immoral, depending on if you like entitlements-spending or not. But that’s missing what the technical term means. It means instead that the federal government adopts a certain set of criteria for payments, and that it is then obligated to make those payments, regardless of budgetary decision-making by Congress. It means we essentially don’t budget for entitlements. The payments get made according to pre-set criteria and we deal with the financial consequences once payments are made.

War_costsAnd sure, we shouldn’t forget about entitlements spending either. But these issues are already part of active political debate daily: ACA repeal, Medicaid cuts, Social Security reform. As a fiscal conservative, I am quite confident that a significant group of powerful people is working to limit two of the three big expenses of government: healthcare and Social Security. Entitlements spending isn’t likely to get out of control with such hawk-eyed defenders of our financial situation. But I keep looking and I can’t find a fiscal conservative wing fighting to limit the one thing Congress can control each year – our war spending.

Can we end these wars and balance our budget? I don’t need my tax break as badly as I want my peace dividend.

 

Please see related post:
SIGAR and Afghanistan Waste

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The GOP Tax Reform’s True Target

unified_frameworkTaxes form the backbone of the relationship between government and the governed, revealing most starkly what we value as a society. Spoiler alert: We value business owners and investors.

The most dramatic proposal to emerge from “The Unified Framework For Fixing Our Broken Tax Code”  announced last Wednesday from GOP leadership in Congress and President Trump is the drop in the top corporate tax rate from 35 percent to 20 percent. Other provisions to encourage more investment and business growth include:

  1. A one-time low-tax incentive for on-shoring money held by corporations overseas,
  2. The option for faster expensing of capital investments over the next five years, to incentivize further investment and lower corporate taxes, and
  3. Because 95 percent of businesses are organized as LLCs and LPs subject to “individual pass-through taxation,” paying individual (aka personal) tax rates, the proposed framework would lower top tax rates for such businesses to 25 percent, well below the proposed 35 percent top personal tax rate.

The net effect of this sweeping tax reform would dramatically lower the burden of taxes on businesses. Initial estimates of lower tax revenues as a result of the proposal cite $5 trillion less in revenue, and possibly $1.5 trillion in increased federal debt, over the next 10 years.

Do not get overly distracted by proposals regarding household or individual taxation, because the framework’s central bet is the following: If businesses are the job creators and businesses make most investments in this country, then businesses will be the engine of economic growth and national economic strength. Treat businesses well, and plentiful jobs, higher salaries, increased investment, and national prosperity will follow. That’s the guiding theory of this tax reform. If that theory turns out to be true, this reform will be hailed by future generations as a smashing success.

On the individual and household side, the proposal would reduce the need for most itemization on a tax return by doubling standard household deductions, and it proposes three individual and household tax brackets, with an option for a fourth bracket, targeted at higher earners.

Also on the individual side, the proposal would eliminate the Alternative Minimum Tax, and the estate tax, which only affects 0.2 percent of deceased’s estates. These two proposals would only benefit high earners (subject to the AMT) and the very wealthy (subject to the estate tax), respectively.

So what to think about this proposal?

First, let’s talk about simplification, a stated goal of reformers. Simplicity in a new tax code doesn’t derive from a smaller number of tax brackets, but rather from eliminating itemized deductions, loopholes, and abolishing the AMT.

paul_ryan_white_people
#PaulRyanSoWhite

Perhaps cleverly, but ominously, the framework does not specify whether and how certain deductions popular with businesses and households will survive or not. We know many targeted tax breaks (aka loopholes) must be eliminated, however, to make up revenue lost by lower corporate and household tax rates overall.

That is left, as of now, to the future sausage-making congressional committee process. The basic problem is that everybody likes to keep their own loopholes (which are job-creating and fair, naturally) while eliminating everybody else’s loopholes (which are unfair and benefit special-interests, naturally). There’s a fight to be had there.

The more sweeping the loophole-elimination, the closer we get to the Shangri-La of tax reform: tax filing on one single page, prepared in less than an hour, without hiring a tax specialist. But it’s politically challenging to eliminate loopholes to which specific powerful constituencies have become attached. Getting to simplicity, therefore, won’t be simple.

Next, let’s talk politics.

The political stakes of tax reform could not be higher for the Trump Presidency. This is his legacy moment, as well as the legacy moment for House and Senate GOP leadership.

For many, President Ronald Reagan’s signature triumph was the Tax Reform Act of 1986, forged in compromise with a Democratic House led by House Speaker Tip O’Neill. Top tax rates came down, the code was simplified, the bull market in stocks roared. We remember Reagan’s presidency as a time of increasing national prosperity. Could Trump make this his legacy too?

