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Could Abolishing Federal Income Tax Unleash Prosperity—or Chaos?

Could Abolishing Federal Income Tax Unleash Prosperity—or Chaos?

Picture of the word taxes crossed out

The notion of eliminating the federal income tax in the United States has lingered in public discourse for years, touted by some as a daring leap toward economic growth and a streamlined tax system. Advocates suggest it could liberate capital, spur investment, and allow Americans to retain more of their earnings. Yet, this provocative idea raises a critical question: would it truly pave the way to prosperity, or would it unleash fiscal turmoil? To explore this, we’ll sift through the data, theories, and practical implications.

The Backbone of Federal Revenue

The federal income tax is the linchpin of U.S. government funding. In Fiscal Year 2024, the government collected approximately $4.9 trillion in revenue, with individual income taxes accounting for 49%—roughly $2.4 trillion—making it the largest single source. This money sustains a vast array of programs, from national defense and Social Security to infrastructure and healthcare. Payroll taxes, which primarily fund Social Security and Medicare, contributed 35%, while corporate income taxes added 11%. The remainder came from excise taxes, tariffs, and assorted fees. Since 1944, income tax has held its dominant position, a role formalized by the 16th Amendment in 1913. Removing it would carve out nearly half of the government’s income, leaving a $2.4 trillion shortfall that demands serious consideration.

The Case for Ditching It

Picture showing arguments for tax abolition

Here are the most common arguments against income tax as put forward by renowned economist Ludwig von Mises:

  • Taxation as Coercion
    • Income tax violates property rights by forcibly taking earnings, which Mises views as theft.
    • In Human Action (1949), voluntary exchange is the foundation of a free society, not forced redistribution.
    • The Institute argues it funds an overreaching state, eroding individual liberty.
    • Eliminating it lets people keep and control their full income.
  • Economic Distortion
    • Income tax warps labor and investment incentives—why work or save if it’s taxed away?
    • Creates "deadweight loss"—economic activity stifled by disincentives.
    • High earners may avoid taxes, relocate, or reduce effort, shrinking productivity.
    • Scrapping it boosts entrepreneurship and efficient market allocation.
  • Government Inefficiency
    • Mises in Bureaucracy (1944) saw governments as wasteful, lacking profit-driven discipline.
    • Income tax fuels bloated bureaucracies and cronyism, not value.
    • Without it, the state shrinks to essential roles, cutting inefficiency.
    • Forces prioritization over frivolous spending.
  • Regressive Alternatives Beat Progressive Taxes
    • Consumption taxes (e.g., sales tax) are less invasive, targeting spending not earning.
    • Institute highlights states like Texas thriving with sales tax over income tax.
    • Progressive income taxes fuel class conflict and punish productivity.
    • Simpler systems align with voluntary market principles.
  • Historical Precedent and Moral Clarity
    • U.S. had no permanent income tax until 1913, yet saw massive growth.
    • Proves economies flourish without it, driven by free markets.
    • Morally, you keep what you earn—redistribution is socialist overreach.
    • Reflects a principled stand against state coercion.

These capture the core Mises-inspired case: liberty, efficiency, and a lean state, with faith in markets to fill the gaps. In theory this seems a desirable approach but there are dangers. Markets are not always efficient and can be heavily influenced by external events, take this past week as an example. A true laissez-faire system is an ideal that may never be achieved.

The Fiscal Fallout

Eliminating $2.4 trillion in annual revenue would send shockwaves through the federal budget. Without a replacement, the deficit would surge, piling more onto an already substantial national debt. Increased borrowing would drive up interest payments, squeezing out funds for essential services and potentially raising interest rates across the economy. This could dampen private investment and, if investors lose confidence, trigger a fiscal crisis. While the Congressional Budget Office hasn’t specifically modeled this scenario, its analyses of tax cuts consistently highlight deficit increases unless offset by spending reductions or new revenue. Closing the gap through spending cuts would mean slashing programs like defense, Social Security, or Medicare—decisions with profound social and political ramifications.

Alternatives on the Table

Picture showing alternatives to current tax system

If income tax were abolished, the government would need a substitute capable of generating comparable funds. Several options emerge, each with its own complexities:

  • National Sales Tax: The “Fair Tax Act” proposes a 23-30% rate, though analyses suggest 40-60% might be needed, raising concerns about its regressive impact on lower incomes.
  • Value-Added Tax (VAT): Common globally, it could raise significant revenue but risks regressivity unless structured carefully—a challenge for a U.S. with no federal consumption tax tradition.
  • Wealth Tax: Levied on net worth, it might generate $1-2.9 trillion over a decade, though valuation issues, capital flight, and legal hurdles loom.
  • Payroll Tax Hike: Removing the Social Security income cap could bring funds, but it might discourage hiring and burden wage earners.
  • Tariffs: Import taxes sound simple, but they’d disrupt trade, inflate prices, and fall short of replacing income tax revenue.

None of these options offers a singular, straightforward fix. It is likely that a combination of them would be required. And each of the above come with potential risks of their own. There does not seem to be a riskless solution.

Sectoral Shake-Ups

The economic ripple effects would vary by sector. Investment might rise with higher after-tax returns, though a swelling national debt or a wealth tax could counteract that by raising borrowing costs or taxing assets. Savings could increase under a consumption tax, which spares unspent income, but the real-world impact remains debated. Consumer spending might initially jump with more disposable income, yet higher prices from sales taxes or tariffs—or reduced take-home pay from payroll hikes—could offset those gains, leaving the net effect uncertain.

Expert Takes and the Bottom Line

The expert community largely approaches this idea with caution. Organizations like the Tax Policy Center, Center on Budget and Policy Priorities, and Committee for a Responsible Federal Budget warn of soaring deficits, mounting debt, and worsening inequality without a robust replacement plan. Proponents of alternatives like the “Fair Tax” emphasize simplicity and growth potential, but their projections often face skepticism. The prevailing view suggests that abandoning income tax without an airtight strategy carries risks that overshadow the theoretical upsides.

So, should we abolish federal income tax? The promise of prosperity is seductive, but the specter of fiscal collapse, slashed services, and regressive burdens looms large. Rather than a sweeping overhaul, a more measured approach—refining the existing system by closing loopholes and enhancing efficiency—might better balance growth and stability. Bold ideas have their allure, but the evidence points to prudence over radical disruption.

The AI Generated Income Tax Solution!

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