Trump Wants To Eliminate Income Taxes: 3 Ways That May Hurt the Middle Class
At first glance, Donald Trump’s idea of not paying federal income taxes might sound appealing. Taking home a larger portion of your hard-earned paycheck would seemingly put more money in your pocket.
The thing is, federal income taxes are imposed for a reason. They fund many key services Americans rely on each day.
Federal government funding comes from a variety of sources, including income taxes, payroll taxes, corporate income taxes, national park admissions and customs duties, according to the U.S. Treasury Department. However, individual income taxes was the primary source of revenue in 2023.
Individual income taxes have amounted to 52% — $1.7 trillion — of total revenue for the U.S. federal government in fiscal 2024 to date, according to the U.S. Treasury Department.
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So while no longer having to pay federal income taxes might seem like a fantastic idea on the surface, there’s a lot more to it.
“Not paying income taxes will negatively impact the majority of the middle class,” said Noah Damsky, founder and wealth advisor at Marina Wealth Advisors. “There’s no free lunch — the government spends much more than the revenue it brings in as it is, so not paying income taxes will have consequences.”
Not paying federal income taxes could add up fast, both literally and figuratively. Here are three reasons Damsky said eliminating this major tax could hurt the middle class.
Inflation Would Soar
As noted above, the federal government gets the bulk of its revenue from individual income taxes. If income taxes were eliminated, the money would have to come from somewhere else.
“There would be increased government borrowing to replace the lost income tax revenue, and the consumer’s income tax savings would increase spending and push prices higher,” Damsky said. “Everything from food, rent, home values and transportation will soar in cost.”
It might feel hard to imagine, but he said buying a home would become even more challenging.
“Imagine a world in which middle-class families have a few more thousand dollars per month,” he said. “They’ll become more aggressive in bidding for homes and push prices higher.”
Rising home prices and greater competition could put homeownership even more out of reach for middle-class families. The average home value in the U.S. is currently $360,681, with homes going to pending in approximately 13 days, according to Zillow.
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Social Services Would Decline
Without income taxes, Damsky said local communities would suffer.
“Local communities receive federal funds for things ranging from highways to homelessness,” he said. “With any potential decline in federal revenues, local communities will receive less federal support.”
He said the impact would be felt on multiple levels.
“This will be a double whammy,” he said. “Imagine receiving less support as prices are soaring. At a time when folks will need even more support, they’ll be receiving even less.”
One of the government’s largest spending categories is income security — programs such as unemployment compensation, federal employee retirement and disability, and food and nutrition assistance.
Additionally, Social Security, health programs (e.g., programs related to healthcare services, health research and training, and consumer and occupational health and safety), Medicare, and national defense (e.g., military and defense-related activities) are paid for by the federal government, which is largely funded by individual income taxes.
State Taxes Could Increase
“Remember ‘cash for clunkers’ in 2009 when the government subsidized $4,500 off the price of a new car?” Damsky said. “There was such a shortage of qualified cars that auto dealers increased car prices, which meant the dealers took about half of the $4,500 government support.”
If federal income taxes are eliminated, he said states will react accordingly.
“They’ll increase tax rates, since consumers have the ability to pay more state taxes if there are no more federal income taxes,” he said.
Not all states impose individual income taxes. However, in fiscal year 2022, broad-based personal income taxes were the greatest source of tax dollars in 31 of the 41 states that levy them, according to Pew.
All but four states received most of their fiscal year 2022 revenue from personal income or general sales taxes. Specifically, severance taxes were the leader in Alaska and North Dakota, license taxes in Delaware and corporate income taxes in New Hampshire.
Tax revenue is clearly pertinent on the state level as well, so it’s easy to see how lawmakers could jump at the potential to levy higher taxes.
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