All posts by Sam Dinkin

How to Subsidize Space Transportation

There are a variety of ways to subsidize space transportation. Rand’s idea to implement my proposal is a good one. I chose the $15 billion number not because I thought it was the minimum necessary to kick start the industry, but to beg the question about what we are getting from NASA for the same amount of money. I do not propose to use new spending.

Instead of an auction for launch services, followed by a delivery of cash on completion of the launch there are several other ways to implement a subsidy:

  • Have a box on the launcher’s corporate tax return that says payload to orbit
  • Have a box on the customer’s corporate tax return that says payload to orbit
  • An application like student aid or a federal housing loan with a fixed subsidy level that is adjusted periodically based on the rate of takeup

Rand’s auction is simple and would set the price in advance of flying which would be good.

As for popularity, it will take someone like Eisenhower or Kelly to make this happen. If someone can make the case for California stem cells, the case for space access ought to be possible.

Don’t Wait for Cheap Orbital Access

See my proposal for a decentralized approach to developing space in this week’s The Space Review here. What people don’t seem to understand about my subsidy proposal that I first put forward last year (See recommendations 10 and 14) is that NASA and DoD would no longer be directing the space programs. It would be private industry and individual citizens who could book whatever missions they wanted. That would lead to the following benefits:

1) Freedom and liberty
2) Capitalism instead of central planning allocating capacity
3) Private development instead of government development

Government would be the primary beneficiary of cost savings since they are the primary space user. They would have more responsibility since all of space would become open for business.

Private industry and citizens would have new services that would be less valuable at first, but would be more price elastic than the government demand.

Give It a Break

John Schwartz of NYT has written “NASA Is Said to Loosen Risk Standards for Shuttle” published today. My cost benefit analysis is here.

The statistics can be simplified. What are the failure modes? What are their probabilities? How much do those probabilities overlap? What rate is it OK for the shuttle to fail? How much does it cost to mitigate the failure modes? Stack rank them according to the highest increase in safety for the lowest cost. Go to work.

So we have a failure mode of about 1% based on 100 trials. So far it has cost $2 billion to mitigate it. That implies that NASA is acting as if the value of the orbiter and crew on each flight is $7 billion or more to make the benefits of the fix outweigh the cost ($2 billlion to achieve a less than 1% reduction in the probability of a fail in 28 flights. $2 billion/(28 * 1%) = $7 billion). The families of the 9/11 victims each received $2.1 million. To compensate the families of astronauts who may die at the same level would cost $15 million. At commercial prices of $16 million for a Falcon V which delivers about 1/4 of a shuttle’s worth to the ISS, we could buy 443 flights for $7 billion not counting range and payload costs or over 100 shuttles flights’ worth. Even using the Ariane at $4,000/lb according to Futron’s 2002 price estimate we could buy 28 shuttle flights’ worth of Ariane payload for $5.6 billion. With viable outside commercial options that are less expensive to build and operate than the shuttle is to just operate, the sale price of the shuttle would be zero. We should not be treating it like a $7 billion asset. So perhaps the cost/benefit analysis is a little off at NASA.

Or maybe the following quote from AWST, 4/11/2005 (subscription required) will give you a better feel for what is really going on at NASA:

“We had one place in the backpack where, because of the confined space, the wire bend was tighter than the specified engineering limit was. And the EVA folks said it will cost us $100,000 to fix this,” [Wayne Hale, the deputy shuttle program manager] said. “Well, in the space business, $100,000 is not a lot of money, so I said go fix this.”

This man should be relieved and someone put in place someone who can explain cost-benefit to the public.

End of Newspapers

The Economist quotes Rupert Murdoch saying so. I predict a set of better paid part time specialist bloggers taking over for the generalist newspaper journalists. It may happen soon:

Whereas 56% of Americans haven’t heard of blogs, and only 3% read them daily, among the young they are standard fare, with 44% of online Americans aged 18-29 reading them often, according to a poll by CNN/USA Today/Gallup.

