How would eliminating income taxes affect us?
President Donald Trump has continually implied that he might abolish the federal income tax, substituting its revenues with those generated by the institution of high tariffs upon our country’s trade partners, such as Canada, China, and Mexico.
While certain states like Hawaii and California would greatly benefit from this since they already have high tax rates, there are other states that wouldn’t feel the impact of eliminating income taxes nearly as much as others.
So let’s get to the bottom line. Here are 10 states that would feel the biggest impact of eliminating income taxes where it counts: their residents’ bank accounts!
West Virginia
Bi-weekly taxed paycheck: $1,388
Added % of weekly pay by eliminating income tax: 23.6%
Bi-weekly untaxed paycheck: $1,716
Mississippi
Bi-weekly taxed paycheck: $1,347
Added % of weekly pay by eliminating income tax: 23%
Bi-weekly untaxed paycheck: $1,657
Louisiana
Bi-weekly taxed paycheck: $1,481
Added % of weekly pay by eliminating income tax: 23.4%
Bi-weekly untaxed paycheck: $1,827
Oklahoma
Bi-weekly taxed paycheck: $1,558
Added % of weekly pay by eliminating income tax: 24.4%
Bi-weekly untaxed paycheck: $1,938
Arkansas
Bi-weekly taxed paycheck: $1,405
Added % of weekly pay by eliminating income tax: 23.8%
Bi-weekly untaxed paycheck: $1,740
New Mexico
Bi-weekly taxed paycheck: $1,477
Added % of weekly pay by eliminating income tax: 24.2%
Bi-weekly untaxed paycheck: $1,835
Kentucky
Bi-weekly taxed paycheck: $1,491
Added % of weekly pay by eliminating income tax: 24.4%
Bi-weekly untaxed paycheck: $1,855
Wyoming
Bi-weekly taxed paycheck: $1,956
Added % of weekly pay by eliminating income tax: 25.9%
Bi-weekly untaxed paycheck: $2,463
Alabama
Bi-weekly taxed paycheck: $1,472
Added % of weekly pay by eliminating income tax: 24.5%
Bi-weekly untaxed paycheck: $1,832
Tennessee
Bi-weekly taxed paycheck: $1,640
Added % of weekly pay by eliminating income tax: $25.1%
Bi-weekly untaxed paycheck: $2,051
Can the IRS be replaced with a tariff-led revenue system?
The short answer is “No,” according to a Peterson Institute policy brief. Why, though? Well, President Trump has doubled down on tariffs since beginning his second term.
Some government officials indicate that the president is looking to replace the IRS with revenue collected from taxes on foreign trade. In case you missed it, here’s what the Trump administration has accomplished so far:
-Announced a 25% tariff on pharmaceuticals, autos, and semiconductors.
-Threatened and thereafter delayed a 25% tariff on all Canadian and Mexican imports to the U.S.
-Placed a 25% tariff on all imported aluminum and steel, effective March 12th.
-Laid off more than 6,000 IRS employees after postponing buyout offers on particular “critical” workers.
-Threatened and postponed a 25% to 50% tariff on Colombian imports.
-Implemented a 10% duty on Chinese imports, passed on February 4th.
Furthermore, Trump recently announced a “Fair and Reciprocal Plan,” which would impose symmetrical tariffs on international trade allies.
So, what’s up with all these taxes on U.S. imports? U.S. Commerce Secretary Howard Lutnick recently spoke about the Trump administration’s ultimate goals, saying that Trump’s policy aims to replace income taxes with tariffs.
But, economists warn that this plan would be extremely damaging to economic growth and not monetarily possible.
Let’s see what the numbers have to say
Tariffs imposed on imported goods totaled $3.1 trillion in 2023. The income tax surpasses $20 trillion, and the U.S. government raises about $2 trillion in corporate and individual income taxes. Donald Trump’s campaign proposal for 10% tariffs on all imports and 60% tariffs on China would bring in about $225 billion.
