Oh, and welcome to the session. This is Professor Farhad, and this session we would look at an introduction to the third tax asset and the third tax liability. This topic gives students a lot of problems, especially in intermediate accounting or on the CPA exam. I'm here to help you. I'm gonna demystify this topic. This is an introductory topic, so please make sure to take notes and you should be good to go. Before we start, just wanna remind you that if you haven't connected with me, connected with me only then please do so. YouTube is where you would need to subscribe. I have 1,500 plus accounting, auditing, finance, and accounting lectures. Here are a list of all the courses that I cover. I have a Facebook page as well as an Instagram page. You can follow me there. Also on my website, farhadlectures.com, I do have additional resources. In addition to the lectures, you'll have access to the notes, PowerPoint slides, additional practices, multiple choice questions. And if you're studying for your CPA exam, you'll have 2,000 plus CPA questions. So in this session, what we're gonna go over is accounting fundamentals for accounting for income taxes. This topic is quite challenging for a lot of students. So the strategy is to listen to the lecture, listen to the lecture. Then after the lecture, you're gonna have to work multiple choice questions. Make sure to work the multiple choice questions because without working the multiple choice questions, it's not gonna be very helpful for you because you need to practice what you have learned. If you don't practice what you have learned and to a degree, it's useless because you really don't know if you really understood something unless you practice. So please practice, make sure to practice after the lecture. So what is the big idea here? And it's a big idea. The big idea is this. Corporation must file an income tax return. And here we are talking about 1120. So let's talk about form 1120. Let's assume we are looking at a corporation and what they do every year, they form their 1120. And what do they follow when they form the 1120? They follow the IRS rules. Now that's on one hand. On the other hand, they have to prepare their financial statements. So companies, they have to prepare their financial statements. And when they prepare their financial statements, their financial statements are prepared for external users. Therefore they have to use generally accepted accounting principles. So they do use different rules for preparing their financial statements. And because there are differences between GAP and IRS, if they were the same, we wouldn't be doing this chapter now. If both IRS and GAP had the same rules, then there's no reason for the third income taxes and the third tax liability. But since they differ, we have to account for the difference in terms of the third tax asset or the third tax liability. So here we go. In this session, I'm gonna be referring to something called income tax expense. Every time I say income tax expense, it means that's the GAP or the financial statement expense. So if I say financial statement income tax, it means GAP. If I say GAP, it means tax expense. If I say tax expense, it means GAP. And this is how they are used in the real world as well as the on the CPA exam. The same thing apply when I say income taxes payable. Income taxes payable, it means you have to pay it to the IRS. It means that's the IRS. So when I say this is income taxes payable, this is how you compute income taxes payable or this is how you compute your taxes for IRS, it means I'm referring to income taxes payable. So make sure you write this down right now. Okay, if you're not writing it down, write it down because it's gonna become very handy as we go through this. And this is a picture of what I just said. Hopefully it will make more sense to you. We have investors and creditors, they follow GAP, okay? So what they do is they compute something called financial income, pre-tax financial income. Again, pre-tax financial income is a GAP terminology. Then pre-tax financial income will give them their income tax expense. Remember income tax expense is GAP. Now for tax purposes, we're gonna have the term as taxable income. So notice here, financial income or pre-tax financial income or income before taxes versus taxable income. The IRS for tax purposes, we use taxable income. Then we compute our taxes, then we come up with income taxes payable. Notice there are differences between how we do things, differences in terminology and differences in actual computation. So notice this is tax and this is financial statement. The reason we prepare financial statements is for external users and the Securities and Exchange Commission. The reason we compute our taxes is to pay our taxes to Uncle Sam following the IRS. There are differences between the two. Now to illustrate these concepts, the best way is to work an example and go through it step by step. So let's start with this example. We have Chelsea reported revenue of 130,000, expenses of 60,000 in each of the first three years of operation. Notice for tax purposes, Chelsea reported the same expenses. So notice as far as tax is concerned, the expenses of 60,000 are the same. So we don't have to worry about the expenses, just keep in the example simple. Chelsea reported taxable revenue. Notice taxable revenue, it means for IRS purposes of 100,000 in 2020. So if we're looking at 2020, they reported revenue of 100,000. For 2021, they reported revenue of 150. And for 2022, they reported revenue of 140. And this is for tax purposes. This is how they reported the revenue for tax purposes. Okay, what is the effect on the account of reporting different amount of revenue for gap versus taxes? So let's take a look at how they reported it for gap as well so we can compare the information side by side. Now remember, expenses will be the same. So if you're wondering why expenses are the same for both is because we say expenses are both as far as gap and as far as IRS. So we don't have to worry about the expenses. We have to focus on the revenue. And the reason we do it this way is to illustrate the point, to illustrate the point initially that you understand. You need to have a fundamental understanding of the third tax asset and the third tax liability in order to understand it. Da, yes, you need to understand something in order to understand it. And that's the purpose. So notice, let's go through the IRS again. For tax purposes, they reported 100,000 revenue for tax purposes. For gap purposes, they reported 130,000. Simply put, if you're looking at this, what does that mean for you? Let's just simplify it. What does that mean? It means for gap, they reported more revenue. How much more revenue? 30,000 more revenue. Remember, just to kind of tell you why would that happen? Just kind of, it's also, it's very, very important to understand why would this happen. Remember, for gap purposes, we use accrual. So we book revenue before we receive it in cash. Maybe for tax purposes, we are using cash method. So for tax purposes, we are using the cash method. Therefore, we only report 100,000. For gap purposes, we are using accrual. Now, to be more specific, let me show you the journal entry.  For gap, here's what's gonna happen for gap. For gap, let me show you the journal entry side by side. For gap, they reported revenue. So they credit revenue of 130,000. They debited cash for 100,000 and they debited account receivable for 30,000. So this could be, this is good of what happened. So they end up with revenue of 130,000. For tax purposes, they only reported the cash. So they debited cash 100,000, they credited revenue 100,000 and this is what happened for tax purposes and this is what happened for financial statement purposes. Okay, so I just want to make sure you understand this. So what happened as a result of this, what happened as a result of this, your pre-tax financial income or gap taxable, gap financial income, pre-tax financial income is 70,000 and there's a 20% tax rate, 70,000 times 20%, your income tax is 40,000. Now, although I did this, I showed you this is how it gets done but this is gonna change. This is a very simple illustration. So this is not how you compute your income tax. Again, not how you compute your income tax. So what I just did is incorrect. The reason I just wanna explain those numbers here while you are seeing these numbers but this is not how we compute income tax. Let me show you how we compute tax for tax purposes. So for tax purposes, we have revenue of 100,000, expenses of 60,000, taxable income is 40. Taxable income times 40% will give us an income tax expense of 8,000. This is how you compute your income tax expense. Your income tax expense, if you want to write it down, please go ahead. It's very important that you write it down. So you take your taxable income. I know you're gonna say this is easy but write it down. Taxable income times the rate. Whatever that rate is happens to be. This is how you compute your income taxes for tax purposes. Not the same for gap purposes, okay? But let's do year 21, 22, just to show you what happened overall, then we'd look at the deferred income tax asset and deferred income tax liability. In 2021, gap had 130,000 of income. Now in 2021 for tax purposes, we received more revenue. Notice in 2021, we have more revenue for tax purposes. It means the client paid us more in cash and less for gap. So as a result, our taxable income is 90,000 and our taxes are 18,000. For 2022, for gap, it's 130,000, our revenue for tax purposes 140,000. Again, as a result, we have minus 60,000 in taxes. Our taxable income is 80,000 and our taxes are 16,000. So the 8,000 here, the 18,000 here and the 16,000 here, this is what we actually send to the IRS. This is the money. This is the check that we send to the IRS. This is what we are responsible for. This is what we are responsible for. So basically, when we say income tax expense, this is also income taxes payable. So the 8,000, the 18,000 and the 16,000 are income taxes payable. Now let me show you the total over a period of three years. So this is the total. And there's an error on this slide. Revenue 130 plus 130 plus 130 equal to 390,000. This is the error. Expenses over three years equal to 180. Notice for tax purposes, revenue over three years is 390. Revenue expenses over three years is 180. What does that mean? It means over a period of three years, revenues and expenses are the same. They differ from year to year, but in total they are the same. In total, your pre-tax financial income is 210. Your taxable income is 210. Your income tax expense is 42,000. And your income tax expense for IRS purposes, 42,000. So for a period of three years, they are the same. What does that mean? It means those changes reverse. So those, what we call those, we're gonna learn the term later. Those are temporary differences. It means differences that they are different from year to year, but overall over the long period, they reverse and they equal to each other, okay? Hopefully you see the big picture. Now let's see the difference between the income tax for GAAP and the income tax for the IRS. Again, the way we computed GAAP is not accurate, but this is, it will help us just to kind of, it will help us just to, for now, it will help us for now. For 2020, GAAP income tax was 14,000. Income tax is payable, which as I said, income tax expense for IRS, we call it income tax is payable, 8,000. So notice, in 2020, we paid less to the IRS. We paid less. Think of it this way. In 2020, we paid $6,000 less than our GAAP income because this is what we actually have to pay, okay? Are there any differences accounted for financial statement? Yes, there are differences between the two, right?  