We May Be Watching The Death Of The Federal Income Tax

Think of the federal income tax as a patient with heart disease. But instead of treating the condition, the hospital removes the oxygen the patient needs to breathe, then fires the doctors who could unblock the clogged arteries.

The actions of President Trump combined with early policy initiatives in Congress threaten to kill the federal income tax. If these efforts continue unabated, the current revenue system could collapse, opening the door to two stated goals of many Trump supporters—deep federal spending cuts and some form of consumption tax.

Such a result would be consistent with multiple initiatives by Trump and his supporters. For example:

• Trump has vowed to replace the income tax with tariffs, though even his most aggressive import taxes would raise far less revenue than the existing system.
• Project 2025, the conservative manifesto for a second Trump term, proposed a two-step process for replacing the income tax with an unspecified consumption tax.
• Trump’s nominee for IRS commissioner, former GOP congressman Billy Long, sponsored legislation while in the House to abolish the IRS and replace the income tax with a national sales tax.
• The White House plans to cut IRS staff by at least 18 percent, which will limit compliance and taxpayer support and potentially undermine public confidence in the tax system.
• At the state level, conservative governors and legislatures have moved aggressively to shrink income taxes and replace the revenue with sales and excise taxes.

There are merits to a well-designed consumption tax. But destroying the existing tax system before a replacement is carefully crafted and without first developing a transition plan is dangerous and doomed to fail.

Congress isn’t going to vote any time soon to explicitly replace the income tax with a consumption levy. But aggressive efforts to dismantle the IRS combined with a hollowing out of the income tax base could render the existing revenue system unsustainable. And drive lawmakers to replace it with something else.

Revenue Shortfalls

The current tax system already falls far short of generating enough money to pay for what most Americans want. Last year, the federal government collected 17.1 percent of Gross Domestic Product in taxes yet spent 23.4 percent. Except for periods of war and recession, that gap is among the highest in history. Extending the 2017 Tax Cuts and Jobs Act without offsetting spending hikes or tax increases would widen this chasm substantially.

While the Trump Administration, led by the high-profile efforts of Elon Musk and the Department of Government Efficiency, has severely disrupted the federal regulatory and administrative system, it has yet to produce substantial spending reductions.

However, Congress seems well on its way to lowering even further the amount of revenue the existing tax system can collect. And many in the GOP believe that will give them a new opportunity to enact deep spending cuts or, as some say, “starve the beast.”

A Long Wish List

If Congress extends the expiring provisions of the TCJA later this year, it will reduce projected federal tax revenues by at least $4 trillion over the next decade. Trump’s many campaign-related tax cut promises, including proposals to make income from tips, overtime, and Social Security benefits tax-free; lower the corporate income tax rate; and raise the state and local tax deduction cap could more than double that revenue loss, according to the Committee for a Responsible Federal Budget.

On top of that, Capitol Hill Republicans reportedly have a wish list of more than 200 additional tax cuts they hope to roll into any end-of-year revenue bill. While the congressional GOP leadership has yet to place a top-line limit on the size of all that largess, it likely will be hefty.

Congressional Democrats will have no say in this year’s tax bill. However, they made no real effort to bolster the income tax when they controlled the White House and Congress earlier this decade.

IRS Cuts

On top of more tax cuts, Trump and Hill Republicans have slashed IRS resources and its tax compliance efforts. Congress has rolled back nearly all the funds it approved in 2023 to buttress IRS enforcement. The Administration says it has fired nearly 7,000 IRS staff and at least another 5,000 have resigned or retired in the past few months. And it plans to reduce the agency’s total workforce by thousands more by mid-May. In total, the White House hopes IRS staff will shrink by at least 18 percent in what it calls “Phase 1,” according to a document obtained by The Washington Post.

These cuts already have resulted in the agency dropping audits of high-income households, partnerships, and corporations, according to published reports.

Public confidence in the IRS’s ability to collect taxes fairly is critical to people’s willingness to pay their own taxes. Even before these cuts, people worried that corporations and the wealthy paid less tax than they should. Slashing IRS staff could reduce taxpayer services as well as compliance by those who aggressively game the system, knowing they will be unhindered by audits.

On April 15, I’ll be participating in a Tax Policy Center event that will illuminate many of these issues.

We don’t know if the steps we’ve seen so far are part of a deliberate strategy by Trump to replace the income tax. But if that was my goal, this is exactly how I’d go about it.