Now, this is an overestimate, not accounting for potential inflationary pressures and trade wars. A Peterson Institute for International Economics analyst says that tariffs can’t replace income taxes altogether.
Tariff rates would have to be incredibly high on such a small base of imports to cover for the income tax, and as tax rates increased, the base itself would diminish as imports fall, making President Trump’s $2 trillion goal unlikely.
Who’s paying for all these tariffs?
As reported by different news outlets, tariffs on imports are paid by domestic companies, and that extra cost is generally passed on to the consumer. This means that you’re the one who’s stuck footing the bill.
According to a nonpartisan tax policy research organization, instead of harming foreign exporters, economic evidence indicates American consumers and businesses were the hardest hit by President Trump’s tariffs during his first term.
They’re also known as “regressive” taxes because they disproportionately affect low- and moderate-income households.
Let’s talk about the Fair Tax Act
What about the legislation that seeks to abolish the IRS? The Fair Tax Act of 2025 would replace key federal government revenue sources with a rebate and national sales tax. These include corporate and personal income, gifts, death, and payroll taxes.
According to its supporters, the consumption tax would eliminate the requirement for the IRS. If passed, the national consumption tax rate would be a tax-inclusive rate of 23% beginning in 2027. Economists say that rate would rise to about 30%. According to the Tax Foundation, for every $1 spent, taxpayers would reimburse the federal government about 30 cents in sales taxes.
Of that, 64.83% of total revenue would be directed to general revenue. Also, 27.43% would go to disability trust funds an the old-age and survivors insurance, and 7.74% would be given to the hospital and federal supplementary medical insurance trust funds.
After 2027, the consumption tax rate would alter based on government spending. The combined federal tax rate would be determined as follows:
-A 14.91% sales tax to cover general fund spending
-Two variable sales tax rates to cover trust fund spending as defined by the Social Security Administration
Now, remember that Economists have previously noted that the Fair Tax proposal is “essentially unworkable.” The Brookings Institution argues that the suggested rates would be inadequate to replace payroll, income, estate, and gift taxes, to name a few.
What about consumption taxes?
A consumption tax would redirect the collection of taxes from your earnings to spending. Under the current law, the US accumulates revenue from taxing your capital gains tax and individual income, among other taxations. Some states also impose consumption taxes such as sales and excise taxes.
The Tax Foundation suggests that even though a consumption tax might theoretically promote investment and savings for some, the tax is ultimately “regressive” because lower-income households would end up spending more of their incomes than they can save.
The Center for American Progress has characterized the proposal as “radical,” warning that it would broaden the nation’s already sizable wealth gap.
So, what does the future of the IRS look like this year?
The federal tax code and the IRS can expect a huge shakeup under the Trump administration this year. President Donald Trump’s tax agenda will definitely be humming in 2025, beginning with tackling the looming tax cliff tied to the Tax Cut and Jobs Act.
President Trump has also suggested abolishing income tax on Social Security benefits and eliminating income taxes on tipped workers. He has selected former Missouri Congressman Billy Long to lead the IRS, which would prematurely oust IRS Commissioner Danny Werfel.
If that happens, Long would be the first politician appointed to the position in over 80 years. Besides the reintroduced Fair Tax Act, The IRS is facing other challenges, including:
-GOP lawmakers are seeking to block the IRS Direct File.
-Privacy concerns as Elon Musk gained unusual access to the agency’s sensitive data systems through the Department of Government Efficiency.
-Massive layoffs. More than 6,000 IRS employees were terminated in February. The agency’s workforce might shrink even further once the pause on buyout offers lifts later this year.
Recently, another $20 billion in critical enforcement funding was lost.
All these looming shifts affecting the IRS could also affect you as a taxpayer, from something as minimal as a tax return delay to your access to free tax filing services.
Need help filing your taxes? Check this out!
How do you feel about Trump eliminating income taxes? Feel free to share your thoughts in the comments section. And if you liked this article, check out: 12 Debt-Free Lifestyle Habits You’ll Want to Copy TODAY
