Income taxes may seem like one of those unchangeable facts of life that you just have to deal with as long as you work. However, one of President Trump’s tax reform proposals is to consider doing away with income tax altogether for people who make less than $150,000 per year. Trump has also proposed eliminating taxes on overtime pay, Social Security Benefits and tips.
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While the initial result might seem positive — keeping more of your earnings — Christopher Stroup, CFP and president of Silicon Beach Financial, warned that there could be financial downsides that might actually hurt middle-class wallets down the line.
While it’s unclear if and when any of these proposals might move beyond theory, Stroup explained what might come of eliminating income taxes for this segment of American workers.
If income tax disappears, expect higher sales taxes, property taxes and other fees to make up the difference, Stroup said.
“Middle-class households, who spend a greater percentage of their income on essentials, would bear the brunt.”
A 10% national sales tax, for example, would make everyday necessities significantly more expensive while benefiting wealthier Americans with lower tax burdens.
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Income tax plays a major role in funding Social Security and Medicare. Without it, where does that money come from? Stroup explained that “a tax overhaul could lead to benefit cuts, delayed eligibility or even privatization.”
Middle-class workers and retirees who rely on these programs the most could face financial instability just as they need guaranteed income the most.
If there’s no income tax on a certain level of earnings, then some entrepreneurs and small-business owners who benefit from income tax deductions on expenses like health insurance, retirement contributions and home offices would not have these deductions.
“Without an income tax, these deductions disappear,” Stroup said. “This could increase net tax burdens and make it harder for self-employed professionals to reinvest in their businesses while larger corporations find new loopholes.”
Most states rely on federal funding for infrastructure, education and public safety — much of which comes from income taxes, Stroup explained.
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