The political body-language between the President and the Republican leadership of Mitch McConnell in the Senate and Paul Ryan in the House has always been one of mutual wariness and uncomfortable tolerance, at best. The calculation for the fiscally-oriented wing of the Republican party, led by Ryan, is that all of it will have been worth it if they can accomplish comprehensive tax reform in 2017. If they can pull it off, the historic legacies of Paul Ryan, Mitch McConnell, and Donald Trump are dramatically bolstered.

Finally, how to react personally, to upcoming tax reform?

If you are already a business owner, this is a thrilling tax reform proposal. Like seriously, chills and fist-bumps all around. By now you’ve probably already posted on Instagram with LOLOLOL OMG <3 <3 <3 Paul Ryan 4-Eva written in red lipstick font over a selfie of you in a bro-hug with your investors.

paul_ryan_workoutBut if you are currently a salaried employee, what’s in this reform for you? Consider this: If you are a wage earner, rather than a business owner, the framework suggests you are basically doing it wrong. The current proposal to change so-called pass-through taxation of small businesses like LLCs and LPs from top rates like 35 percent to a top rate of 25 percent means that everybody (and their mother!) should earn money only through a business like an LLC or an LP, not through a salary paid by someone else.

I, for example, need to stop charging money personally for my writing, and rather quickly open up “The Smart Money Business Columnist Thing LLC,” a financial opinions consultancy business, and sell my columns to the newspaper as a business service. My income tax rate could be a lot lower that way, under the latest proposal. You need to do the same.

The framework says vaguely that it “contemplates that the committees will adopt measures to prevent the recharacterization of personal income into business income,” but, well, we’ll see. In the meantime, wage earners, open up your LLC and become a business owner.

 

Please see related posts:

Adult Conversation about Income Tax Policy

Death Tax is my Favorite Tax

 

 

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A Budget Discussion Thats Not Stoopid

As of last week, your income taxes are all filed. Congrats! Or, like me, you got an extension. Boo!

federal_spendingIn either case, it’s a good week to think about what our tax money bought this year. And since we’ve all been promised federal tax reform this spring or summer from a unified legislative and executive branch it’s also good to reflect on how the federal government spends our tax dollars now, and how it might spend them in the future.

A simple way to understand federal government spending is to compare it to a household. I don’t mean governments should be run like households – they shouldn’t – I just mean that we taxpayers can understand numbers that resemble the size of our expenditures in our own life. Otherwise you know, a billion here and a trillion there, it can get confusing.

The median household income in 2015, according to the US Census, was $55,775. With simplicity as my goal I prefer an easier, rounder number. So let’s just say instead of the median, we have $100,000 to spend each year as a household.

Looking at the federal government as a household with $100,000 in annual income, here’s where all the money goes, rounded to the nearest hundred dollars.

  1. Our federal government household paid $33,300 for a combination of Social Security, unemployment payments, food assistance, housing assistance, welfare, and labor costs. All of these are considered “mandatory” in the sense that they are promised payments, and not voted on in a budgetary process each year by Congress.
  2. We paid $27,400 on Medicare and other federal health-care costs. This is also “mandatory” and outside of the annual budgeting and decision-making process. The bill just comes in the mail and we pay it, no questions asked.
  3. Our household paid $15,800 for military expenditures. This is considered “discretionary” spending, so Congress must approve an annual budget for setting this amount.
  4. We spent $6,000 on debt interest, our household credit card. This is not discretionary if we ever want to be able to borrow again.
  5. Lastly, everything else cost $17,500 in 2015, also part of the “discretionary” part of the budget approved by Congress. That includes everything from veteran’s benefits to transportation, and from energy and the environment to education and international affairs.

 

So…what do we think of that? If you were in Congress looking to rein in spending as the majority party, what would you cut?

On the real political spectrum there are numerous (I won’t say there are fifty) shades of grey on the topic of federal spending. But to oversimplify into black and white shades, we could say that a prototypical left-of-center voter will say “hands off Social Security and Medicare,” while a prototypical right-of-center voter will say “hands off the military.”

sacred_cowsAnd I mean, ok, sure, we all want security from foreign threats, security from catastrophic medical expenses, and security from eating cat food in our old age. So again I’m simplifying people into these two Left and Right buckets.