The Sin of Inaction

There is an interesting argument going on here about my article on Orion. I am cc’ing you the following:

I always thought the active-passive distinction in philosphy and law was a cop out. We are just as responsible for the millions who die from our inaction as we are for murder. If you are consciously not donating to a hunger fund with the understanding that the inevitable consequence is that an additional person will die of hunger, it is tantamount to first degree murder.

There is an active choice to be part of coal deaths. Every time we turn on a light switch, we actively increase the coal output that kills tens of thousands per year or more. So each flick is increasing the likelihood of death. It is therefore self-deception to suggest that moving in the direction of safety is a sinless course. It is just murder too common to prosecute.

So if we can all agree that we are a civilization of murderers, then we can get on to real questions like is it better to kill people with atmospheric nuclear explosions to colonize the solar system or kill each other through inaction.

Sticking with spending $15 billion/year on chemical rockets instead of half on nuclear rockets and half on defibrillators is killing hundreds of thousands.

I would give my life to colonize the planets. Our focus on saving every life is penny wise and pound foolish.

Do people avoid having children so that all their cells can die a natural death? Envision all humanity as cells of a greater organism, the global species. Envision that it is time to have a child species on another planet. Isn’t that worth the death of millions or hundreds of millions if new billions will spring into existence? I am asking for dozens possibly killed offset by savings thousands of others that would otherwise be killed.

I don’t expect to fundamentally change dinosaur thinking. “I will not kill anyone to save the species from the asteroid that has our species’ name on it.” But be aware of the systematic cost of the capricous risk aversion we impose in the name of morality.

Virgin Galactic Taking Deposits

I don’t know if they read this or not, but Virgin Galactic appears to be taking money.

I got the following link in an email confirmed for all to see here.

Go quick. $20,000 refundable deposit only costs about $1200 in interest costs at today’s money market rates. No word if the deposits are transferrable.

The Near Future of High School

The baby boom echo kids (born between 1982-1995) are almost out of high school on average. It will be another 5 years of reduced enrollments until the baby boom echo echo kids start showing up in the schools. This will have implications for optimal school policy. Underlying this is a richer, better prepared, better nourished, healthier population that is increasingly going to college after high school. The high schools will increasingly adopt the trappings of junior and four-year colleges in order to adapt to the academic and funding environment.

With the schools having a temporarily sufficient capacity, there is a strong incentive for school to heavily recruit students for transfers under the No Child Left Behind Act (NCLB). The facilities costs are largely fixed. The money brought in by additional students would be marginal profit for the school system. That money could be used to provide enrichment activities for the existing student body and hold the line on general cuts in services as enrollment subsides.

NCLB encourages high schools to take a step in the direction of becoming like universities by having admissions requirements. College admissions are brutally competitive. High schools develop brands that influence college admissions officers much as the college brands influence employers. A high school needs to have high scores, achievement and diversity from its student body for the school brand to positively influence a college admission decision. It follows that a high school admission requirement be put in place to increase the academic and cultural luster of the high school.

High schools also face a budget squeeze. Money from state and federal sources is often keyed to the number of students. As the number of students fall, budgets come under pressure. Many jurisdictions have property tax caps that prevent further tax increases. School financing has a difficult battle at the ballot box as empty nesters and newlyweds grow in the demographics compared to parents of school age children. Financing pressure leads schools to turn to parents and community to establish and fund foundations and build alumni associations to assist with high school excellence. As contributions go to the foundations and the schools, the money can be used to further improve the brand and upgrade the teaching quality, supplies and equipment.

The curriculum must also evolve to become more relevant to the knowledge age. Vocational tracks should encourage students to become software developers and enter other high wage careers. As computers and the internet have nullified or inverted age stereotypes in many industries, we have already seen high school students driving new SUVs with money they earned from software development. This may be a critical national resource to tap as overseas competition forces older workers even higher up the value chain.