So what happened in 2020, because I paid less taxes, it means in the future, I have to pay more taxes. Does that make sense? If they are this, if over a period of three years, and I already showed you this, that GAAP and IRS are the same. And I paid less this year in taxes. Well, guess what? This less of taxes this year will catch up for me in future years, okay? Now, what does that mean from the third tax asset and the third tax liability? It means for 2020, I have to report at the third tax liability by $6,000. Let me explain this for you. What does that mean is this? It means in 2020, I computed my taxes and I find out I'm paying $6,000 less to the IRS than my GAAP income tax. Well, guess what? That difference eventually will catch up with me. So for me to show that difference to the investors, so tell the investors and the users, look, I paid less taxes to the IRS this year, but look, I'm gonna have to pay an additional $6,000 in IRS payment more in future years. And to show them this, I have to book a third tax liability. Therefore, a third tax liability is born. Just a third tax liability is born because I'm responsible for more taxes. Again, how did I know I'm responsible for more taxes? Well, I looked at my 2020. I paid the IRS $6,000 less than what my GAAP income tax is. And I know that difference would reverse. It means in the future, I'm responsible for $6,000. It means the third tax liability is born of $6,000. Which reverse in the future? When is it going to reverse? It's gonna reverse in 2021 and 2022. Let's see what happened in 2021. In 2021, my income tax expense for GAAP is $14,000. My income tax expense for the IRS is $18,000. Notice I wrote a check. This is the check. The $18,000 is the check. I wrote to the IRS an $18,000 check, but for GAAP purposes, I only booked. I only reported $14,000 in income tax expense. What does that mean? It means that $6,000, that I said it's gonna be the third tax liability, it's catching up with me. Now, since I paid more to the IRS, I'm going to reduce. I'm going to bring down that liability by $4,000. Okay? I'm gonna have the third tax liability reduction reduced by $4,000. Now, what's happening is my liability is reversing. My liability is reversing. My third tax liability is reversing. In 2022, my GAAP taxes are $14,000. My IRS taxes are $16,000. It means I paid more for the IRS. Exactly how much more? $2,000 more. Well, guess what? You remember that $6,000? 4,000 of it was reversed in 2021. The remainder, the $2,000 remainder will be reversed in 2022. Well, from a T-account perspective, if you really, if you wanna see it from a T-account perspective, this is the third tax liability. And I'm gonna show you the journal entry in a moment. So I have $6,000. This is year 2020. Basically, by putting $6,000 as the third tax liability, I'm telling the investors, look, I'm responsible for more taxes in the future, which indeed in 2021, 4,000 of it reversed and in 2022, 2,000 of it reversed, the whole thing is reversed. So notice over a period of three years, everything equal over a period of three years. So all what I'm doing is I'm accounting for the difference between my income tax expense for financial statement purposes and my income taxes payable for IRS purposes. Now let me show you how things are reported on the financial statements. And this is where, this is, and I'm gonna tell you how to compute income tax expense. So, so maybe I should show you the journal entry first. So let me show you the journal entry for 2021. I'm gonna show you the journal entry for 2021. So I'm gonna erase everything and show you the journal entry. So here's, so this is the first journal entry and this is important that you understand this journal entry. It's gonna help you understand future journal entries. You always start with the easy one. The easiest is income taxes payable. Income taxes payable. Why do I say it's the easiest? Because it's the easiest. Income taxes payable is the easiest. Because it's your taxable income times the rate. So it happens to be 8,000. So I would credit, sorry, I would credit income taxes payable. Income taxes payable, $8,000. I'm done with this. Then notice my deferred tax liability went up by 6,000. Well, I have to book a deferred tax liability. I have to credit a deferred tax liability of how much of 6,000. Hold on a second, where did that 6,000 came from? It's the difference between what I paid to the IRS and what I booked on the income tax return. Now I'm missing a debit. Those are both credit because they are both liabilities and they're both going up. The debit is income tax expense. And what's my income tax expense? Think of income tax expense as a plug. Hold on a second, did you just say a plug? Yes, think of it as a plug. It's the deferred tax plus current tax. So this income tax is payable. This is what I'm gonna be paying currently. So we call this current tax. This is my current bill right now. The $8,000 is my current tax bill. The deferred tax liability is my deferred tax. So income tax expense equal to what I paid now and what I'm gonna have to pay in the future. Therefore, six plus eight equal to 14,000. And this is the journal entry, write it down so I can, I will show it to you on the, how everything is reported on the financial statement. Okay, so this is the journal entry. I'll show it to you later, a little bit further later down the road. So here's how things are reported on the income statement. Once again, I compute my income taxes payable first. Then I compute my deferred taxes. The third taxes, liability plus income taxes payable will give me my income tax expense. My income tax expense is my gap. And this is my IRS. 8,000 is my IRS number. Okay, and the 6,000 is the difference. Where does the deferred tax liability gets reported on financial statements? It's a liability. It's a liability. Okay, now let's talk more about future taxable and deferred amount. So let's talk about something called temporary difference. So what is a temporary difference? A temporary difference, and this is, we looked at it, but now we're gonna define it, is the difference between the tax basis of an asset or a liability and it's reported carrying value amount and the financial statements that would result in a taxable amount and that would result in a taxable amount or a deductible amount. Well, what does it mean? It's gonna result in a future taxable amount. Well, I just showed you, it's gonna result in a deferred tax liability. Let me go back and show you what I mean by the, between the tax basis of an asset and the tax basis of a liability and it's reported carrying value. Remember for gap, when I booked the entry, I said for the first year, my revenue was 130,000. I debited account receivable of 30,000. I debited cash of 100,000. Then for IRS purposes, I said I only have cash and revenue of 100,000. If you remember that entry, this is the tax entry. Now, what is the difference between these two? The difference is the account receivable. The account receivable is an asset. So I don't have the asset for tax purposes. So I have a basis. I have a carrying value of an asset of 30,000 that's going to do what? That's going to reverse down the road. That's going to reverse down the road. Now, if you think about it, if I take $30,000, okay, and it's gonna reverse down the road. Reverse means what? Reverse means it's gonna go to the tax purposes. It's gonna consider revenue to tax purposes. So as it's considered revenue, I'm gonna have to pay taxes on it. So what does that mean? It means I'm gonna take $30,000 multiplied by some tax rate that's gonna reverse at, and it gave me $6,000. It gave me $6,000. So simply put, that book basis, the $30,000, it's gonna reverse down the road. It's gonna reverse down the road. And remember, the tax rate is 20%. Okay, so that $30,000 eventually will turn into actual taxes. And when it turn into actual taxes, I have more taxes of $6,000. It means this is a temporary difference. So let's look at the temporary difference of a liability. Okay, so the definition to be for a liability will be something like this. A temporary difference is the difference between the tax basis of an asset or a liability and it's reported book value in the amount of the financial statement that would result in a taxable amount. Stop right there. Stop right there. This is the definition of a deferred tax liability. It's a temporary difference that's gonna give me more taxes in the future. Now, let me give you the deferred taxed asset definition, which as we did not see an example, we'll see shortly. A temporary difference is the difference between the tax basis of an asset or a liability and it's reported carrying or book value in the financial statement that would result in a deductible amount in the future. So the deferred taxed asset, this is the deferred taxed asset, it's what I'm gonna happen in the future. I'm gonna have more deduction. And what would deduction give me? Duction will give me lower taxes and lower taxes will give me more assets. So this is the definition for the third tax liability, represent an increase in taxes in future years as a result of a taxable temporary difference existing at the end of the current year. And this is the example that we worked. So what happened is in the future, I'm responsible for more taxes. Why? Because whatever I deferred now, it's gonna catch up with me. Therefore, I'm responsible for more taxes. Future deductible amount, which we did not look at this, it's a deferred taxed asset, represent the increase in tax refundable or saved. So I'm gonna either have, I'm gonna either have a refund, or I'm gonna save more taxes in future years as a result of a deductible temporary difference existing at the end of the current year. When I have a deferred taxed asset, which will work an example to illustrate it, in the future years, when it reverse, it's gonna give me more savings.  I book a deferred tax asset, a deferred tax asset. Let's take a look at this. So in Chelsea, a situation, the only difference between the book basis and the tax basis of the asset and liability related to the account receivable that arose from the revenue recognized for book purposes. So I showed you poor books. I have a $30,000 of receivable for tax purposes. I don't have any. And I showed you this when I did the journal entry. Now this $30,000 in 2020, it would reverse, some of it reverse in 2021, some of it reverse in 2021, 20,000 reverse in 2021 and 10,000 reverse in 2022. So guess what? Basically it over the period of two years, taxable amount was higher in those years as a result, the liability reversed, okay? Chelsea assume it will collect the account receivable and report the $30,000 collected as taxable revenue in the future tax return, okay? And by doing so, she would start to deferred, that she would start to reduce her tax liability or the third tax liability, okay? So once again, the first tax liability represent the increase in taxes payable in future years as a result of a temporary difference existing at the end of the current year because of a temporary difference that's happening now and that temporary difference would reverse in the future. When it reverse, I'm responsible for more taxes. I have a deferred tax liability, okay? Because it's the first year of operation, there's no deferred tax liability at the beginning of the year. So we're keeping this example simple because there's no prior deferred tax liability but we're gonna have to deal with prior deferred tax liability but it's very important to understand the idea, okay? Again, this is a picture of what we just did and this is the journal entry as I told you, income tax expense is the current, this is income taxes payable, this is current taxes plus deferred, so the both of those, current plus deferred equal to income tax expense. So this is the journal entry for 2020. Now, can you do the journal entry for 2021? Can you do the journal entry for 2021? All right, let me do the journal entry for 2021 for you. Again, how do you start? How do I start? Easy, simple. I start with income taxes payable. My income taxes payable is 18,000, this is the amount I have to pay to the IRS. So I'm gonna credit income taxes payable 18,000. Okay, now, the difference is a reduction in deferred tax liability, so I'm gonna debit, I'm gonna abbreviate DTL, deferred tax liability, I'm gonna debit the third tax liability, $4,000. Hold on a second, didn't you tell me income tax expense is a plug? Yes, I told you it's a plug, what am I missing? I am missing income tax expense. So income tax expense for GAAP purposes, the difference between those two, I'm looking for a $14,000 debit and this is how you compute your income tax expense. So here, income tax expense equal to your current taxes minus the reduction in the deferred tax liability. Okay, let me show you the journal entry for you. So income taxes, 18,000, easy, this is what I pay the IRS. This is my current taxes. The third tax liability is a reduction. Since it's a reduction, it's gonna reduce my current taxes, okay? So 18 minus four, so it's basically 18 minus, I'm sorry, 18 minus four equal to 14,000, which is my income tax expense. This is my GAAP number, this is my GAAP number. That's, can you do 2022? 