But since entitlement reform (Social Security, Medicare, food, unemployment and housing subsidies) and Defense budgets then become sacred cows to the Left and Right, all budgetary discussion becomes really stoopid, really fast. Elected officials don’t want to turn off half the electorate by promising to actually get serious about spending cuts, so they talk about stoopid stuff.

It’s stoopid to focus on some bad art you don’t agree with funded by the National Endowment for the Arts. It’s stoopid to complain about pointy-headed liberals getting PBS funding. It’s stoopid to focus on “waste, fraud and abuse” as a real source of cost savings in the federal government. These are mere pimples on the butt of the federal government’s spending.

We need to get more like Willie Sutton and his bank robbery strategy. Why do we need to talk about cutting entitlements and defense, Mr. Sutton? “Because that’s where the money is!”

where_the_money_isIf you’re not willing to discuss cutting both entitlements spending AND defense spending then I don’t know what to tell you except you’re not invited to my birthday party and your ideas about fiscal responsibility are stoopid too.

Having gotten that off my chest, let me say one or two sentences about why each of the three biggest sacred cows – Social Security, Medicare, and Defense – should be targets for cost-cutting at the federal level. I honestly don’t know the best way to do it. I’m just saying we could spend less on all three.

Social Security – when this program was first enacted in 1935, the average lifespan in the United States was just under 62 years. Maybe logically, people became eligible for Social Security at age 62. Would a newly-designed Social Security program set 80 as the right starting age for benefits? Maybe. Furthermore, in 1935 a 65 year-old beneficiary could expect to live until age 74, on average. Now, a 65 year-old could expect to live until age 82, on average. While that’s good news, it also means the program is far more generous, far longer, than originally intended. Sorry folks, we need to raise the eligibility age further.

Medicare – We spend 30% more than the 2nd highest-spending country-per-capita (Switzerland), and typically about double what rich countries like Canada, France, Japan spend on healthcare overall. Strangely, we have notably worse outcomes in terms of life expectancy, infant mortality and other major chronic problems such as heart disease and diabetes I don’t personally pretend to know how to cut spending and raise outcomes. And anyway, who knew health care policy could be so complicated, right? But surely we could learn a thing or two from other countries about how to bring costs down while improving health outcomes? (But please don’t call me Shirley.)

Defense – We not only pay more for defense than any other country – and three times more than #2 spender China – we pay more than the next 8 countries combined.

defense_spendingPaying too much for one’s military – to enforce global peace – is how empires always fall. Ask the Romans, the Spanish, and the English.

No more sacred cows. No more avoiding. Do the real cost cutting if you want to be taken seriously, and face the political consequences. Everything else you say about federal government cost-cutting is a joke and we’re not stoopid.

 

 

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Carbon Dividends?

Conservative_case_climate_changeEarlier this month, a blue ribbon panel of US statesmen released “The Conservative Case for Carbon Dividends,” as a way to address climate change, reduce US regulations, and to provide additional funds for working-class people.

The first interesting thing about the proposal is to note the resumes of the authors, each of whom boasts serious conservative policy bonafides.

Harvard economist Martin Feldstein, Ronald Reagan’s Chairman of the Council of Economic Advisors, joined with Harvard economist Gregory Mankiw, who held the same post under George W. Bush. Hank Paulson, Treasury Secretary under W, joined with Secretaries of State James Baker (under W) and George Shultz (under Reagan). To round out the conservative business credentials, Thomas Stephenson a partner at Sequoia Capital and Rob Walton, the former Chairman of Walmart, respectively, also authored the proposal.

The proposal is bold, conservative, and has a little something for everyone.

First, something for you climate-change people.

If you’re concerned about the melting ice cap, rising sea levels, and irreversible damage worldwide, the proposal would tax carbon-emitting industries at a starting rate of $40 per ton at the point of production – such as a refinery, a coal mine, or a port. The obvious economic incentive here would be to reduce the production of carbon emissions. In addition, taxes on carbon would ratchet upward over time.

“The idea for a tax on carbon dioxide emissions from industry has been on the back-burner for a long time among climate scientists and professionals in the oil and gas business,” says Kelly Lyons, professor of Biology at Trinity University in San Antonio, “and it’s something we could all get behind.”

climate_changeThe conservative authors argue that Obama-era regulations – a mishmash of auto-industry emissions targets, punitive regulations on coal production, financial incentives for “green energy,” and the occasional symbolic pipeline-squashing – lead to business uncertainty, higher costs, and executive branch overreach. And then it’s inevitably followed by back-lash and/or repeal, as is happening now. A carbon tax, by contrast, addresses the entire problem at once and puts a known, predictable, price on carbon reductions for the entire economy.