It will no longer be enough to simply offer AP courses. High schools will need to start considering hiring ever more qualified and illustrious professionals to teach their college courses. If many students are taking AP courses, the school must compete with the junior colleges, community colleges and four year universities for staff. With those staff will come research opportunities for students that rival those at highly rated universities. Those will be necessary to match the bios of the Intel Science Talent Search winners. As hundreds of schools aspire to be the next Bronx Science, Bronx Science is aspiring to be the next Caltech and already boasts six Nobel Prize winning alumni. High school researchers from the baby boom echo echo may well be the source of the next shot heard round the world.

Ten Tax Loopholes

Here are some counterintuitive tax loopholes to ponder:

  1. Savers can separate high and low income securities. Pre-tax savings instruments such as 401k, 403b and 529 plans are taxed at ordinary income tax rates when the money is withdrawn. This is great because it avoids double taxation of both income tax and capital gains tax. It is worth considering where it is most beneficial to put different types of securities from a broad portfolio. Even though the accounts are tax advantaged, the tax advantage all comes at the head end when money is put into the account. Once it is in the account, it is tax disadvantaged due to the high rate when it is withdrawn. (529s only avoid this for a few years while the beneficiary has a lower tax rate than the maximum). Thus if a portfolio has some securities with high expected return (like high beta risky securities), they incur lower taxes in a post-tax account so that upon withdrawal only capital gains of 20% are paid. Bonds and low risk securities belong in the 401k, 403b or other pre-tax account because they will pay out 35% (or higher if taxes go up) when they are withdrawn.
  2. Savers can back load non-matched 401k deposits. The tax benefit accrues if contributions to a 401k occur at whatever time during a year. If that all occurs on December 31, then the growth occurring at ordinary income tax rates has on average a half a year less to accumulate. Here is a strategy that compares favorably with contributing to a 401k all through the year. If money is placed in S&P 500 depository receipts (SPDRs) during the year, if it goes up a saver can borrow against it and put that money into a 401k and sell the SPDRs after a year and book the long term capital gain, holding cash in the 401k, then buying SPDRs in the 401k when it is sold in the cash account. If SPDR prices go down, they can be sold, the capital loss booked and the SPDRs rebought in the 401k. The reduction from 35% to 20% tax on the gains can make up for a lot of margin interest.

    There are some disadvantages to this loophole. Note that there are maximums to 401k contributions so the saver probably needs to start earlier. If the saver’s job security is in doubt, it would be wise to start even earlier because some jobs have a waiting period before contributions may start. Finally, the saver may need the help with the will power that contributing every month brings.

    (Note: for matched deposits, the doubling of the principle earning income offsets any savings in taxation so those contributions are not subject to this loophole.)

  3. Savers can actively convert ordinary income into capital gains. If securities prices rise and fall together, then they can be used to induce “spooky action at a distance”. Einstein coined the phrase to talked about quantum entanglement of particles. Suppose instead we have two entangled investments. If a cash (post-tax) account holds a short position in a risky security and the 401k or 403b holds a long position in the same security, one account will rise and the other will fall as an exact mirror image.

    To mix another metaphor from physics, the custodian of the accounts can behave like Maxwell’s Demon who lets energetic particles through a door and sends slow particles back the other way. Dinkin’s Demon is going to close both positions after one year if the price of the risky security falls and keep positions where the risky security rises. There entropy in thermodynamics that makes Maxwell’s Demon expensive. Dinkin’s Demon only costs commissions. The risky security is held both long and short so all the security has to do is oscillate to generate the opportunity for money to flow from the pre-tax account to the post tax account.