2022, what do I start with? Start with the IRS, 16,000 for the income taxes payable. Then that year, my deferred tax liability reduced by 2,000, my income tax expense is 14,000. Again, income tax expense is a plug. Again, these, hopefully you are following, but remember we're gonna be adding balances at the beginning of the year, which we'll deal with that shortly, okay? So this is the T account for the third tax liability. I created $6,000 over the third tax liability. In 2021, 4,000 of it is reversed. In 2022, 2,000 of it is reversed. Therefore, my balance by 2022 equal to zero, equal to zero. Let's take a look at the balance sheet and the income statement, balance sheet and the income statement. So here's what's gonna happen on the balance sheet and the income statement for 2020. I'm gonna have on the balance sheet, income tax expense payable, deferred tax liability. On the income statement, it's gonna be this plus this equal to 14,000. In 2021, I'm gonna have income tax payable of 18,000, deferred tax liability of only 2,000. Deferred tax liability only of 2,000. So notice what happened. There was a reduction of 4,000. So 18,000 minus the reduction equal to 14,000. Notice there was a reduction. 2022, my income tax payable is 16,000. My deferred liability went to zero. It means it went down by 2,000. So 16,000 minus the decrease equal to 14,000. Now you might be saying, why did you do this the decrease and 18,000 and you did 18,000 plus six? Well, 18,000 plus six because there was zero and it went from zero to 6,000. So I took 8,000 plus the increase of 6,000 and just in case to be consistent. This is how I come up with the 14,000 for 2020. For 2022, it's 18,000 minus the decrease. So it's 18,000, but my liability went down. So I reduce it from my liability. So I reduce it from my liability. So let me show you specifically how things will appear on the income statement. For example, for 2020, here's how you would, this is how you would show your income statement. On the income statement, income tax expense is composed of two components, current and deferred. The current portion is 8,000. The deferred portion is six, okay? And I had to pay in total 14,000. I had to pay in total 14,000. I have to pay in total 14,000. Okay, let's look at another example that deals with the third tax liability. So let's look at another example of the third tax liability to make sure we understand this. So South Carolina Corporation has one temporary difference at the end of 2020 that will reverse. It's a temporary difference and cause a taxable amount of 55,000 in 2021, 60,000 in 2022 and 75,000 in 2023. What does that mean? If I'm gonna, if I have a difference and that's gonna reverse and cause a taxable income in the future, it means I'm looking at a deferred tax liability, although it's here, but let's assume it's not here. Hopefully you understand, you're looking at a deferred tax liability. Starfield pre-tax financial income, translation, gap income for 2020 is 300,000 and the rate is 30% for all years. Now this is important because later on we're gonna be changing the rate. So make sure the rate is very important. There are no deferred taxes at the beginning of the year. So this is basically a simple example because there are no deferred taxes at the beginning of the year. Compute taxable income and income taxes payable for 2020. Well, let's start with taxable income. How do we compute our taxable income? How do we compute our taxable income? Okay, so for 2020, for 2020, are they giving us taxable income? They're not, but we have to compute taxable income. How do we compute taxable income? Gap income, they gave us gap income of 300,000 that was given to us. The gap income is 300,000 and they told us there is a difference, there is a difference of 55, 60 and 75. So in future years, 55 plus 60 plus 75 would reverse. What does that mean? It means this year, those are not taxable. It means to compute our taxable income we have to deduct those three amount, 55,000 plus 60,000 plus 75,000 and those three equal to 190,000. So I'm gonna deduct 190,000 and while I deduct this, those are the amount that are going to reverse. So they're not included in taxes this year. It means my taxable income equal to 110,000. Well, if my taxable income equal to 110,000, I'm responsible for paying 30% in taxes, 100,000 times 30% equal to 33,000. I just figured out my taxable income. I just figured out my taxable income. Okay, I just figured out my taxable income. Now, let me show you the, let me show it to you on the second slide because it's easier to show it to you but hopefully you understand this. So first I went, I did the first thing I did is my 2020, I said gap is 300,000, temporary differences of 190, which is the reversal. My IRS taxable income is 110 times 30%, gives me income taxes of 33,000. Therefore, what you do is you credit income taxes payable of 33,000 immediately. Then you would say in future years in 2021, I have more $55,000 more, I have $60,000 more in taxes and $75,000 more in taxes. From the year 2021, 55,000 times 30%, I'm gonna have more taxes of 16,500. From year 2022, I'm gonna have 18,000 more in taxes and from year 2023, I'm gonna have 22,500 more in taxes. So this plus this plus this is what I called the third tax liability in increase from zero to 57,000. So my third tax liability was zero and it increase to 57,500. So I credit the third tax liability, 57,000. Now 33,000 plus 57,000, those two together equal to the income tax which is a plug. This is how you compute your income tax. I know this is funny, but income tax expense for financial accounting purposes is a plug. It's the result of the current plus current and deferred. I'm not gonna say plus, sometimes we have to deduct, therefore current and deferred, sometimes we have to depending what the deferred is. So it's the current and the deferred. I'm not gonna say plus because you don't always add. Sometimes you have to deduct if there was any reduction in your deferred tax liability or when it comes to the deferred tax asset, it's the opposite. So we'll hold on that. So let's take a look at another example. Let's take a look at another example and see how this all fits together.  During 2020, Cunningham estimate its warranty costs related to the sale of microwave oven to be half a million, paid evenly over the next two years. For book purposes in 2020, Cunningham reported warranty expense and related estimated warranty liability of 500,000 in its financial statement. Let's translate this into simple English. What happened is the company sold an item and as a result, they sold a warranty with it and from financial accounting statements hopefully you know that you have to book a warranty expense of half a million and you have to credit estimated warranty liability of half a million. So for GAP, this is what you have to do and you learn this. Now for tax purposes, what do you have to do for tax purposes? Nada, nothing. You don't have to do anything for tax purposes. For tax purposes, you cannot take, you cannot estimate your warranty liabilities. You have a liability when you actually pay for it. What does that mean? It means for book purposes, for GAP purposes, you have a liability of half a million and for tax return, you did not report any expense. So this expense did not exist on the tax return and this liability don't exist on your balance sheet for tax purposes. So now what's gonna happen in the future, you are going to have a deduction. So in the future, when these customers come back and ask you to repair their product, you are going to have an expense. But for GAP purposes, you will not have an expense. It means in the future in the next two years, this half a million would reverse. So let me show you when it reverse what's gonna happen. In future years, you're gonna have a future deductible amount. It means in future years, you're gonna have a lower taxable income because you have lower taxable income than GAP income because you're gonna have more deduction. So in 2021, you're gonna have more tax deduction. 2022, more tax deduction.  What does that mean? It means in the future, you have more savings. What does that mean? It's in the future, you're gonna have to book now a deferred tax asset. Why? Because if in the future, you have more savings, you have a deferred tax asset. So when Cunningham pay for the liability, it report an expense that's deductible for tax purposes. Cunningham report this future benefit. So they report this future benefit now. They report it now. How do they report it? They report it as a deferred tax asset. They report it as a deferred tax asset. And this is how a deferred tax asset will be born. So we'll have a deferred tax asset and we'll book in the deferred tax asset half a million times whatever the future rate is. Let's assume it's 20%, that's 100,000. Therefore, we have a deferred tax asset year 2020 of 100,000. This is how a deferred tax asset is born, okay? Let's take a look at, let's take a look at the definition of a deferred tax asset. The deferred tax asset represent the increase in taxes saved in future years as a result of a deductible temporary difference. So that warranty is a deductible temporary difference that exists at the end of the current year. Let's take a look at this example to see how it all works. Hunt Company has revenues of 900,000 for both 2020 and 2021. It also has operating expenses of 400,000 for each of these years. In addition, Hunt accrues a loss and related liability of 50,000 for financial reporting purposes because of appending litigation. So what happened, Hunt has to book a contingent liability. What does that mean? It means they debit lawsuit loss of 50,000 and they credited estimated liability, estimated contingent liability of 50,000. So they debited a loss, which is they take for GAAP, this is for GAAP. For GAAP, they have a loss and a liability. For tax, what did they have for tax purposes? Nada, nothing, because for tax purposes you cannot deduct a future liability. You cannot deduct the contingent liability. Hunt cannot deduct this amount for tax purposes until it pays the liability, expected in 2021. So this was 2020. Guess what, in 2021 they're gonna pay the lawsuit, therefore then that's when they take the deduction, okay? As a result, a deductible amount will occur in 2021 when Hunt settles the liability, causing a taxable income to be lower, okay? So