No Income Tax: Boom or Bust?

What if your paycheck came with zero income tax deductions? In this episode, Paul explores a proposal to eliminate federal income tax for those earning under $150K—and what that could mean for small businesses, economic classes, and your vacation fund. Spoiler alert: spending may go up, prices might follow, and the long-term effects could reshape the economy as we know it. But don’t worry—no spreadsheets were harmed in the making of this episode.

Transcript

Episode 55

Tax season is almost over, as I am recording this at the end of March (at least in the U.S.), and since so many ideas have come out of the leadership of the United States since the last inauguration, I wanted to discuss some of them as they relate to small business and economics, of course, not the political ramifications. I’m (taking off a few minutes from bookkeeping) Paul Rosenblum.

But first, Don’t forget to check out the YouTube channel as we now have some videos!  The link is below. 

It has been a busy tax season, but I will get back soon to posting on the Substack newsletter.  And if you have any suggestion ideas for episodes in this podcast, shoot me an email at bookkeepermensch@gmail. 

Much has been said recently about how income taxes might change in the U.S. at some point.  No real timeframe has been talked about, but ideas about who would pay income taxes, and who wouldn’t pay any income tax.  

I must say that the idea of income tax (and maybe I shouldn’t say this since I’ve made a living as a bookkeeper for so many years), is a bit strange to me. I’m not getting political here, or at least I don’t mean to be -- but taxing people based on income creates economic classes.  The rich, the middle class, and the poor. In other words, the ‘Have’ and the ‘Have-nots’.  It also incentives schemes to save money on income taxes if you are rich, using the IRS laws as an advantage to pay lower taxes. The rich can hire accountants who have people on their staff who study the tax code for loopholes, and legal ways of saving on income taxes, where the middle class and the poor can’t afford to.  The net result is the rich pay more taxes dollar amount, but less percentage of their income because of all the minute details in the tax code and the middle class and the poor pay closer to the straightforward percentage of their income without delving into the tax code word for word looking for ways to save money.  And doing that costs money. 

So, when I first heard about the idea of eliminating income tax and possibly replacing it with a national sales tax as I talked about in episode 45, I thought that it was an interesting idea. By the way, that idea was first mentioned by Ross Poirot back in the 1992 presidential election cycle.  And I talked about the creation of a national sales tax which would mean that people would be taxed on what they spent, not what they earned. 

Much talk and action has happened since then. The new administration has been cutting costs in government agencies, raising tariffs on imported products from other countries, and promoting manufacturing in the United States. 

And the latest is the administration is now talking about changing the income tax requirements only to people making $150,000.00 taxable income or more per year. If one makes less than that per year, then no income tax would have to be paid. This is where trimming the government is important.  If less tax money is coming into the government by taxpayers, then the government’s costs must get smaller.  Tariffs would add to the income for the U.S., but not if other countries tariff the United States exports as well. Less taxes being paid in, smaller government, possible tariff income from other countries, and less government grants, subsidies, and social programs being paid out. It’s an interesting idea. 

But the question that I ask in this podcast is ‘How does this affect small businesses?  (Since this is what this podcast is all about). And does implementing an income tax program with the threshold of $150,000.00 invite fraud or manipulation for people making over that amount? 

Let’s answer the second question first. If someone makes $170,000.00 a year, and this income tax policy takes effect, then wouldn’t that person want to get below the $150K threshold?  Why not go to the boss, have them lower your salary, and make up the rest with legal employee benefits like gym memberships, childcare costs, better health care benefits or 401K matching if the company doesn’t offer it already?  Maybe more people would begin to earn less than the threshold of $150K to not pay income tax.  So, I wonder if this strategy from strictly an economic standpoint will logistically work.  

And the other question here is, “How would this effect small businesses?’ 

