Today, we no longer question income taxes as an inevitable part of life, just like death and other types of taxes.However, before World War I, the United States only sporadically toyed with income tax. Most of the government’s revenue came from excise taxes and customs duties.
So what would happen if we abolished income tax today? Would society collapse into Mad Max-like anarchy?
Not at all. Different governments use different types of taxes to raise funds. Nine state governments already do this, levying no income taxes and funding their taxes through property, sales, and excise taxes.
Regressive or progressive?
Because our hyper-polarized society lives in a political echo chamber and sees everything through its own tribal lens, the first thing people wonder is, “Abolishing the income tax would do the opposite. Isn’t that progressive?” (Regressiveness means that the weight of taxation on the wealthy is low.)
No, not necessarily. It depends on what you replace it with.
That actually makes this thought experiment politically agnostic. It can be taken either in a regressive direction or in a progressive direction.
For example, imagine we abolished the income tax and replaced it with excise taxes on tobacco, alcohol, marijuana, and gasoline. It would be regressive because it would impose a relatively high tax burden on low-income Americans.
Now imagine the opposite extreme scenario. In other words, suppose you replace income tax with a steep ladder of property and sales taxes. For example, the government does not impose property taxes on homes valued below $200,000, but for homes valued above $200,000, it adds a 1% property tax for every $200,000. This means that a home worth $350,000 would be taxed at 1% ($3,500), a home worth $550,000 would be taxed 2% ($11,000), and a home worth $750,000 would be taxed 3% ($11,000). $22,500) in property taxes.
You can do the same thing with consumption tax. Perhaps the government does not impose a sales tax on food, but imposes ladder-type tax rates on clothing, cars, boats, luxury goods, etc. For example, you pay a higher tax rate on a luxury car than on an economy sedan. If you want to bend the tax system in a more environmentally friendly direction, you can impose higher excise taxes on vehicles with poor fuel efficiency.
The bottom line? You can freely configure these tax brackets to be flat or progressive as you wish. The concept itself is not politically oriented in any direction.
Benefits of abolishing income tax
First, abolishing income tax would make the tax code much simpler. You don’t need thousands of pages of rules, exceptions, exclusions, and loopholes.
Don’t you like that wealthy people pay a relatively lower percentage of their income in taxes than working professionals? This only happens because the tax code is so complex. is. The wealthy can afford to hire knowledgeable and expensive tax accountants to find and exploit every loophole in the system.
Property and sales taxes are clear and transparent. If you own a mansion worth $10 million, you can’t avoid property taxes. You will have to pay a certain percentage of the appraised value and it will be a hard stop.
In fact, the main reason we need the IRS is because of the complexity of income and corporate tax enforcement. Throw them away and you (mostly) throw away the IRS and taxes. $16.1 billion I spent the last year running it. I don’t see local governments struggling to enforce property taxes. If someone doesn’t pay, a lien is placed on the property and the property is auctioned off.
Finally, income taxes create an accounting and tax preparation nightmare for millions of Americans.Average amount Americans spend 13 hours We prepare tax returns every year, often spending hundreds of hours.
How much time and stress would be saved if no one ever had to file a tax return and just paid taxes every time they swiped their credit card or paid their property tax bill? Please think about it.
Disadvantages and risks
At this point, you’ve probably come up with a dozen or so objections. There are several things to consider.
First, a federal sales tax would encourage behind-the-scenes and black market transactions. If sales tax jumped to 15% overnight, suddenly everyone would be interested in paying in cash.
Similarly, the popularity of bartering will increase. If two people realize that each has something the other wants, they may end up with accommodations that don’t require an exchange of money.
This forces us to reconsider the premise that just because the tax code is simple and transparent, we don’t need the IRS as an enforcement agency. Sure, sales tax goes both ways, but if we suddenly all started evading taxes by paying for items that were under the table, we would still need officials to force people back in line. Become.
And what about wealthy people who end up paying hefty sales taxes when they buy luxury items like yachts? Maybe they just get on a jet and go to another country to buy that yacht.
In other words, perhaps consumption taxes are relatively low and therefore easy to enforce.
Impact on real estate and investors
Finally, the increase in property taxes raises another question for real estate investors.
We run a passive real estate investment club that meets monthly to vet different types of real estate as a group investment. Different types of real estate have different risks and certainly have different sudden federal estate tax consequences.
At first glance, you might think that adding high property taxes would put downward pressure on home values. The end result is a higher total cost of ownership.
However, I would like to deny that assumption. Remember, there will be no income tax bill for the owner. They still need a place to live, so they pay the current rate for housing and use their income tax savings to pay property taxes.
While this logic holds true well for residential and industrial real estate, it becomes even more unstable when applied to potentially non-essential real estate costs like office space. Imagine a company that maintains an office footprint, liking the idea of teams physically coming together at least a few days each week. But if office rents skyrocket due to rising property taxes, that calculus may change to “fuck it, no more.” Let’s go completely remote. ”
Again, you could argue that that’s not such a bad thing. Perhaps these buildings would better serve as housing sources for cities, reducing commuting and greenhouse gas emissions in the process. These are all debatable points.
Governments rarely give up sources of revenue.
There are no longer any major political parties fighting on the platform of fiscal conservatism.trump administration spent much more than the Obama administration. This means that the government will continue to spend billions of dollars unchecked, and since the federal government has trained us to accept income taxes, it will never give up.
One of the reasons I like investing in real estate is the tax benefits. Specifically, I use a lazy 1031 exchange strategy to minimize my income tax bill. This works because through SparkRental’s co-investment club, you can invest small amounts in new syndications every month. With all this in mind, think about your tax strategy. The more you take your income out of Uncle Sam’s hands and into your pocket, the sooner you can secure your financial future.
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Note by BiggerPockets: These are the opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.