let's take a look at the picture first. So this is GAAP. GAAP, we have revenues, expenses minus the lawsuit. Our pre-tax financial income is 450. For tax purposes, we have revenues, expenses, notice no lawsuit for 2020, taxable income of half a million times 20% income taxes payable of 100,000. Can you do the entry? Can we do the entry? Can you do the entry now? Can you do the entry now? Let's do the entry. So for 2020, you will say income taxes payable, income taxes payable, 100,000, okay? Income taxes payable is 100,000 coming from here. Now, what's the difference between income taxes, what's the difference between income taxes payable and what I have to pay in taxes? Well, the difference technically is $10,000. The difference is $10,000. The difference is $10,000. Well, this is the third tax liability of $10,000 because in the future, I'm gonna, I'm sorry, I apologize, it's not the third tax asset. The difference is at the third tax asset of $10,000. In the future, I have a deduction. And what is the deduction? The deduction equal to 50,000 times 20%. So in the future, I'm gonna be saving, when I pay that lawsuit, I'm gonna be saving $10,000. Therefore, I have a third tax asset. Therefore, I book my deferred tax asset of $10,000. Now, all what I have to do now is book income tax expense. What is my income tax expense? It's my current portion and my deferred portion. My current portion is 100,000. And in the future, I'm gonna be saving $10,000. So I'm gonna be reducing my taxes. Therefore, my income tax expense is only $90,000. And this is how I compute income tax expense. It's 100,000 minus 10. It's the current portion minus the increase in the third tax asset. So if I have a deferred tax asset, I'll take the, if I simply put, if the deferred tax asset went up, I'm gonna take my current minus the increase in the third tax asset. Minus the increase in the third tax asset. If I have a deferred tax liability, if I have a deferred tax liability increase, the third tax, I'm sorry, the DTL increase, I'm gonna take my current, sorry, my current taxes plus the increase in the third tax liability to get to my income tax expense. Expense to get to my here income tax expense, okay? So make sure you know these two formulas. You make sure you know these two formulas. If I have a deferred tax asset and it went up, I'll take the current minus the increase. If I have a deferred tax liability and went up, I'll take the current plus the increase. Now, the opposite is true. If my deferred tax liability goes down, I'm gonna take the current plus, if it went down, it's the current plus. And I showed you already what's gonna happen to the third tax liability. If it went down, it's the current minus, okay? Copy this dose formula down, okay? So the deferred tax asset is 10,000 and the beginning was zero, okay? So the deferred tax asset at the end of the year is 10,000, the beginning was zero. Therefore, there was an increase of 10,000. There was an increase of 10,000. So the current tax expense is income tax expense is 90,000, which is the current minus the increase, minus the increase in DTA, minus the increase in DTA, because the beginning was zero. So from a T account perspective, this is DTA. The beginning was zero and the account went up to 10,000. It means there was an increase of 10,000. If it's an increase, I take the current minus the increase in DTA and the third taxed asset. And this is the journal entry. So income tax is fable is 100,000. Remember, what we did is we took half a million times 20% for tax purposes. Then for the 10,000 here, we took 50,000, which is the lawsuit that we're gonna be deducting later times 20%, the tax rate will be 20%. It gives us the third taxed asset. So our income tax expense is the current. This is the current and this is the deferred. So we'll take the current minus the increase in the third taxed asset. Now in 2021, when it actually reverse, when it actually reverse, what's gonna happen is this. When it actually reversed, remember I had 10,000 at the beginning of the year. When it reverse, I'm gonna reduce that 10,000 down to zero. Therefore DTA will go down, DTA will go down. Well, DTA will go down. Let's see how it works from a, let's see how it works. So 2021, gap for gap, I have 900,000 in revenues, 400,000 in expenses, the lawsuit already deduction taken. I have pre-tax financial income of half a million. I'm gonna stop right here. Let's go to tax purposes, 900,000. 400,000 and now I paid for the lawsuit, 50,000. Therefore my taxable income is 450. 450 times 20%, I have to pay the IRS $90,000. I have to pay the IRS $90,000. I have to pay the IRS only $90,000 because I paid them the prior year 100,000. I paid them more. So that $10,000 difference, it reversed. Because it reversed, I have to reduce my DTA. Remember when DTA goes down, I'll take my current, which is 90,000 plus the, if DTA goes down, if DTA, which is it's gonna go down, I'll take the current plus the reduction. So 90,000 plus the reduction of 10,000. So notice what's gonna happen. Income tax expense equal to 100,000, which is the beginning was 10,000 and the ending was zero. So it went down. It went down by 10,000. It went down, DTA went down by 10,000. Therefore I'll take my current plus the reduction in DTA will give me my income tax expense. And this will be my journal entry. Income tax is payable 90,000. This is 450 times 20%, 90,000. This is a reduction. Remember that 50,000 lawsuit, it's gonna have to reverse. And as it reverse, my DTA, my DTA, my deferred tax asset will go down. As it goes down, it's gonna increase my income tax expense because for gap purposes, I cannot take that $50,000, okay? So it's gonna increase it. So let's take a look from a presentation perspective. For 2020, your income tax is payable is 100,000. Your deferred tax asset is 90,000. In 2021, you pay the IRS 90,000 and you no longer have income tax asset. For 2020, this is your income tax expense on the income statement. The current portion was 100,000 minus the increase in the deferred tax asset, minus the increase in the deferred tax asset, okay? In the subsequent year, it reverse. In the subsequent year, what happened, current was 90,000, then the third tax asset was a plus, I added 10,000. Therefore, income tax expense was 100,000 in 2020, 21. I'm not sure if you're gonna see it. You don't see 2021, but I just showed it to you what happened in 2021, okay? Okay, notice the 90,000 is right here. Your income tax asset goes down. As it goes down, I add the increase in deferred tax asset. Therefore, income tax expense equal to 100,000. So this is what happened in 2020. They created the deferred tax asset in 2021, it reversed. Therefore, the balance is zero. Therefore, the balance is zero. Let's take a look at another example for deferred tax asset, deferred tax asset, okay? So we have Columbia Corporation has one temporary difference at the end of 2020 that would reverse and cause a deductible amount of 50,000 in 2021, 65,000 in 2022 and 40,000 in 2023. It's a reversal. It's gonna cause a deductible amount. It's gonna give me a deferred tax asset into the future. Columbia pre-tax financial income for 2020 is 200,000, aka gap income to 200,000. And the tax rate is 34% for all three years. There are no deferred taxes at the beginning of the year of 2020. We are still keeping things simple. Columbia expected to be profitable in future years. You're gonna see why this is important later on. Compute taxable income and income taxes payable. Again, you start with taxable income and income taxes payable. Can you compute taxable income? Hopefully you can. You have 200,000 for gap. Now, as far as the IRS are concerned, you did not take, you cannot take, you are losing a deduction this year of 50,000 of 65 and 440. So in total, those three, 50,000 plus 40 equal to 90 plus 65 equal to 155. You are losing a $155,000 deduction this year that's gonna reverse in future years. It means if this is gap, your IRS must be way higher than gap because you're not taking those deduction. Therefore, I have to add those future deduction for this year. Therefore, your taxable income for IRS purposes for this year is 355. Once I find my taxable income, I just did 355. I'll take 355 times 34% to find my income taxes payable. So let's show you this. Gap was 200,000. My future deduction amount, 50,65 and 40 equal to 155. 200 plus 155 equal to 355. I'll take 355, taxable income times the tax rate. Give me my income taxes payable right here. Income taxes payable, 120,700. Now, in future years, 2021, 2022, 2020, 2023, I'm gonna have more deduction, more deduction, more deduction. So the 158 would reverse. As first let's compute the future benefit. 50,000 times 34, 65,000 times 34 and 40,000 times 34. So for 2021, it's gonna give me a tax saving of 17, 22,113,600. I take those three together and I book my deferred tax asset that I'm gonna have for the future three years that's gonna reverse. The next three years, that deferred tax asset would reverse, but I book it now. I book it, this is 2020. I book it in 2020, but it would reverse in 2021, 2022 and 2023. Now I'm left with my income tax expense. My income tax expense is a pluck. So I'm looking for a debit, but specifically it's my current taxes, current taxes minus my increase in DTA because DTA went up minus the increase in my DTA. And if you learn this minus the increase in DTA, it's gonna make your life easier when you have a prior balance, when you have a prior balance. Again, don't worry, we're gonna work with prior balances, but this is basically an introduction to this topic. The last thing I'm gonna discuss here before I'm gonna send you to work some multiple choice questions is the valuation allowance. A company should reduce the third tax asset by evaluation allowance if, so learn the rules, you might see this on the exam. If it's more than like, more likely than not, it will not realize some portion of all the deferred taxed asset. More likely than not means a likelihood of at least more than 50%. Now let's translate this in simple English. Remember, when you book your deferred taxed asset, what are you saying? You are saying in the future I'm gonna have a future tax savings or a future tax deduction. This is what I'm saying. But guess what? If you are not going to have any profit in the future, if you're not gonna have any taxes, how good is your deferred taxed asset? It's useless. So if you think you are not going to be using that deferred taxed asset, it means when it reverse, it's useless for you because it's only good if you have a taxable income. Guess what? You have to create evaluation allowance.  When do you reduce it? When there is 50% a chance or more, you are not going to realize it, okay? And the best way to illustrate this is to actually work an example. Jennifer has a deferred taxed asset account with a balance of 75 at the end of 2019 due to a single cumulative temporary difference of 375,000. Simple English, we have a DTA account and it has $75,000 as a result of some temporary difference of 375,000, okay? At the end of the 2020, the same temporary difference has increased to a cumulative amount of half a million. So this 300,000, it increased to half a million, it increased by 120, it increased by 125,000. Taxable income for 2020 is 820, the tax rate is 20% for all years. No valuation account related to the deferred taxed asset is in the existence at the end of 2019, okay? So what happened is this temporary difference, it's gonna increase by 125,000. As it increase, your DTA should also increase. Why? Because you have more temporary difference that's a future deductible amount, then it means you're gonna have more deferred taxed asset. Now, assuming that is more likely than not that 15,000 of the deferred taxed asset will not be realized. What are we saying here? We are saying let's assume after we book the entry, after we book that increase of 125,000, increase from 375 to half a million, let's assume that 15,000 will not be realized, will not be realized. What does that mean? It means write the DTA down, but before we write it down, let's do the, let's book it, let's book it. So here's what's gonna happen. In 2020, we have financial income of 695 minus the temporary difference. It's gonna give us taxable income of 820, which was given to us times 20%, 164. So we credit income taxes payable 164. Then the deferred taxed asset is 125, the tallest, it's gonna increase from 375 to 500,000. That means an increase of 125, times 20%, that's gonna give me 25,000. My DTA will increase by 25,000. My income tax expense equal to my current minus my increase in my deferred taxed asset. My income tax expense equal to 139. So I just booked my DTA.  