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Here’s a fascinating tax hack from Belgium (listen to the details here, episode #484 of “No Such Thing as a Fish,” at 28:00).
Basically, it’s about a music festival on the border between Belgium and Holland. The stage was in Holland, but the crowd was in Belgium. When the copyright collector came around, they argued that they didn’t have to pay any tax because the audience was in a different country. Supposedly it worked.
My latest book, A Hacker’s Mind, is filled with stories about the rich and powerful hacking systems, but it was hard to find stories of the hacking by the less powerful. Here’s one I just found. An article on how layoffs at big companies work inadvertently suggests an employee hack to avoid being fired:
…software performs a statistical analysis during terminations to see if certain groups are adversely affected, said such reviews can uncover other problems. On a list of layoff candidates, a company might find it is about to fire inadvertently an employee who previously opened a complaint against a manager—a move that could be seen as retaliation, she said.
So if you’re at a large company and there are rumors of layoffs, go to HR and initiate a complaint against a manager. It’ll protect you from being laid off.
My latest book, A Hacker’s Mind, has a lot of sports stories. Sports are filled with hacks, as players look for every possible advantage that doesn’t explicitly break the rules. Here’s an example from pickleball, which nicely explains the dilemma between hacking as a subversion and hacking as innovation:
Some might consider these actions cheating, while the acting player would argue that there was no rule that said the action couldn’t be performed. So, how do we address these situations, and close those loopholes? We make new rules that specifically address the loophole action. And the rules book gets longer, and the cycle continues with new loopholes identified, and new rules to prohibit that particular action in the future.
Alternatively, sometimes an action taken as a result of an identified loophole which is not deemed as harmful to the integrity of the game or sportsmanship, becomes part of the game. Ernie Perry found a loophole, and his shot, appropriately named the “Ernie shot,” became part of the game. He realized that by jumping completely over the corner of the NVZ, without breaking any of the NVZ rules, he could volley the ball, making contact closer to the net, usually surprising the opponent, and often winning the rally with an un-returnable shot. He found a loophole, and in this case, it became a very popular and exciting shot to execute and to watch!
I don’t understand pickleball at all, so that explanation doesn’t make a lot of sense to me. (I watched a video explaining the shot; that helped somewhat.) But it looks like an excellent example.
The blog post also links to a 2010 paper that I wish I’d known about when I was writing my book: “Loophole ethics in sports,” by Øyvind Kvalnes and Liv Birgitte Hemmestad:
Abstract: Ethical challenges in sports occur when the practitioners are caught between the will to win and the overall task of staying within the realm of acceptable values and virtues. One way to prepare for these challenges is to formulate comprehensive and specific rules of acceptable conduct. In this paper we will draw attention to one serious problem with such a rule-based approach. It may inadvertently encourage what we will call loophole ethics, an attitude where every action that is not explicitly defined as wrong, will be seen as a viable option. Detailed codes of conduct leave little room for personal judgement, and instead promote a loophole mentality. We argue that loophole ethics can be avoided by operating with only a limited set of general principles, thus leaving more space for personal judgement and wisdom.
EDITED TO ADD (5/12): Here’s an eleven-second video that explains the Erne (or Ernie).
Here’s a religious hack:
You want to commit suicide, but it’s a mortal sin: your soul goes straight to hell, forever. So what you do is murder someone. That will get you executed, but if you confess your sins to a priest beforehand you avoid hell. Problem solved.
This was actually a problem in the 17th and 18th centuries in Northern Europe, particularly Denmark. And it remained a problem until capital punishment was abolished for murder.
It’s a clever hack. I didn’t learn about it in time to put it in my book, A Hacker’s Mind, but I have several other good hacks of religious rules.
An elephant uses its right-of-way privileges to stop sugar-cane trucks and grab food.
The tax code isn’t software. It doesn’t run on a computer. But it’s still code. It’s a series of algorithms that takes an input—financial information for the year—and produces an output: the amount of tax owed. It’s incredibly complex code; there are a bazillion details and exceptions and special cases. It consists of government laws, rulings from the tax authorities, judicial decisions, and legal opinions.