To gain popular buy-in, next the authors propose distributing the carbon tax revenue back to American families in the form of a dividend – rather than to fund government programs. Money, obviously, appeals to wide swathes of the left and right. The proposal estimates a family of four would receive $2,000 in the first year. As the carbon tax rate increased over time, the dividends would increase as well.

The authors note the dividends would offset higher consumer costs due to the carbon tax. Just as importantly, I’d say a dividend makes for good political optics.

The Treasury Department estimates that the bottom 70 percent of households would be net beneficiaries, financially, from carbon dividends.

Third, in what I interpret as a nod to the current direction of trade policy proposals, the authors call for a “border carbon adjustment” fee that somewhat resembles proposals for something I wrote about recently, the “destination-based cash flow tax with border adjustments.” In the carbon-dividend context, however, the point of a border adjustment fee is not necessarily nationalist trade policy, but rather to nudge other countries to also get with the program of reducing their carbon emissions.

Finally, to attract the support of a traditional conservative base, the carbon dividend would almost completely replace or phase out the EPA’s suite of regulations regarding carbon dioxide emissions. The business rationale for this plan rests on the idea that less regulation, replaced by predictable market signals, would spur investment in the private sector. The authors claim the freer market approach stands in contrast to traditional Democratic solutions of larger government and greater regulation.

Ok, so let’s be real for a moment: “carbon dividends” is a clever rebranding of “carbon tax,” which forms the core of this proposal. The tax would raise costs for energy producers such as coal and oil and gas extractors.

As part of this rebranding, the authors chose the fiscally conservative approach of redistributing funds collected going back in the form of “dividends” to taxpayers, rather than using the revenue stream to fund existing government programs.

Dr. Lyons doesn’t love the dividends approach, noting that “not everyone would agree that dividends should be sent back to consumers rather than invested in research and development on solar and wind, although I can see why giving people money back makes political sense.”

Do I think this idea will pass a unified Republican Congress and Executive branch, despite its thoughtful conservative origins? A key Trump cabinet member could be a natural ally.

Rex Tillerson, Secretary of State and formerly the CEO of Exxon, has backed the idea of a carbon tax, at least when compared to a mishmash of federal regulations on the oil and gas industry.

No doubt under a Republican president Jeb Bush, John Kasich or even Marco Rubio, these blue ribbon statesman would be guiding a conservative consensus toward a cleaner energy future. But that, right there, is probably the most interesting thought inspired by this conservative proposal.

liberty_under_waterAnother way to view this carbon tax proposal would be as a reminder – and a metaphor for – the true power of Establishment Republicans right now.

Shultz. Baker. Feldstein. Paulson. Mankiw. That’s a batting order of heavy hitters, a murderer’s row of Republican Statesmen. They made the Reagan administration what it was. They made the Bush Administrations what they were.

Which is to say, the Republican Establishment is now like a coastal city of the future, swamped and under water. The Establishment has been covered by the rising tide and heated rhetoric of an “America First” populism that disdains markets, globalization, and science.

I’d say this thoughtful conservative idea doesn’t have a snowball’s chance in Haiti of ever becoming law.

 

A version of this post ran in the San Antonio Express News and Houston Chronicle.

Please see related post:

Border-adjustment Tax – An untested idea

 

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DBCFT – An Untested Tax Policy For Strange Days

paul_ryan_tax_reformWith Congress and the White House unified under the same party, radical corporate tax reform is coming our way very soon. Although some reform is welcome, this is a column about the part of the reform that worries me the most, known by the non-mellifluous label “Destination-Based Cash Flow Tax With Border Adjustment.”

Let’s say you are a tax-policy maker in Washington and you wanted to address two problems at the same time with US businesses that make money overseas. The first problem might be that US multinationals leave a big pile – an estimated $2 trillion – of profits overseas, which they do in order to avoid having to pay our relatively high 35 percent corporate tax rate. The second problem might be that you want to create more jobs here by encouraging an “America First” approach to global trade. You would do that by giving US corporations tools to export more stuff, and maybe import less stuff, to encourage businesses to expand in the US, create jobs, and help our trade balance.

DBCFT

The solution among tax nerds is this so-called “destination-based cash flow tax with border adjustment.” It’s a mouthful, I know. The Twitterati have shortened it to #DBCFT for the newspaper readers who want to follow along this debate, in real-time.