Now let's take a look at DTA here, DTA. When we started the year, it was 75,000. Then this year we booked an additional 25. So DTA as it stands is 100,000, deferred taxed asset. What they told us is, guess what? You have 100,000, guess what? 15,000 you will never realize. So what do you have to do? You have to create an allowance account, an allowance account. And what's an allowance account? Basically a reduction in your deferred taxed asset. But don't reduce DTA, you would credit an allowance for the third taxes which would reduce. It's a contra asset. So you would reduce this asset and allowance for the third taxes of 15,000 and you debit income tax expense. Remember, so here's a good tip here. When you're deferred taxed asset goes down, your income tax expense goes up. When you're deferred taxed asset goes down, your income tax expense goes up. Notice what happened here in the prior entry. In the prior entry, it's the opposite. In the prior entry, notice when your deferred taxed asset goes up, your income tax expense goes down. You can say that when every time you are increasing your deferred taxed asset, your income tax expense goes down for tax purposes. Goes down for tax purposes. Let me make sure I said this right.  As it goes up, your income tax expense goes down. That's right. I want to make sure I'm saying this right. And this is how you show the allowance on the balance sheet. On the balance sheet, you would still show the deferred taxed asset of 100,000, which was 75 plus 25, and you would reduce it by the allowance amount of 15,000, which will give you a deferred taxed asset of 85,000. Now this is a solid introduction to the deferred taxed asset and the third tax liability. In the next session, what I would do is I will work multiple choice questions covering this topic. So make sure you practice the multiple choice. Make sure you master the topic before we move on. As always, don't forget to visit my website for additional resources. Consider subscribing. It's an investment in your career. Good luck.


when the 1964 civil rights law was being debated in Congress and in the nation, we heard the line that you can't legislate morality. And that is absolutely wrong. This is Rob Johnson, President of the Institute for New Economic Thinking. I'm here today with Norman Solomon, who I discovered part of the year as my neighbor out in Northern California. I'm only out here a couple months a year. But he is an extraordinary author. He's the co-founder of rootsaction.org, founding director of the Institute for Public Accuracy, and he's written two books that I'm aware of, War Made Easy, How the Presidents and Pundits Keep Spinning Us to Death, Made Love Got War, Close Encounters with America's Warfare State. He writes a lot of fascinating articles I've followed for a great deal of time over time. Salon.com. They made a film of War Made Easy, which is available on YouTube. And without disclosing any details, he's got another book on the horizon. So I think you can count on the fact that we'll make another chapter after we finish this episode. But Norman, thanks for joining me here today. Hey, thanks, Rob. This is a terrifying time. And I was inspired to explore with you to try to understand what's going on. How do we get here? And what do we do about it? So let's start with, I mean, we have an audience of young scholars too. And if there are things that you can impart as to why you've chosen the career trajectory you have, I think they would be curious about that as well. So let me start there. What got you into this realm of looking at national security and American political economy and so forth? What was the catalyst that inspired you to choose this path? Gradually, as a teenager, I became aware of the Vietnam War. I was born in 1951 and grew up in the Washington, D.C. suburbs where, of course, so many people were government workers in various roles and levels. And around about 1965, 66, as I entered high school, I, of course, began to think about and I would read the Washington Post on the kitchen table every morning and so forth. And I assumed that the people in charge knew what they were doing and were believable. And gradually, by 1967, I started to believe that we were not only being lied to, but I think even more viscerally that my own country was slaughtering people who just had been born and were living, quote, unquote, in the wrong place at the wrong time. And so that really was an early catalyst for me to think critically and also involve myself emotionally and what's the role of my government. And so as time went on and as I became more of a researcher, writer, activist, one aspect that really interested me because I was living near a nuclear power plant in Oregon about an hour drive up the Columbia River from Portland, it made more specific. What is nuclear energy? Might there be a danger? What is that danger? Are the assurances we're getting worthwhile, credible, and so forth? And at first, I thought that nuclear weapons were a reality that were unchangeable like the stars in the sky. And so I focused on nuclear power. But after doing activist organizing and we were doing nonviolent civil disobedience at that Trojan nuclear power plant, which was the first time that there had been sort of a gondian mass organizing to nonviolently blockade and operating nuclear power plant. This was in the late 1970s. I began to read more about this plant up the river, so to speak metaphorically. What's up the river from nuclear power and realized that the Hanford plant had been central to the nuclear preparation and the actual construction of the bomb that was dropped on Nagasaki. And so that connection, you know, I began to see the way that sort of the nuclear synapses, so to speak, were connected and did some writing about the Hanford plant and did a lot of interviews and so forth. And began to have a sense of sort of connecting, of course the Vietnam War was over then, but connecting a sense in which a mass frenzy could become so ubiquitous that it would seem normal, whether it was a war that would go on year after year during the Vietnam War and was taken to be nothing but common sense to support, whether it was the building and maintenance and deployment of ever more destructive nuclear weapons. All of that, you know, percolated through my mind and some might say my spirit, you know, whatever words one might want to attach to it, it came to be sort of concentric. I think it is for a lot of people, there's a sort of macro of this is a country I live in, this is the only planet we have. And then personally, existentially, you know, what do we hear for? What am I here for? And the destructiveness of U.S. foreign policy and the political economy based on war and destruction, that, as it has for so many people, hit me very hard. Well, I'm very grateful that you, I always say, chose to devote your energy to such a, which you might call profoundly important challenge to the trajectories we've been on and the difficulties that we all are haunted by. It's not very often that you find someone with your capacity capability that stays that course. And I'm delighted to be able to talk with you now because it's almost like I'm just a little bit younger than you are. I was born in 1957. I kind of got a wake up call when Dr. Martin Luther King came to Detroit in 1967, three weeks to the day, excuse me, in 1968, three weeks to the day before he passed away and was murdered. But his speech he gave the other America startled people. And his speech before that, about the one year before his death, Time to Break the Silence, Beyond Vietnam, was a very profound influence on me. And I minored in creative writing and studied the writings of Martin Luther King as an undergraduate. As I was taking courses in arms control and disarmament. And I remember, what was it, the bulletin of atomic scientists, they had the clock, the number of minutes till midnight, all these things were just, were very central. And so what I'm really enthusiastic about is it's almost like something's just dropped back on us. That was a part of a haunted story in my childhood that I thought had dissipated. And I know at some level the stocks of weapons and other things haven't been disassembled and retired. But we're looking at this Russian war now. I read a column of yours, let's see, it was just about two weeks ago, I guess. Russia's war is an inexcusable crime, but the US is not a credible force for peace. What's going on right now? And why are we here? Robbie, use the word haunted, which I think is quite appropriate, both generally in terms of our moments in history living in this era. And when we are willing to or able to be cognizant of the threats that emanate from our own society to not only our own lives and our loved ones, but the future generations. And also this specific moment, this shocking conflagration in Ukraine that I don't think almost anybody really anticipated. And one of the striking aspects, I think, has been that there's very much a enemy of my enemy as my friend psychology that kicks in very easily. And so it works in a lot of different directions. Some of it is obvious, maybe some of it is not at all. But we're encouraged to choose upsides between the forces that Martin Luther King Jr. called the madness of militarism. And I think he was quite apt. As you know, as somebody who became a scholar of King's work, he didn't use words lightly. There was nobody who chose his words more carefully or precisely. And when he spoke repeatedly in the last year of his life about the madness of militarism, he was addressing not only the specifics of the Vietnam War and the slaughter that the U.S. was engaged in in Southeast Asia, but the political economy, the psychology, the interweave of how lives were lived and lives were taken, the livelihood, so to speak, that were tied to the extermination of other people and his commitment to challenging that interweave of what he called materialism, the deadly triplets as he called it, materialism, which I think is really a word for in that context of the grasping, the thrashing, the destructiveness of capitalism and racism and militarism. And here we are in 2022 and those dynamics have us by the throat. And so when we look at the the genesis and the reality now of the killing as we speak in Ukraine, it very much is a challenge to get beyond the sort of either or either we support one side or the other in terms of U.S. foreign policy and what Russia has been doing in Ukraine. And one way that I came to see it is that hypocrisy doesn't justify carnage and a mistake among people on the left. I don't think it's dominant, but there's certainly that strain that we can hear and see on the internet. There's this mistaken belief that well, because the United States is hypocritical, therefore there's some excuse for what the Russian government has been doing in Ukraine. There is no excuse for that. It