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The 'black box' approach to tax reform

By Murphey Johnson • Sep 24, 2017 at 12:00 AM

In science and engineering, we have the concept of the “black box.” This is a theoretical construct with inputs on one side and outputs on the other. What happens within the box does not matter as long as for a given set of inputs, we get the desired outputs.

A simple example might be an adder, where there are two numerical inputs and a single numerical output that is the sum of the inputs. It doesn’t matter whether you’ve got IBM’s Watson or a monkey with an abacus inside the box, as long as the result is the same.

This concept is helpful when trying to solve large problems. If you can assume that a properly defined black box will handle some of the work, you can concentrate on other parts of the system, leaving the implementation of the black box for later or perhaps for someone else.

I like to think of the tax code as a big black box with various measures of the economy on one side and revenue on the other. If we understand the relationship between inputs and output, we can use that to forecast revenue. This is really important if we want to be able to pay our bills and balance our governmental budget. Of course, that forecasting is easier to do if the relationship is simple. A simple relationship also allows for easy comparison of tax burdens for different payers.

Most people would agree that a simplified tax code would be good. Well, we’re in luck. Following on their lack of productivity in other areas, Congress is gearing up for an effort at “tax reform.”

But it’s not so easy to accomplish. You see, when we crack open that big black box, we find little black boxes that represent individual taxpayers. These have inputs for various types and amounts of income and expenses, and they have outputs that represent taxes due. The problem is that since these boxes are so complex now, any simplifying change within them will almost certainly change the relationship between those inputs and outputs.

“That’s the idea,” you say. You want to pay less tax. Wouldn’t it be great if the code was changed so that you do?

Well, let’s see. Messing with the little black boxes is going to create one of four scenarios. 1.) There will be no change in outputs for a given set of inputs. Because of the current complexity of the system, this is not possible. 2.) Everybody will pay the same or more tax. This would never pass. 3.) Everybody will pay the same or less tax. In theory, this might work, but in practice, the government has a lot of bills to pay. 4.) Some of us will pay more while others pay less.

That fourth scenario is pretty much unavoidable. That’s why we all need to keep a close eye on our elected representatives over the coming weeks. Most of them, both Democrats and Republicans, have a lot more money than most of us. This “reform” effort gives them the perfect opportunity to hook themselves and their wealthy buddies and benefactors up to pay less tax.

That’s good for them, but unless they want to seriously cut expenditures or blow up the deficit, they’ll need to foist those increased-tax outputs on someone else. (No, don’t bother looking behind you.)

Do we really need to worry? After all, the various factions in Congress can’t seem to agree on much of anything these days, and the president, who needs to eventually sign any resulting bill, can’t get along with anybody on Capitol Hill. Fortunately for all of them, greed and self-interest can be powerful motivators, and they all want to be able to claim that they got something done before the midterm elections.

I’m not saying that actual tax reform isn’t needed. After all, if the tax code were any bigger, it might be too big and heavy for an indignant member of Congree to lift it up in a binder to show us just how big it is.

We must be realistic, however, about the results of a tax overhaul. We should all be on alert whenever politicians start talking about “reforming” anything, because political “reform” translates almost directly into the selection of winners and losers.

We need to hold them accountable for their participation in this effort and pay close attention as it happens. We deserve better than secret conferences, creative accounting, bent rules, and midnight deals that can leave us holding the bag while the politicians publicly point fingers at one another — and privately laugh their way to the bank.

Murphey Johnson of Johnson City is an engineer. He can be reached at murph@murpheyjohnson.com.

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