Interstellar Trade Would Be a Tax Nightmare
Paul Krugman is a Nobel Prize-winning economist, a respected professor at Princeton University, and an outspoken liberal columnist for the New York Times. But first and foremost, he is a huge nerd, and proud of it.
Back in the sweltering summer of 1978, Krugman's geekiness prompted him to tackle a matter of galactic importance: the economics of interstellar trade. Then a 25-year-old "oppressed" assistant professor at Yale "caught up in the academic rat race," Krugman crafted his "Theory of Interstellar Trade" to cheer himself up. Krugman's jocularity is evident throughout the paper, which was published online in 2010, thirty-two years after he stamped it out on a typewriter. Early on in the article, he even pokes fun at his chosen profession:
"While the subject of this paper is silly, the analysis actually does make sense. This paper, then, is a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics"
The key problem with interstellar trade, Krugman writes, is time dilation. When objects travel at velocities approaching the speed of light -- roughly 300,000 kilometers per second -- time moves more slowly for them compared to objects at rest. (For a great explainer of this effect, which is tied to Einstein's theory of special relativity, check out this video.) So the crew of a space-faring cargo ship might experience only ten years while thirty years or more might pass for the denizens of the planets they're traveling between. How then, does one calculate interest rates on the cost of goods sold? Trading partners will undoubtedly be many light-years apart and trips will last decades, so this is a vital issue to resolve.
Since the speeds of vessels will undoubtedly vary, but both planets should be moving through space at close enough velocities where time dilation wouldn't be a factor, Krugman contends that the interest costs should be tabulated based on the time shared by the two planets. But what about those interest rates? Won't they differ? Not necessarily, Krugman argues. Competition should lead them to equalize amongst interplanetary trading partners.
"Interstellar trading voyages can be regarded as investment projects, to be evaluated at an interest rate common to the planets," Krugman says. "From this point the effects of trade on factor prices, income distribution, and welfare can be traced out..."
"The picture of the world -- or, rather, of the universe -- which emerges is not a lunatic vision; stellar, maybe, but not lunatic."
What might drive one insane, however, are the inevitable tax headaches.
In 2009, Adam Chodorow, a professor of law and a faculty fellow at the Center for Law, Science & Technology at the Sandra Day O’Connor College of Law of Arizona State University, tried to solve the potential problems of boldly taxing where no man has taxed before. Again, time dilation would be an issue, Chodorow says. To illustrate the point, he raised the theoretical example of a deckhand, Darf McKibble, on a future trading vessel traveling at relativistic speeds, where one year on the ship is ten years on Earth.
"If we use the Earth’s frame of reference as Krugman says we must... Darf must file taxes 10 times in each of his subjective years, a significant burden for Darf. In contrast, if the answer is every [ship] year, he gets significant deferral, at least from an Earth perspective."
But if Darf is light-years distant from Earth, it will be rather difficult to file in a timely manner. Unless TurboTax finds a way to break the light speed barrier, there's no way Darf's return will arrive at the IRS before the April 15 filing deadline.
Chodorow raises another pertinent issue:
"What if Darf has investments on Earth at the same time he earns income on the ship? In that case, regardless of which year is chosen, Darf will either get significant deferral on his terrestrial income or he will be required to pay taxes on interstellar income at unreasonable intervals."
After much learned agonizing, Chodorow defers decisions on many of the finer tax details and recommends simplifying the process altogether.
"In-flight income is clearly subject to tax under current law and prevailing theory, but administrative concerns warrant excluding that income from the tax base until the intrepid taxpayer returns to Earth."
So there you have it. If you haven't finished your taxes yet, try hitching a ride on board a space ship bound for Tau Ceti.