is absolutely without any credible justification whatsoever. And part of our quest, I think, and Dr. King was a leader on this and many others in many walks of life have strained and struggled and worked very hard to bring to light is that we need single standards of human rights. We need single standards of how a society treats people in one's own country and behaves internationally. And so underlying that there's a saying among blues musicians, you might feel like you're getting lost, but you won't if you know the blues. And I think of that because with all of the cross currents of ideology, nationalism, and so forth, and these conflicts that occur with propaganda, dueling propaganda, and even warfare, it's easy to get lost. And I believe that there is a core that many people are striving to and often staying within, which is a single standard. And it's a single standard of human rights. And in the war and peace context, it says, no, you don't get to have your country invade another country because you want to get your way. Your national government wants to work its will somewhere else. And so whether it's what Russia is doing in Ukraine or the United States did in Afghanistan and in Iraq, those are all invasions. And when we hear Anthony Blinken, the Secretary of State, condemn what Russia has been doing by declaring that it's absolutely unacceptable for a powerful nation to invade another, it's like calling to a draw. Well, what's going on here? Are we supposed to engage in double think to that extent that we forget? I think one of the rough definitions in the book 1984 of double think was you have a fact and you put it on the shelf and then when you need it for your particular double think, you pull off the shelf and use it and acknowledge it just so long as it is helpful and then you put it back on the shelf. And so just to sort of sum up, I think that we have this challenge and this opportunity to say not only do we believe in a single standard of international conduct, but we're going to insist on it. I'm sitting here with all kinds of cross curtain grins, but with a name like Robert Johnson and the blues music. Whether we're at the crossroads or whether we got a hellhound on our trail, I don't quite know, but I did spend a few years of my life running a blues label, which was called Rooster Blues Records and did the comeback of Ike Turner in the realm of blues and all that. So I can feel a lot of the energy that you were describing in that music. And I always cite the theologian James Cohn who wrote a book called The Spirituals and the Blues. And he said, the spiritual is about when you know you're in chains and you're giving yourself strength through the afterlife. But the blues are that are music that was spawned at a time when you're allegedly free, but you're not free. And he said, and what you're doing is defying things in the here and now, in code. And I just thought that was such a beautiful way of seeing how that music was spawned and the contrast with the spirituals that come from. But you're seeing all of these, there's a part of me that says, I remember reading stories that said Bismarck says that when a national leader can't resolve their problems at home, the best strategy is to create a foreign enemy to unify everybody around that. And I've been curious given the tumult that we've had in light of the pandemic and other concerns in the polarity and what I'll call hate politics that we've seen on left and right, whether this ritual is what you might call feeding that external focus in ways that probably have some very, very detrimental side effects. As Barry White, the musician once had a song called Practice What You Preach, and you're talking about Blinken talking about how atrocious what Russia is doing is, which it is. But are we going to practice what we preach? Or are we going to go back to the same kind of thing like we did in Iraq or Afghanistan? These are enormous moral dilemmas. And being the Institute for New Economic Thinking, I really would like to explore with you a little bit what's going on with the, what I'll call the force field of market political economy that may be driving this process to a dangerous place. What's going on with what they call the military industrial complex? Well, that force field is just so powerful has been for really ever since World War II and remains so arguably as much or more than ever. So when you have five huge mega corporations absorbing so much of the military budget, Boeing and Northrop Grummond and a few others, they cast such a large shadow. William Hartung has done such good work publishing studies and so forth. The lobby, both for the ICBMs that not only we don't need, but make the world more dangerous. And other, the airborne weaponry that is the buzz word is aerospace industry. It's just the tremendously lucrative aspects there. And I think it's not rocket science to use the cliche to see that there were limited possibilities to garner enormous profits by saying we need to protect ourselves from people in car bombs with box cutters. That ultimately as the so-called war on terror unfolded and reached some of its limits such as, you know, there was a light at the end of the tunnel. It was the wrong light according to the what the systems prognosticated. But that cash cow was going to diminish in Afghanistan and Iraq and so forth. But China and Russia were very important enemies. And it doesn't mean that those are angelic countries. I believe nations, governments, you know, I believe that I have stone had it right. All governments lie and nothing they say should be believed. It doesn't mean governments lie all the time. It doesn't mean they all lie to the same extremity or with the same results. But we can't simply suspend our sense of disbelief. We can't simply go on faith with anything. And in case of the military industrial complex which after 9-11 expanded and we can just extend it out to military industrial intelligence complex, you know, outside of the Beltway and also Baltimore, Washington International Airport, just these huge growth industries immediately after 9-11 that have continued to this day, that whole nexus of militarism and surveillance and so-called intelligence. You know, we use these words sometimes we don't think about them. We talk about now we're hearing about the civilized world and civilization. There was the anecdote of the reporter asking, Gandhi, Mr. Gandhi, what do you think of Western civilization? And Gandhi replied, I think it would be a good idea. We have so many ways that we're encouraged to even use words going back to oil like defense. I mean, it is just ubiquitous across the political spectrum. We talk about defense spending. In print it is lowercase d. It's preposterous. And that's yet another benchmark of the psychological progress and achievement of the military industrial complex to have us believe that now when President Biden puts forward, and this isn't all of it, doesn't include nuclear weapons, $813 billion for the next fiscal year that we just heard announced for the Biden budget and that will probably be bumped up. And we're told in the vernacular, that's a defense budget. Well, that's absurd. I would say very little of that is legitimate defense spending. So that works at so many levels. And Rob, we could really talk about it all day and not really exhaust the subject, because it's the political economy, the profit making, the ways that almost every congressional district has some company that is involved in profiting from the contracting to the Pentagon, tremendous lobbying on Capitol Hill, tremendous contributions. People like Adam Smith, chair of the House Armed Services Committee, who publicly flirted with the idea a couple of years ago, maybe we don't need a triad of nuclear weapons. Maybe we don't need land-based missiles. And he was absolutely correct for that nanosecond. And as Daniel Ellsberg has documented in his book, The Doomsday Machine, the existence of the land-based leg of the triad, the ICBMs, makes us less safe. But very quickly, Adam Smith, who in the last cycle had received $400,000 from so-called defense industry contributors, he flipped right over and said, we need this quarter of a trillion dollar investment in the GBSD, what they call the new Northrop Grummit now, an initiative to build another generation of ICBMs. It's so ingrained. And Rob, when I think about, can we imagine the United States of America without a powerful military industrial complex? And at this point, since 9-11 or October 2001, nonstop war. And no matter what Biden said, and he did say last September at the UN, the United States, for the first time in 20 years, Biden says, we're no longer at war, the United States is no longer at war. To use Biden's one of his favorite words, that's malarkey. It's just nonsense. When you look at the cost of war project at Brown University, very clear documentation. The United States is engaged in the so-called war on terror operations in more than 80 countries as we speak. So this gets back to almost being, one might say, gaslighted. Who are you going to believe, what you're told, what is actually occurring? Yeah, I had a good fortune a few years ago to meet a man who makes documentary films at the BBC, Adam Curtis. And he made a three-part series called The Power of Nightmares. And I joked with him when we had dinner, I said, there's a thing in economics called Say's Law, how supply creates its own demand. And I said, that really applies to the military. And when I started my career, I spent a little time six years in Washington, I worked on the United States Senate Budget Committee under the leadership of Pete Domenici. I noticed every time defense appropriations bills hit the floor in the media were ominous declarations about the threat, the stories about the enemies and so forth. In other words, promotion for the need to pass those bills. And I watched that process over and over again. When I got to Adam's movie years later, he essentially was saying the way in which they demonized the Soviet Union in order to foster, and this was kind of a Rumsfeld-Janey skit that he focused on, he said, when the Soviet Union stopped, they just transferred the same script to Saddam Hussein in order to keep the urge or the demand for the military procurement vital and alive. But I found all of this, which you might call very haunting. And a person like yourself seems to have found the way to see through it. I think a lot of people are terrified and they feel like they're being protected. So they'll take these signals as evidence of being protected by the government as opposed to being deceived so that the defense industry that you've referred to can prosper. And this is a very, very potent thing. I mean, I'm sure you've done work comparing the size of the United States defense spending, as they call it, military spending with other countries. And it's orders of like 15 and 20 times. So what are we defending against? It's just all kinds of questions. When I look at our budget, like in OECD numbers, if you look at our government budget, the proportion that's the military and the proportion that's related to healthcare, primarily pharmaceuticals, is so large in comparison to any other country. You can see what you might call self-fulfilling elements of lobbying and campaign contributions are a very big part of the architecture that we have to endure. And in many respects, building things like school systems or quality healthcare or elder care that would improve the quality of life markedly. So this is the first topic that you adore your life to is a first order piece of what we need to understand to get to a better place. And Dr. King, I went to a conference at the Riverside Church. Andrew Basovic and Hartung and others were there on behalf