An Epic Blunder

Imagine waking up tomorrow to find that the federal income tax is gone. No more deductions, no more tax season stress, just your entire paycheck deposited in full. It sounds like a dream. But beneath the surface, this proposal isn’t just radical; it’s reckless. Eliminating the federal income tax without a sustainable replacement would destabilize the economy, devastate the federal budget, and drastically increase the cost of living for everyday Americans.

The federal income tax is the backbone of government revenue, providing $2.5 trillion annually, nearly 50% of all federal revenue. It funds essential services: Social Security, Medicare, infrastructure, defense, education, and disaster relief. Without it, the government would be forced to either eliminate critical programs or find new ways to tax Americans.

Even the most drastic spending cuts couldn’t offset this loss. In 2023, Social Security alone cost $1.4 trillion, while Medicare and Medicaid required another $1.6 trillion. Military spending was $800 billion. Eliminating income tax revenue would create a $2.5 trillion shortfall, forcing either unsustainable borrowing or a radical shift in taxation.

Most economists agree that two major tax alternatives could replace the income tax: a Value-Added Tax (VAT) or high tariffs. Neither would come close to keeping the cost of living stable.

A VAT, similar to those in Europe, would impose a 20-30% tax on every stage of production, increasing prices on everything from groceries to healthcare. If you think inflation is bad now, imagine every product costing 20-30% more overnight.

Europe’s experience with VAT offers a cautionary tale. In countries like France (20% VAT) and Germany (19% VAT), consumers pay significantly higher prices for basic necessities. A study by the Tax Foundation estimates that a 20% VAT in the U.S. would increase consumer prices by at least 15-20% across the board.

For middle- and low-income families, this would be devastating. Unlike the progressive income tax, where the wealthy pay a higher share, a VAT is regressive, disproportionately impacting the poor. An individual making $30,000 spends nearly all their income on taxable goods, while a billionaire, who invests rather than spends most of their earnings, would bear a lighter burden.

An alternative proposal gaining traction in Republican circles is replacing the income tax with massive tariffs. But tariffs function as an indirect tax on consumers, one that disproportionately hurts middle-class and working Americans.

Today, the U.S. imports $3.4 trillion in goods annually. Imposing a 10-30% tariff across the board would mean hundreds of billions of dollars in higher prices for essential goods like food, clothing, electronics, and cars.

• A 10% tariff on all imports would generate $340 billion annually, a fraction of what’s needed.
• A 20% tariff could bring in $680 billion, still leaving a $1.8 trillion deficit.
• A 100% tariff on all Chinese imports (around $500 billion annually) would spark retaliatory tariffs, devastating American industries that rely on exports.

Consumers would be forced to pay significantly higher prices on everyday items:

• Electronics: A 25% tariff could raise the price of a new iPhone by $250.
• Clothing & Shoes: A 20% tariff would increase the price of imported apparel by 15-30%.
• Vehicles: A 25% tariff on foreign cars could increase car prices by $5,000 or more.
• Groceries: Fruits, vegetables, and coffee, most of which are imported, would become substantially more expensive.

The worst part? Tariffs don’t just make imports more expensive, they also drive up the price of domestic goods. U.S. manufacturers, now protected from foreign competition, can raise their prices since consumers have fewer choices. This is exactly what happened when Trump’s 2018 tariffs on steel and aluminum increased manufacturing costs for American companies, leading to higher prices on everything from appliances to beer cans.

Shifting to a VAT or high tariffs wouldn’t just increase the cost of living, it would cripple economic growth and job creation.

1. Higher Prices, Lower Wages
   With prices skyrocketing due to a VAT or tariffs, businesses would face higher production costs. Many would be forced to cut jobs or suppress wages to stay profitable.

2. Trade War Fallout
   Major trade partners, China, Mexico, Canada, and the EU, would retaliate against high U.S. tariffs by imposing their own tariffs on American exports. Farmers, manufacturers, and tech companies that depend on international sales would lose billions in revenue.

3. Retail Collapse
   Big-box retailers and small businesses alike depend on imported goods. A 25% increase in wholesale costs would put thousands of retailers out of business, eliminating jobs and reducing competition, which would drive prices even higher.

Eliminating the income tax in favor of a VAT or tariffs isn’t just bad policy, it’s a massive wealth transfer from the working and middle class to the wealthy.

The progressive income tax system ensures that those who earn more pay more. But a VAT and tariff-based system forces lower-income families to shoulder the same tax burden as billionaires, who spend a smaller percentage of their wealth on taxable goods.

Meanwhile, Wall Street investors and multinational corporations, who thrive under an income tax repeal, would pay almost nothing in a VAT or tariff system.

As tax policy expert Howard Gleckman of the Tax Policy Center warns:

“Abolishing the income tax would shift the burden of funding the government almost entirely to consumers, while shielding the wealthiest Americans from taxation altogether.”

The promise of eliminating the federal income tax may sound appealing, but the reality is disastrous. VAT and tariffs would gut household budgets, increase inflation, and destabilize the U.S. economy, all while shielding the wealthiest from contributing their fair share.

If lawmakers truly care about tax reform, they should focus on closing loopholes, ensuring corporations pay their fair share, and strengthening progressive taxation, not shifting the burden to everyday Americans.

Abolishing the income tax is not tax relief. It’s a recipe for economic disaster, one that would make life harder for millions while benefiting only the wealthiest few. Congress should reject this reckless idea before it turns the American dream into a financial nightmare.