On October 22, 1986, the world was an entirely different place.
The Soviet Union still loomed, as did the threat of nuclear annihilation.
Most people had no idea how to use a computer, let alone even heard of the “Internet” (which at the time was still a military communications project.)
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Hardly anyone had ever seen a cell phone. And with a $4,000 price tag, even fewer people owned one.
Microsoft stock had recently IPO’d, making 30-year old Bill Gates one of the richest men on the planet.
And the most powerful supercomputer ever created, the Soviet M13, could perform 2.4 billion “floating point operations per second”, which is a fraction of what an iPhone 5 can do today.
1986 was a totally different world. It was also the last time that the US tax code was comprehensively updated.
And that was a big deal.
Prior to the 1986 tax reform, the previous US tax code had been enacted in 1954.
Needless to say the world had changed a lot between 1986 and 1954.
From 1954 to 1986, the federal tax code had become enormously complex; rather that rewriting the code, Congress had spent decades making countless changes, tweaks, and additions.
By the late 1960s the tax code was completely incomprehensible and grossly overcomplicated.
But it still took them decades to fix it.
In 1986 they hit the reset button; the primary goal was to simplify the tax code and rewrite it for (what was then) the ‘modern world.’
Over the past four decades they’ve made the exact same mistakes.
Congress has made countless small changes, tweaks, and additions to the point that the current tax code is once again completely incomprehensible and grossly overcomplicated.
Tax preparation service H&R Block has been aggressively advertising that they are using IBM’s Watson, one of the most advanced AI technologies ever invented, to do people’s taxes.
That pretty much sums up how complicated the tax code has become… that a leading tax prep service is now relying on advanced AI to get the job done.
Taxes are a nightmare in the Land of the Free.
It’s not simply the amount of tax that people and businesses have to pay (which is quite high, especially if you’re a small business owner.)
And it’s not simply the lack of benefit you receive in exchange for paying your taxes (more debt, more government waste.)
The nightmare of taxation is also about the waste of so much time, money, and stress on such a demeaning activity.
Tax preparation sucks innumerable hours and tens of billions of dollars out of the economy each year that could be used far more productively.
I have friends in foreign countries from Estonia to Singapore who are successful investors and entrepreneurs that spend literally minutes each year preparing their taxes, filing online, and paying a low, reasonable sum.
If they were in the US, the nuances of their international business and investment activities would have them buried in paperwork.
Additionally, the US tax code is packed full of provisions that provide strong incentives and disincentives which dramatically alter people’s decision-making.
The current US tax code provides huge incentives for Americans to get married and have children, showering families with extra benefits that don’t apply to single taxpayers.
And given the generous deductions for interest and depreciation, it also provides strong incentives to invest in real estate.
Yet the tax code actually provides disincentives for investing in gold (which is subject to a higher 28% tax on capital gains).
So basically the government wants us to have babies, buy houses, but avoid gold.
Most of all, the majority of the tax code is simply obsolete; it was written in 1986 at the peak of the Industrial Age.
Back then the biggest companies in the world back then were General Motors, Exxon, Ford, Chevron, General Electric, and DuPont… pretty much all oil and manufacturing.
Today it’s companies like Apple, Google, Microsoft, Facebook, Amazon, etc.
Our world is dominated by digital technology that eradicates international borders.
E-commerce and digital products didn’t even exist in 1986.
Yet entrepreneurs and business people are somehow expected to cram 21st century business models into an industrial era tax code.
It simply doesn’t compute.
Of course, the burden is always on the taxpayer to navigate the obsolete complexities of the tax code.
And if you screw up, they threaten you with debilitating financial penalties and even jail time.
Sounds like a fair system to me!
What’s incredible is that they’ve been talking about reforming and simplifying the tax code for years… and years…
Everyone knows it needs to happen. But it still hasn’t. And likely won’t.
That’s because, as my tax attorney explained to me long ago, every single line of the tax code, no matter how outdated or obscure, is backed by some special interest group.
Developers want to keep the interest and depreciation deductions. Family advocacy groups want to keep the child tax credits.
And they’ll all fight tooth and nail for their prized tax provisions.
I truly hope I’m wrong. But I wouldn’t hold your breath on some major tax code reset.
Yet as I often write, there are still endless options at your disposal to legally reduce what you owe… without adding any complicated burdens.
Establishing a more flexible retirement plan is one obvious option.
Switching to a solo 401(k) plan could triple your tax benefit, while a self-directed SEP IRA could increase your tax benefit by nearly 10x.
You still have until midnight tonight to make a contribution that will apply to 2016.
Remember, you can always contribute to your existing IRA today, and then switch to a better plan down the road.
Don’t miss tonight’s tax deadline– it’s literally free money.