of the Quincy Institute. I went last Saturday. It was a celebration of Dr. King's time to break the silence beyond Vietnam speech, which was delivered on April 4th of one year to the day before he was murdered. And it was fascinating listening to his daughter Bernice and other panelists talking about how he was attacked when he delivered that speech. And the man who wrote it with him, Vincent Harting, is someone I've met. He's deceased now, but I spent a lot of time talking to his book The Inconvenient Hero, about the last three years of Dr. King's life, is enormous. Like this man is being attacked by his allies in the civil rights movement because they think he's abandoning that agenda. He's being attacked in the Washington Post, the New York Times, and so forth. Dr. King was extremely courageous. And when I had the opportunity to teach an economics course at the Union Theological Seminary, I would always bring out a thing that he did with a Philip Randolph called a freedom budget for all Americans. What's done for his group, albeit African Americans were at the bottom of the economic ladder and quite abused, he was talking about what we need to do with that tryout that you mentioned, militarism, racism, and materialism. What we need to do to create a budget that is for all Americans. And just those exercises, I think while he was a theologian, he's a tremendous social scientist or diagnosed our melodies with such penetrating insight. And I guess the question I'm kind of pivoting towards with you is, we see this, we see this unhealthy dynamic. If you were, I'm a doctor son, diagnosis, we can continue that. But what kind of remedies do you prescribe for the patient called the United States of America or for planet Earth? I think of a phrase from the Beyond Vietnam speech that King gave where he said that a nation that year after year continues to spend more on the military side than on social uplift is approaching spiritual death. And it wasn't too many years before that it was still pretty much in that era. I can remember back when I was a teenager, when the 1964 civil rights law was being debated in Congress and in the nation, we heard the line that you can't legislate morality. And that is absolutely wrong. We do that all the time for good and for ill. And I believe the structure of the economy has to be changed. There are so many people who would love to devote themselves to helping others in their community and on their planet. And the possibilities for a sense of a livelihood and a personal future as well as a social future, those possibilities are very short supply. So people go where there is a sense of security. And that goes at the level of a sense of a personal and family livelihood and security. But also it's also psychological, what is viable. And so I believe we're trapped in this self-fulfilling mythology that perpetrates itself as reality, that pragmatism is to keep things going the way they are and to invest in the politics of death. And yet that is what in another context, C. Wright Mills described as crackpot realism. This is not realism to go ahead as though the climate was not being destroyed by fossil fuel and other emissions, that we have some human control over if we can get a grip. And that's why I come back, I think the economics is just crucial and is part of the weave of what makes a society what it is. And people respond accordingly. We're so human an animal as the saying goes, that's how we are. Well, we have this parable that the legitimacy of capitalism comes from being embedded in a democracy which governs it. And one of the critiques that I've often explored on this podcast is what I call the commodification of social design, where the legislators, the regulators, the enforcement are all things that people can, which you might call influence the likelihood that a politician stays in office with money. Plus or minus, they can attack you and they can, I watch commercial media avoiding certain subjects because they're advertisers. I watch universities yearning for enhanced endowments as public funding is cut off in a place like California for the state universities. And so they build laboratories and things as joint ventures, which may have some positive dimension. But they also seem to, what you might call succumb to, I guess the way I put it is development departments don't want rebel scholars talking outside of what's comfortable for the power elite that fund the university. And so we have a very different political economy where entertainment, media, education, and campaign incentives have all been commodified and have all been subject to that force field of the power of money. And as you've talked in just today and in many of your writings, these refractory forces are taking us to a place that Dr. King referred to as on the way to spiritual death. I think this is a very, very different economy than the one which is romantically embedded in a democracy, ungoverned by a democracy. When dollars matter more than votes, what's the real currency of decision making for our social architecture and design? There's common sense that would tell us that if you keep going in a certain direction, you will be getting closer, you'll be getting there. And as you're describing, Rob, I was thinking of a speech that a physicist, as I remember named Philip Morrison, who was part of the scientific research, as I remember, that led to the Manhattan Project and Nuclear Weapons, gave the speech in, I believe it was 1948, said the researcher, the scientist, the physicist at the universities is seeing the flood of money from the navy, from the military, from the then war and then so-called defense department. And the scientists generally know that this is wrong. Their capacities, their skills, their educated abilities are being funneled into military, into the war preparation, into the weapons research. This is in 1948. And from that day to this, that dynamic, as you allude to, is so powerful in academia, in the private industry, in the so-called public-private partnership, and now very insidiously in the last decade, more and more clear it's happening in Silicon Valley.  You know, workers at Google and elsewhere have been trying to say, no, we don't want to be an accessory to the war machinery, but that machinery is very powerful to put it mildly. And I think, you know, we keep coming back to what can we as individuals as organizers, what can we do as people who really care? And I think, among other things, is to not be overtaken and suppressed and reconfigured by what is, as though that's the only possibility, because there are real possibilities. The great activist A.J. Musty, when there were the calls to engage in atomic bomb drills in the 1950s, or when he went out to the Nevada test site, when bombs were being exploded there in the 50s, and he was asked, do you really think that what you're doing will change the way the world is? And his reply was, well, I don't know about that, but if I don't do this, the world will change me for the worst. It's the acquiescence that is to be struggled against first internally, at the same time that the social structures, the economy are absolutely crucial. And I think sometimes there's, maybe this is sort of a new age danger, there's a sort of a false dichotomy. You'll hear people say, well, I just think the world will change when I change myself internally. And that's like so non-dialectical, you know? It's like we are in the world. And it's not an either or. There's a constant interplay between what's in our hearts and minds and what is going out in the macro in terms of our conditions that we live under as people in the society and the world, to choose one or the other, I think is ridiculous. And so maybe very, very, very vulgar, Marxist might say, oh, it's all about the way the economy is structured. And then very fashionable, I think, in some circles is, oh, you have to really just change yourself and work on yourself. I think both of those are inadequate, but have some grains of truth. Yeah, they may be necessary, but not sufficient conditions. I have recently been inspired by some friends to read some of the works of the psychologist Carl Jung that he wrote around, it's around volume 10 of his collected works, that the title of that volume is Civilization in Transition. And this is where he goes from dealing with the shadow work and unconscious of the individual to what he calls the collective unconscious and the dynamics of how to say how we can together get off course or with those improvements within the self contribute to the challenge and restore the course. But the shadow of the collective unconscious seems to be quite resilient, persistent. He was actually reflecting on the experience in Germany in the 30s and 40s that stirred him up. He saw things as much what I'll call the ugly was much more resilient and powerful than he had imagined. And how we went together, how do we come out of that ditch is very much a concern. The epigraph to a book that we refer to today by Daniel Ellsberg, the doomsday machine is from Nietzsche, where he says madness and insanity is rare in individuals, but in groups and nations, it's commonplace. I think there's a lot to that. And the group, whatever we want to call it, frenzy, hysteria, psychosis of militarism, we've seen it time and again. I mean, how do we explain that fairly reliable polls show most people in Russia are supporting Putin and the so-called military operation Ukraine? Now, it's true that the facts are distorted and maybe they probably, many of them don't have full information, but still there's a enthusiasm that is tapped into stoked and exploited by leaders who lead their country and send their militaries into war. And I've been looking at the polling, for instance, when the first President Bush sent U.S. troops and the missiles into war on Iraq and when the Iraqi troops were driven out of Kuwait. Well, that was notoriously called a turkey shoot by one officer, the slaughter of retreating soldiers. And many civilians killed during the Gulf War in six weeks in 1991. 