Like computer code, the tax code has bugs. They might be mistakes in how the tax laws were written. They might be mistakes in how the tax code is interpreted, oversights in how parts of the law were conceived, or unintended omissions of some sort or another. They might arise from the exponentially huge number of ways different parts of the tax code interact.
A recent example comes from the 2017 Tax Cuts and Jobs Act. That law was drafted in both haste and secret, and quickly passed without any time for review—or even proofreading. One of the things in it was a typo that accidentally categorized military death benefits as earned income. The practical effect of that mistake is that surviving family members were hit with surprise tax bills of US$10,000 or more.
That’s a bug, but not a vulnerability. An example of a vulnerability is the “Double Irish with a Dutch Sandwich.” It arises from the interactions of tax laws in multiple countries, and it’s how companies like Google and Apple have avoided paying U.S. taxes despite being U.S. companies. Estimates are that U.S. companies avoided paying nearly US$200 billion in taxes in 2017 alone.
In the tax world, vulnerabilities are called loopholes. Exploits are called tax avoidance strategies. And there are thousands of black-hat researchers who examine every line of the tax code looking for exploitable vulnerabilities—tax attorneys and tax accountants.
Some vulnerabilities are deliberately created. Lobbyists are constantly trying to insert this or that provision into the tax code that benefits their clients financially. That same 2017 U.S. tax law included a special tax break for oil and gas investment partnerships, a special exemption that ensures that fewer than 1 in 1,000 estates will have to pay estate tax, and language specifically expanding a pass-through loophole that industry uses to incorporate companies offshore and avoid U.S. taxes. That’s not hacking the tax code. It’s hacking the processes that create them: the legislative process that creates tax law.
We know the processes to use to fix vulnerabilities in computer code. Before the code is finished, we can employ some sort of secure development processes, with automatic bug-finding tools and maybe source code audits. After the code is deployed, we might rely on vulnerability finding by the security community, perhaps bug bounties—and most of all, quick patching when vulnerabilities are discovered.
What does it mean to “patch” the tax code? Passing any tax legislation is a big deal, especially in the United States where the issue is so partisan and contentious. (That 2017 earned income tax bug for military families hasn’t yet been fixed. And that’s an easy one; everyone acknowledges it was a mistake.) We don’t have the ability to patch tax code with anywhere near the same agility that we have to patch software.
We can patch some vulnerabilities, though. The other way tax code is modified is by IRS and judicial rulings. The 2017 tax law capped income tax deductions for property taxes. This provision didn’t come into force in 2018, so someone came up with the clever hack to prepay 2018 property taxes in 2017. Just before the end of the year, the IRS ruled about when that was legal and when it wasn’t. Short answer: most of the time, it wasn’t.
There’s another option: that the vulnerability isn’t patched and isn’t explicitly approved, and slowly becomes part of the normal way of doing things. Lots of tax loopholes end up like this. Sometimes they’re even given retroactive legality by the IRS or Congress after a constituency and lobbying effort gets behind them. This process is how systems evolve. A hack subverts the intent of a system. Whatever governing system has jurisdiction either blocks the hack or allows it—or does nothing and the hack becomes the new normal.
Here’s my question: what happens when artificial intelligence and machine learning (ML) gets hold of this problem? We already have ML systems that find software vulnerabilities. What happens when you feed a ML system the entire U.S. tax code and tell it to figure out all of the ways to minimize the amount of tax owed? Or, in the case of a multinational corporation, to feed it the entire planet’s tax codes? What sort of vulnerabilities would it find? And how many? Dozens or millions?
In 2015, Volkswagen was caught cheating on emissions control tests. It didn’t forge test results; it got the cars’ computers to cheat for them. Engineers programmed the software in the car’s onboard computer to detect when the car was undergoing an emissions test. The computer then activated the car’s emissions-curbing systems, but only for the duration of the test. The result was that the cars had much better performance on the road at the cost of producing more pollution.
ML will result in lots of hacks like this. They’ll be more subtle. They’ll be even harder to discover. It’s because of the way ML systems optimize themselves, and because their specific optimizations can be impossible for us humans to understand. Their human programmers won’t even know what’s going on.