If there were no deductions off of W-2 employees’ paychecks and people would take home more money every time they got paid, human nature is to spend that windfall and not put it in the savings account for a rainy day or retirement.  So, I believe that the economy would boom.  More people would buy cars, property, and houses, more people would spend more money on vacations, on clothes, and on entertainment, among other things. The economy would boom big. But the question is – for how long?  Windfalls are great, until they become normalized.  If people’s ‘take home pay’ goes up, wouldn’t you think that retail stores, online stores, grocery stores, public transportation, automobile sellers, vacation rentals and all other kinds of businesses would know that people had more money to spend on things?  Prices would go up in all products and services. And yes, even bookkeeping and accounting. After prices go up, eventually within 1 to 2 years at most, we might be in the same position economically as we are in today.  People would take home more money in their paychecks, no income taxes for some, and much higher prices for all. It might be a temporary fix. And a temporary fix becomes political because it’s all about timing. And election cycles. And when results of policy changes actually show up. 

But during this economic boom, small businesses would get their fair share of extra income as well. Their costs would go up, but so would their (our) income.  Small businesses might be able to expand more easily into larger businesses. And what these businesses do with the extra money and the expansion long term is important as well. When the windfall becomes normal, there is also a chance for a recession which the small businesses that expanded might feel the most.

By creating thresholds with income tax, either the percentage of income as they are now, or just eliminating income taxes for people earning less than a certain amount of money, still creates economic classes, and some anger between the groups of economic classes. In my opinion, it doesn’t solve the problem permanently. 

Before the election, there was some talk about implementing a national sales tax. If income tax was totally eliminated and a national sales tax was put in place with no exceptions as to what was taxable, then taxes would not be based on what someone earned, it would be based on what someone spent.  But implementation is always the key. How would the government get the money that was collected?   How would every shopping cart in websites, and every cash register in stores be re-programmed for a national sales tax and what amount of time would they need to get that done?  What would the system be for the government to collect that money?  Daily transfers?  Weekly transfers?   And how do we get congress to agree on that in the first place?   If we did have a national sales tax, how would that affect importing goods from other countries and the amount of the tariffs?  Lots of questions here that are worth asking. 

And if individual income taxes were abolished, would there still be income taxes for businesses?   Probably YES for corporations, but how about LLC’s or Sole proprietorships, which are part of one’s personal income taxes?  No income taxes on LLC’s?  Then why would anyone want to start a corporation? 

So, it sounds really great to hear that many people would not have to pay income taxes at some point in the future, try not to fall into that trap.  We do need a government.  We do need the government to be funded.  We do need to have a system for the government to collect money to fund the government. And to help keep the world economically stable, we need to trade goods with other countries and be part of world economics. 

The proposed income tax elimination for people earning less than $150,000.00 would affect somewhere between 76% and 90% of earners according to Kiplinger.com. It also aspires to cut income tax for tips and for overtime pay for W2 employees.  For this to happen, according to the Kiplinger article, the national budget would first have to be balanced, and that hasn’t happened since the President Clinton administration and only twice in the last 50 years. 

As Forbes stated in an article, payroll taxes fund Social Security and Medicare. So, can we assume that income taxes do not include all payroll taxes? I’m not sure. T/hat hasn’t been said out loud. And if income taxes don’t exist for most, how does that affect state taxes, as the Forbes article mentions. State programs that are now funded by the federal government still need to be funded (now by the state), because the federal money for state projects would probably end. 

  So, stay tuned.  This could be an interesting year for the very beginning of major economic changes. However, change can take years.  And even if the budget is balanced, politically, congress and the senate might change leadership in a bit more than 3 ½ years from now. And how much time once the budget is balanced could the IRS re-tool, laws written and passed in Congress and the Senate, and those changes implemented in reality?  Could very well be more than 3 ½ years from now. So, don’t be looking at fancy cars just yet. Still have a budget for that vacation and keep talking to your accountant a few times a year even if you don’t have a business since yes, you will have to file income taxes for the tax year of 2025 and quite likely 2026 as well.

When I write these kinds of episodes, some people have called me very level-headed. I look at it as something that I can’t control, so I just report on it, with the facts, as I read them unfold and I mix in some of my own opinions.  We sometimes need major changes in our lives -- small changes that just ‘evolve’ sometimes don’t really work.  Sometimes we need some radical things to happen to possibly make things better.  These things might or might not work, but hopefully Humans will continue to learn from our mistakes over time. 

Let me know if you like episodes like this.  Drop me a line at Bookkeepermensch@gmail.com or voicemail me with the link at Bookkeepermensch.com. Always love hearing from you. 

I’m Paul Rosenblum