100,000 Iraqis killed by the U.S. And yet, tremendous enthusiasm for Arnold Schwarzkopf and Colin Powell. And while he had not been terribly popular before then, Gallup registered the highest popularity rating in its history for president, 89% by early 1991 for George Herbert Walker Bush. And that is not atypical. Also not atypical is that it tends to not last unless it's a clear-cut triumph for the U.S. and unless the domestic economy doesn't tank or go south. And as we know, if you were to look at a graph, it was a plunge for the first President Bush from 89% to about 45% within a year. And of course, he lost for reelection. So it's just to say that it goes to your point, I think, that there is whatever you want to call it, a very dark side in whether we consider it to be a design flaw or human characteristic or an exploited and drummed up possibility in humanity that we always have to be on guard against. And that certainly has to do with the risk of fascism in this country. In the United States of America, in the third decade of the 21st century, the Republican Party is a neo-fascist organization. And it thrives on, whether we look at it that way or not, it thrives on militarism and authoritarian views and the look for a big daddy leader. And speaking of another European philosopher, you might say, and psychologist, Wilhelm Reich wrote about that zeal for the big leader, the great leader who will solve everything for us. And there is no better description of that, in a way, or a way to describe than Donald Trump. You know, Jason Stanley wrote this excellent book describing fascism. And when you read it, I think I have it here somewhere on my desk. You know, let me grab it here. It's quite apropos. It's why fascism works. The politics of us and them by Jason Stanley came out a few years ago. He describes characteristics of fascism. And you can just substitute Donald Trump's name and the whole psychology behind it. And even though he talked against war, he also talked for it and said the US was too wimpy. And my fear as we talk here in the spring of 2022 is that the jacked up militarism that comes with the rhetoric of the Biden administration calling for regime change in Russia, what happened to a single standard, what happened to good for the goose is good for the gander. Let's be clear. If we're going to say that Vladimir Putin is a war criminal, then we also need to say that George W. Bush is a war criminal. And we also, if you really look at the facts, we have to look at the president who Biden was on the ticket with and vice president for eight years, Barack Obama. You could make a very strong case. It was a war criminal. And you look at the escalations and the drone wars and so forth in, especially Afghanistan, but also military actions in Iraq and so forth, horrendous slaughters, even if they weren't covered by US media. What happened to, okay, if you invade a country, then that is impermissible if you just do it without cause, without justification, without any defense. So we're in this sort of Orwellian zone that is enduro to itself and US mass media largely in a irony-free zone. And so the contradictions are almost taboo to talk about. I mean, imagine, Rob, if you or I went to the New York Times and said, you know, we have an op-ed and we're going to talk about, we want to write about how the last few presidents have also been war criminals while also affirming that Vladimir Putin is a war criminal. It's just a no go. It's just not within the realm of discourse. And yet we're told that we have to spend more and more money. We have to send more billions of dollars worth of weapons to Eastern Europe. We have to deploy more troops near the Russian border. This is insanity that we're now facing. We're one leader of a country that has the status of a nuclear superpower is declaring that the leader of another country, that is the leader of a nuclear superpower, that that leader must be taken out of power, must be deposed. This is something where the unthinkable becomes thinkable. And that's something that Stanley is writing about in the social context. He's saying, we're looking for, when is it fascism? They're not goose-stepping yet. They haven't shut down the Congress yet. And the goalposts keep being moved. So what's unthinkable one year becomes thinkable later on and the goalposts keep moving and we become gradually acclimated. And just to sort of go back for a moment to this question of US domestic politics, we need to wake ourselves up more and more because the very possibility of democracy is under threat from the Republican Party and that is just reality and its name is Trump. Well, that January 6th episode was a symptom of the kind of temptations that Mr. Stanley writes about in his book. And what we have, which might call the will to do about it in the aftermath, investigation, legal prosecution and so forth is what you might call seemingly inadequate. It's not what all I'm saying is it doesn't seem to be set up to detour it from happening again. And I think these are very, very daunting prospects. And when I look at, let's just, economists talk about the opportunity cost of this or that. When we're rebuilding and fortifying nuclear arsenals and weaponry and so forth, we're not building the rungs in the ladder called knowledge intensive education. A whole lot of people, I grew up in the Midwest, used their hands and then automation and machine learning and globalization took away their jobs and they didn't get what I'll call transformational assistance of any scale.  And we're going to go build more things in the military and not in the era of digitization so forth. Prepare these young people for careers in the knowledge intensive service business. That looks to me like we're going in the wrong direction. You know, the old parables in economics, W. Arthur Lewis made very clear, the Nobel laureate about moving from the farm to the city in higher productivity, et cetera. Well, now you don't go from the farm to the city, you go from low margin services to high margin services through the education system. The education system is not being fortified. And what does that portend for despair and acquiescence to authoritarianism in the future when out of helplessness you want to protect your children and you feel abandoned by the current structures? I think so much of that is just hidden in plain sight. We rarely see or hear that discourse in the mass media. There's the word neoliberalism, this sort of shorthand for where it's gone. And arguably, and I think sensibly, we could say that the Democratic Party, and you know, I was a Bernie Sanders delegate in 2016 and 2020. I participated in that process of the Democratic Party. But I think it really needs to be said and emphasized and heated that the neoliberal policies really reek of a kind of elitism and snobbery and condescension to working people and want to be working people who are underemployed or unemployed. And so what about that anger and rage of people such as those you're talking about who are not being provided with the real opportunities for gainful employment and education of the sort that will be suited for where the economy has been going? So Trump can speak to them demagogically, but often very effectively. And yet, we have sort of, you know, that stroking the chin and scratching the head from places like the New York Times and Washington Post editorial boards like, how or why are these people voting for Trump? Well, maybe it's because the elitist politicians who such as Hillary Clinton getting six figures for one speech to Wall Street or others who are so enmeshed with those who are making huge profits from the status quo of corporate America, maybe they simply, and I think they are simply not caring very much in their policies about people's standard of livings and their sense of a lack of security for the future, for themselves, for the families, for their loved ones, for their friends. It's all sort of capsulized in that saying, maybe it's too facile, but it's very true. Are the policies geared to Main Street or Wall Street? And the answers have been overwhelmingly Wall Street. And I have seen, I often cite a book that the late Jane Jacobs wrote. Her last book was called Dark Age Ahead. She was based in Toronto, but looking over the world system that was led by the United States. And her third chapter in that book is called Credentializing Versus Educating. Are schools creating inputs to production or are they creating citizens? And citizens in a vibrant democracy become, which you might call the force field or the compass for where we should go. But when people are afraid and fear being left behind, they may become inputs to production in order to secure themselves. But therefore, which you might call using Jung, constructing their own shadows around the dilemmas and the compromises they've had to make to honor their fear, rather than honor what you might call their true spirit or the true self that they aspire to be. And I think these things are very haunting. And when the school system doesn't even contribute rungs in the ladder to that pathway, where do we go? And I know I've done a little bit of work in a study group with people around Pope Francis. They talk about how much of the world doesn't go to college. But people are tempted if education is not teaching us what I will call Econo civics about the institutions of our society. Civics, when I was a kid, taught you about government institutions. Well, now these private institutions and how they work, a lot of people will drop out of high school because they don't think the curriculum has any relevance to their life. And they might as well go start earning a wage to help their family. How do you keep people in school long enough to become citizens so that a democracy can function? I find I think all of these dilemmas are, how I say, interacting with the way we create our priorities within the government. And as we've talked about today, the military priorities, the, in the case of the United States, the pharmaceutical system and others seem to or the allowing of tax avoidance, which used to be called tax evasion, and then say we can't afford it while everybody that's super well off with great lawyers can keep their money offshore. I don't know how you put the Republic back together again, restore faith camaraderie, diminish the polarized hostility that comes from fear. And I've always reminded of a book I read years ago by Gerald Jompalski, a psychologist. Love is letting go of fear. And love is, I'm not talking about romantic love, it's being part of a community with faith. I don't know how we get back on track right now. But I think illumination, which you've done in your writing, is a key ingredient. Understanding the dilemmas in the trade-offs we face is the first step. That's the diagnostic step. You have been an activist. Is activism being unrelenting in working towards these changes the necessary condition of the next step? Part of the process, I think, and as you're referring to, not sufficient but essential is our sense of our own reality right now. I think of, you know, a map, if the map is comporting with the terrain, then it's helpful. If we're using false maps, we're just sort of screwed. We're just going to keep getting lost or we can't really figure out where we want to go or how to go where we want to go. So necessary but not sufficient is to have a fairly accurate map of our current circumstances and power relations in the society and, you know, not the mythology that were largely fed, unfortunately, by mass media. But then, if the terrain is mapped out fairly accurately and not rigidly because things could change, then we have real possibilities because humans have achieved such greatness and I don't mean enormous empires and wealth. I mean greatness of human spirit and achievement for taking care of each other and elevating ourselves as a society and as a species. I think of something that the historian Howard Zinn liked to say. We miss very much. But Howard, year after year, would say that we don't know what is possible. We may be very discouraged but he would cite examples and classic one is how would we ever have believed that in South Africa not only apartheid would end but there would be a sense of reconciliation and that Nelson Mandela, after all those years in prison, would be the president of the country. Of course, the South African government, you know, that was not nirvana and it had a lot of corporatism infecting that government but the point is that we can't always know what is possible and sometimes when things seem very, very bleak, there's an unexpected breakthrough and, you know, a metaphor that's been used as the lily pad in the pond where there might just be one lily pad and then there's another one that seems very isolated but very quickly the whole pond can be filled with the lily pads and movements are that way and we have a lot of examples where people have achieved great things when it seemed almost impossible. So one truism that I think we can be left with is we could work our whole lives, we could devote ourselves to creating necessary change and we could fail but one thing that's for sure is that if we don't dedicate ourselves to making those changes then they won't be made and so in a way that's the existential choice, passivity and capitulation to what in our hearts we know is wrong or finding ways to the best of our abilities individually and collectively to live and work for what we believe in.