Any good ML system will naturally find and exploit hacks. This is because their only constraints are the rules of the system. If there are problems, inconsistencies, or loopholes in the rules, and if those properties lead to a “better” solution as defined by the program, then those systems will find them. The challenge is that you have to define the system’s goals completely and precisely, and that that’s impossible.
The tax code can be hacked. Financial markets regulations can be hacked. The market economy, democracy itself, and our cognitive systems can all be hacked. Tasking a ML system to find new hacks against any of these is still science fiction, but it’s not stupid science fiction. And ML will drastically change how we need to think about policy, law, and government. Now’s the time to figure out how.
This essay originally appeared in the September/October 2020 issue of IEEE Security & Privacy. I wrote it when I started writing my latest book, but never published it here.
Early in his career, Kevin Mitnick successfully hacked California law. He told me the story when he heard about my new book, which he partially recounts his 2012 book, Ghost in the Wires.
The setup is that he just discovered that there’s warrant for his arrest by the California Youth Authority, and he’s trying to figure out if there’s any way out of it.
As soon as I was settled, I looked in the Yellow Pages for the nearest law school, and spent the next few days and evenings there poring over the Welfare and Institutions Code, but without much hope.
Still, hey, “Where there’s a will…” I found a provision that said that for a nonviolent crime, the jurisdiction of the Juvenile Court expired either when the defendant turned twenty-one or two years after the commitment date, whichever occurred later. For me, that would mean two years from February 1983, when I had been sentenced to the three years and eight months.
Scratch, scratch. A little arithmetic told me that this would occur in about four months. I thought, What if I just disappear until their jurisdiction ends?
This was the Southwestern Law School in Los Angeles. This was a lot of manual research—no search engines in those days. He researched the relevant statutes, and case law that interpreted those statutes. He made copies of everything to hand to his attorney.
I called my attorney to try out the idea on him. His response sounded testy: “You’re absolutely wrong. It’s a fundamental principle of law that if a defendant disappears when there’s a warrant out for him, the time limit is tolled until he’s found, even if it’s years later.”
And he added, “You have to stop playing lawyer. I’m the lawyer. Let me do my job.”
I pleaded with him to look into it, which annoyed him, but he finally agreed. When I called back two days later, he had talked to my Parole Officer, Melvin Boyer, the compassionate guy who had gotten me transferred out of the dangerous jungle at LA County Jail. Boyer had told him, “Kevin is right. If he disappears until February 1985, there’ll be nothing we can do. At that point the warrant will expire, and he’ll be off the hook.”
So he moved to Northern California and lived under an assumed name for four months.
What’s interesting to me is how he approaches legal code in the same way a hacker approaches computer code: pouring over the details, looking for a bug—a mistake—leading to an exploitable vulnerability. And this was in the days before you could do any research online. He’s spending days in the law school library.
This is exactly the sort of thing I am writing about in A Hacker’s Mind. Legal code isn’t the same as computer code, but it’s a series of rules with inputs and outputs. And just like computer code, legal code has bugs. And some of those bugs are also vulnerabilities. And some of those vulnerabilities can be exploited—just as Mitnick learned.
Mitnick was a hacker. His attorney was not.
This article talks about public land in the US that is completely surrounded by private land, which in some cases makes it inaccessible to the public. But there’s a hack:
Some hunters have long believed, however, that the publicly owned parcels on Elk Mountain can be legally reached using a practice called corner-crossing.
Corner-crossing can be visualized in terms of a checkerboard. Ever since the Westward Expansion, much of the Western United States has been divided into alternating squares of public and private land. Corner-crossers, like checker pieces, literally step from one public square to another in diagonal fashion, avoiding trespassing charges. The practice is neither legal nor illegal. Most states discourage it, but none ban it.
It’s an interesting ambiguity in the law: does checker trespass on white squares when it moves diagonally over black squares? But, of course, the legal battle isn’t really about that. It’s about the rights of property owners vs the rights of those who wish to walk on this otherwise-inaccessible public land.
This particular hack will be adjudicated in court. State court, I think, which means the answer might be different in different states. It’s not an example I discuss in my new book, but it’s similar to many I do discuss. It’s the act of adjudicating hacks that allows systems to evolve.
Sidebar photo of Bruce Schneier by Joe MacInnis.