The Second Law of Thermodynamic Bureaucracy

Singapore is a wonderful place. Today, we think of it as a modern, thriving, leading-edge city-state. Eighty years ago things were different.

“Living conditions were abysmal as the problems of overcrowding continued after the war, forcing families to live in crammed and filthy slums and squatters that had poor ventilation and lacked proper sanitation. Severe shortages of food and healthcare plagued the population, which was also threatened by outbreaks of fire and diseases due to the poor living conditions and overcrowded situation.”

A combination of good government, entrepreneurial people, globalization, and time drove their rise. It is a staggering transformation.

Good government requires revenue collected in the form of taxes and fees.

Singapore makes it effortless to pay your taxes.

They even have a “no-filing service for individuals.”

“Individuals who have received the No-Filing Service (NFS) letter or SMS from the IRAS do not need to submit an Income Tax Return unless they have additional income to declare or have additional changes in relief claims from the previous year.

“The IRAS will issue individuals a tax bill (Notice of Assessment) based on their relief claims for the previous year and the income details provided by their employer participating in the Auto-Inclusion Scheme (AIS) for Employment Income. Reliefs may be adjusted if the individual has been informed that he/she does not meet the eligibility criteria.”

Set aside the fact that the Inland Revenue Authority of Singapore communicates with citizens by text message. This no-filing dispensation isn’t for everyone, but it could be for most. Imagine people who don’t have other sources of income besides their employment income. The calculation of taxes is formulaic. There is information about their prior eligibility for credits that carries over from one year to the next. If anything substantial changes, the taxpayer can always file a return.

In Singapore, one can pay taxes via Internet banking. The authorities communicate with individuals however people prefer from a selection of multiple digital options.

Simplicity breeds compliance. A whopping ninety-six percent of taxpayers filed on time in fiscal year 2021 and ninety-three percent of them paid on time.

High compliance is one way to keep tax rates down. The progressive rates range from 0% to a maximum 24% that kicks in for income above SGD$1,000,000, or roughly $740,000 US dollars. Everyone pays tax after the first SGD$20,000 in income. Practically all households pay some taxes.

Singapore government revenue (including revenue other than taxes) was 18.9% as a share of GDP in fiscal year 2021.

This is a country with universal healthcare and one that subsidizes housing and education for the poorest members of society.

Contrast that with the United States.

“Over 50% of all people file annual federal income tax returns before April 1 of each year. Most of the rest file in the first two weeks of April, but 5% get an extension to October 15.

“According to the IRS, about 10% don’t file at all.”

Filing is difficult, people wait until the last minute, and compliance is weaker. Anyone who files taxes in the US understands this. There are schedules on top of schedules. There is an almost antagonistic relationship between the taxpayer and the authorities. There are tens of thousands of tax advisors in this country.

Enforcing tax compliance is one of the most important agencies in the federal bureaucracy, the Internal Revenue Service.

One might think that making sure that the government has the money it needs to provide public goods and services was a priority. This country is technology-obsessed. It should have the best technology and the best customer service. It should make it as easy to pay taxes as Singapore does.

Yet its infrastructure is archaic.

“The Internal Revenue Service’s (IRS) legacy IT environment includes applications, software, and hardware, which are outdated but still critical to day-to-day operations. Specifically, GAO’s analysis showed that about 33 percent of the applications, 23 percent of the software instances in use, and 8 percent of hardware assets were considered legacy. This includes applications ranging from 25 to 64 years of age, as well as software up to 15 versions behind the current version. As GAO has previously noted, and IRS has acknowledged, these legacy assets will continue to contribute to security risks, unmet mission needs, staffing issues, and increased costs … IRS recently suspended operations of six initiatives, including two which are essential to replacing the 60-year-old Individual Master File (IMF).”

The inefficiency this spawns is massive.

“The IRS is woefully understaffed and will miss about $600 billion in uncollected taxes this year as it grapples with technology built before humans landed on the moon, according to Deputy Treasury Department Secretary Wally Adeymo.

“The understaffing has also led to frustrations for some Americans who called the IRS for tax help this past year, with only 11% getting another human to answer the phone.”

Which came first? Was it the understaffing, the complexity, or the technology obsolescence? This is a vicious spiral in which the technology gets older and the tax system gets more complicated every year. No wonder they’re understaffed. It must be an extraordinarily difficult job. Imagine what your life would be like at work or at home if you were working with systems that old when everyone around you is using the latest thing.

Where do they even find people who can maintain these systems? How many COBOL coders can there be in India?

All of this is not to criticize the IRS. They’re doing God’s work. Everything good that the US government does from maintaining the security of the oceans to providing healthcare funding for the poor and the old relies on having sufficient funding to do so.

What rule can we generalize from this juxtaposition of the modern with the outdated?

The Second Law of Thermodynamics relies upon a concept called entropy.

“Entropy is a measure of the disorder of a system. Entropy also describes how much energy is not available to do work. The more disordered a system and higher the entropy, the less of a system’s energy is available to do work.”

The US tax system has a high degree of entropy. There is less and less energy available to do the work of getting people to pay their fair share. So much of it is bled off just by staying alive, maintaining ancient software, for example.

“The second law of thermodynamics states that the total entropy of a system either increases or remains constant in any spontaneous process; it never decreases.”

If I leave a hot drink sitting on the counter, it will cool down. The heat from the initially boiling tea will flow into the cooler room. It can only flow one way. Unless I reheat the drink, it will cool down as it sits there.

In our case, without a radical restructuring of the IRS’ technology infrastructure, it’s fair to say that it will be at least as difficult to collect taxes going forward, if not incrementally harder.

The Singaporean system is better staffed and equipped with superior technology. The authority has made a conscious effort to arrest the spontaneous tendency for systems to become less efficient over time. Singapore keeps reheating their tea with fresh ideas and new tools.

Similarly, we can posit that the efficiency of a bureaucracy either stays the same or falls (but never increases) without an intervention to simplify or automate its processes. There is a natural entropy in these types of human systems that parallels what we see in nature.

One reason is that individual agents within the bureaucracy assume that its efficacy will persist despite their incremental changes to policy or inattentiveness to maintenance. The individual fails to account for the impact they have on the system.

Another reason may be that the bureaucracy cannot change at the same speed of progress that we observe in the outside world. Individual agents within the bureaucracy may have a greater incentive to exploit the power it confers in the here and now than to invest resources in exploring new ways of doing things. In a competitive world, this is a luxury that only the largest and wealthiest organizations can afford.

Bureaucracies do not face Darwinian peril.

The corollary of this statement is that a bureaucracy is as efficient as its governance. For it is the governance that dictates the amount of additional energy to add to the system in reforming and modernizing its operation.

In government, these become political questions, at some point. One can make the argument that Singaporean governance is the critical distinguishing factor. Of course, the governance comes down to the people in charge. That’s beyond the scope of this simple study of bureaucracy.