  4. Saver’s can actively convert capital gains and ordinary income into Roth IRA appreciation. The previous loophole would be even wider if the post tax account was a Roth IRA, an account where growth is not taxed. Then no tax would be due on the gains. It would also be quicker because the trade could take one day because there would be no waiting period for the long term capital gains. Not everyone qualifies, however, for a Roth IRA.
  5. Earners can take income in alternate years to avoid estimated taxes. The IRS requires that payments be made to the US Treasury that are the minimum of 90% of current year’s tax due or 100-110% of last year’s tax. If money is earned in alternate years, the minimum will always be zero. Since payments are due annually instead of quarterly, six months interest can be earned on taxes.
  6. Earners can backload regular withholding. There are high penalties associated with the following loophole if it is not executed correctly. By changing the W-4 to have lots of extra withholding in December, it is possible to keep and earn interest on most of the earner’s money that would otherwise be withheld about a half a year extra. Having the high month be November is a little safer because it gives time to correct an accounting error (or find a new job) for December.
  7. Earners can form a partnership to earn dividends instead of wages. Dividends are taxed at ordinary income rates. Wages also require Medicare. The economic incidence of Medicare taxes is twice the employee share of 1.45%. That is, by converting wages to dividends, marginal taxes can be cut by 2.9%. Many states have taxes on partnership and corporate earnings that offset this, but not all. IRS does not look kindly on exclusively paying dividends and not wages so they are on to the loophole. But the loophole is still open for a typical division of profits and salary.
  8. Owners can pay out capital gains instead of cash. One of the biggest drivers of the technology economy was the differential taxation between capital gains and ordinary income. By paying very little cash and making it up with stock or stock option compensation, firms could reduce the tax load of their employees. If the money that was being used for salary and benefits was instead put into a share buyback to reduce the number of shares outstanding, the price of the shares would steadily rise even if the value of the firm stays constant or falls.

    For example, suppose a firm is worth $100 million and stays exactly the same total value. Suppose there are 100 million shares outstanding at $1.00 each. Suppose the firm pays $100 million/year in compensation. If employees and management agreed, 25 million options could be issued, cash compensation reduced, and $50 million (and a $49 million loan) could be used to buy up 99% of the outstanding stock at $1.01, then 8.33 million shares resold. (A synthetic 1 for 3 reverse split). The price per share after the buyback would be $3. The employees would have $50 million in capital gains that they would pay $10 million in taxes on if they exercise the options and hold them for a year so they have $40 million in gains post tax. Compare that to the $50 million they receive in cash. The $50 million would be taxed at ordinary income tax rates so the employees would have only $32.5 million if they are in the 35% bracket. If they are in the 25% bracket, they and their employers have to pay social security so take home pay is roughly the same with cash, but lower brackets do even better with capital gains.

  9. Taxpayers can start a schedule C business. There is a 2% limitation on miscellaneous tax deductions. There is no minimum on schedule C deductions which can be deducted from the first dollar.
  10. High tax payers can renounce citizenship before making too much money. The United States has a mean streak. It has evolved beyond ‘love it or leave it’ to ‘if you leave it we want your money’. If taxpayers pay more than $122,000 in taxes, they may be liable for 10 years of additional taxes if they decide to renounce their citizenship. This way of avoiding taxes will probably become less popular if estate taxes are reduced or eliminated.

An Alternative View of Alternative Minimum Tax

There is a strong case for flat taxes. They reduce compliance (and avoidance) costs. They create a very broad base for taxes that in turn distort the economy less and have a lower dead weight social loss. The Economist says that they may be practical and feasible.

The conventional wisdom from (NYT, April 10) is that alternative minimum taxes (AMT) are bad news. An alternative view is that they are a back door way to get a flat tax. The number of people who pay AMT is expected to grow to $200 billion projected in 2015. This growth is due to three factors: deductions get more generous, maximum marginal rates stay low due to the tax cut, and inflation and growth steadily increase income. While $200 billion less than 5% of the federal budget and less than 1% of the $20 trillion economy (in 2000 constant dollars) projected for 2015, it is still a significant portion of taxpayers paying a flat tax.

If US wants a flat tax, it should do nothing about AMT, it should increase deductions like crazy and reduce the marginal rate of the non-flat tax further. For those worried about the budget deficit, the AMT rate can be raised, or perhaps Medicare and Social Security rationalized.