Donald Trump could return to the Oval Office, and when he does, he could make federal income taxes a thing of the past. On the surface, having more money in your paycheck may sound great, but there’s more to it than that.
Paying income taxes may not be your favorite pastime, but they serve a purpose. Eliminating them could create a ripple effect that drives the cost of living even higher than it already is.
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“If Trump repeals the income tax, almost everything will become more expensive because inflation will skyrocket,” said Noah Damsky, principal at Marina Wealth Advisors.
Some costs may take longer to increase, while others may increase more quickly.
Here’s a look at three things that Damsky says will quickly skyrocket in price once income taxes become a thing of the past:
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Housing
“Rents and real estate prices could rise dramatically,” said Damsky. “Without income taxes, net income would rise.”
That may sound good, but it could prove detrimental to home buyers, he said.
“This extra monthly income will go into the most unaffordable areas of the market, such as housing,” he said. “Buyers will be able to afford a higher mortgage and will therefore bid higher prices that are in line with what they can afford now.”
According to Redfin, the median sales price of a home in the U.S. was $438,483 in May 2024, up 4.8% from May 2023 and 25.9% from May 2022.
Wages
“As demand increases, prices will rise and wages will rise,” Damsky said. “In places like Los Angeles, where the minimum wage is $20 an hour (for fast-food workers, $17.28 for everyone else), the competitive wages needed to hire workers could skyrocket as inflation rises.”
According to the Bureau of Labor Statistics, the median wage for private sector workers will be $35 per hour as of June 2024. This amount varies widely by industry, with average wages as high as $22.06 for workers in the leisure and hospitality sector and $50.83 for workers in the utilities sector.
Shares
“With all that extra money flowing into the economy, stock prices will skyrocket,” Damsky said. “Saving will become much more difficult as inflation rises, but savers will be rewarded as asset prices rise.”
Those who can save money during inflation may benefit from faster wealth growth. But higher prices for everything – including stocks – could make wealth building more difficult for everyone else.
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This is what income taxes pay
Congress passed the Current Tax Payment Act in 1943, which required employers to withhold taxes from employee wages and pay them quarterly. A year later, the Individual Income Tax Act was passed, which established standard deductions on Form 1040.
Most U.S. citizens or permanent residents who work in the United States pay federal income tax, but nine states do not impose income tax. These include Alaska, Florida, New Hampshire, Nevada, South Dakota, Texas, Washington, and Wyoming.
In principle, you can choose to live in a state with no personal income tax, but you will probably still pay federal income taxes.
If you pay federal income taxes, you certainly know that there is money missing from your paycheck. However, you may not know much about the essential services your tax dollars actually fund.
Income tax is an important source of revenue for the federal government.
Specifically, 52%—$1.7 trillion—of the federal government’s total revenues in the 2024 fiscal year so far come from income taxes.
The federal government’s major spending categories include income security, Social Security, health care, defense, and Medicare. According to USASpending.gov, the federal government plans to spend $1.10 trillion on Medicare, $1.03 trillion on Social Security, and $874.01 billion on defense so far this year.
Exactly what would happen to all of these programs without income tax funding is unknown. It is possible that the federal government would have to borrow significantly more money on a regular basis, which would significantly increase the national debt.
It is also possible that some of these important programs will cease to function or will operate at a reduced level. This could be detrimental to both Americans and the country as a whole.
While the thought of not paying federal income taxes may sound appealing at first, it is important to understand the far-reaching impacts this would have. Increased inflation, coupled with a potential threat to important basic services, is definitely something to keep in mind.
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This article originally appeared on GOBankingRates.com: Trump wants to abolish the income tax: 3 things that will immediately become more expensive