But DBCFT is NOT just for tax nerds, it’s the core of House Speaker Paul Ryan’s “A Better Way,” the proposal that sets the blueprint for the major tax reform that’s likely to pass with Donald Trump in the White House.

DBCFT says that US companies would not get taxed on sales revenue generated outside of the country, only revenue made on sales inside of the country. It also says that US companies would pay taxes on the full value of all their imports into the US, rather than deducting import costs like other ordinary business costs.

A_Better_WayThis reform would take care of the accumulated $2 trillion pile of cash, since US multinationals would not pay US taxes on revenues generated overseas. They could onshore future profits with no consequences. Presumably some tax amnesty plan would bring in the existing pile, and there would be no incentive to create a new pile offshore.

DBCFT also appears to offer a massive subsidy to exporters through tax breaks. Like, if Apple earns $1000 in profit (to use numbers absurdly small and simple) from sales in Europe, it would owe Uncle Sam nothing, rather than the current up-to-35 percent rate, or $350. Without that tax burden, big exporters like Apple can turn around and sell stuff even more cheaply than foreign competitors.

Mission accomplished, right? On-shored profits and strengthened export businesses! Everything’s good?

Actually, we don’t know for sure.

A tax plan like this has never been implemented.

We have some economic theory about why everything will be fine – which I’ll explain in a moment – but it’s also fair to say that a massive shift like this could have unpredictable consequences. DBCFT is untested in reality, and like a lot of what’s happening in other policy areas, things could get weird.

Former Treasury Secretary and economist Larry Summers argues that DBFCT could have at least two big troubling consequences.

The first worry is that big exporting companies might generate negative tax bills in perpetuity – meaning a big tax refund every year – which seems super odd, and maybe something the US government wouldn’t really allow.

The second troubling consequence is that companies that import a lot of stuff which they then sell inside the US might have tax bills that are equal to – or bigger than – their entire amount of profits – also a weird result. It wouldn’t feel good – or be financially sustainable – to pay more in taxes than you even earned as a business.

This is scary, and potentially highly disruptive for a company that depends on imports to produce its product.

Think of the kittens?!?

Maybe a small business example can help illustrate this problem for importing companies that sell only in the United States. I have a buddy in San Antonio whose online business delivers disposable cat litter boxes to households, based on an online monthly subscription plan. GoGoGato imports Chinese-manufactured litter boxes from Canada, and then ships them to anywhere in the United States. So, he has significant import costs, and purely domestic sales.

GoGo_GatoLet’s say each imported litter box cost him $5, which he retails for $25 each, and manages to eke out a $1 profit (remember, he has shipping, marketing, packaging, and storage costs) on every box shipped.

At a 20 percent corporate tax rate (the new Paul Ryan-proposed rate) on his $1 in profit, he’d owe $0.20 in taxes on every box he sold. But under DBCFT, the $5 cost of each box imported from Canada would not be tax deductible. Instead, suddenly GoGoGato would owe taxes on $6 – That’s the $5 import cost, plus his previous $1 profit. Instead of owing $0.20 in taxes per box, he’d owe $1.20 in taxes per box, more than his entire profit per box. That’d be a business killer for GoGoGato. Litter-ally.[1]

UC Berkeley economist Alan Auerbach, an advocate for DBCFT, argues that the fears are overblown. The economist’s view is that the tax change would cause an immediate upward move in the value of the US dollar compared to other currencies, which would leave importers and exporters equally well-off from before the change.

How does that work? A strengthened US dollar – the economic theory goes – boosts imports and suppresses exports, in roughly equal proportions to the tax benefits and costs caused by DBCFT. That’s the theory anyway, which Auerbach and other tax policy experts like Kyle Pomerleau at the Tax Foundation say make fears about DBCFT overblown.

The fact that economists say “Don’t Worry!” isn’t stopping retailers, however, from heavily lobbying against the tax proposal.

With the example of even a small business like GoGoGato, it should not be surprising that big-importing retailers like Wal-Mart are gearing up to fight DBCFT.

America First?

Ready for one more potential problem with DBCFT? Summers further argues that if the US dollar appreciates by 20 percent versus other currencies as a result of DBCFT, it might cause disruptive effects on world markets. Heavily-indebted emerging market countries, for example, could find their dollar debts 20 percent more expensive to pay. Financial chaos could ensue.

In an “America First!” world we might not care about the potential devastation our tax policies cause. I would argue, however, that we brush off the risks of untested tax changes at our own great peril.

[1] I apologize.

 

 

Please see related posts:

Corporate Tax Reform is Coming

How to Evade Taxes Offshore – Wyly style

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