During President Donald Trump’s successful campaign bid last year, he proposed eliminating individual income taxes for all Americans and paying for the lost revenue by increasing import tariffs. While the controversial idea would significantly change the country’s economic policy, it could also drastically affect how Americans perceive and negotiate wages and potentially increase disposable income for many workers.
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However, the president’s proposal left questions about how the government would fund essential services and programs and whether employers might adjust worker salaries to offset the tax savings. Here are five ways Trump’s plan to eliminate income taxes could impact your salary in 2025.
Employees could experience an increase in the amount of money in their regular paychecks.
“This increase in disposable income would have the effect of stimulating the economy, but at the expense of likely increasing real inflation,” said Crystal Stranger, CEO at Optic Tax. “Thus, it is likely that, while people would benefit for a short time, soon their wages would be worth less. So, they would not get a long-term benefit in general.”
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Some companies could choose to restructure salary offers or renegotiate existing compensation packages.
“I believe that employers would take advantage of this to enhance benefit packages to reward valuable employees, improve retention and make hiring incentives more available and attractive,” said Rick Miller, a financial planner and investment advisor at Miller Investment Management.
Stranger said eliminating federal income taxes would also remove incentives for businesses to hire in low-income neighborhoods or within the United States.
“So, we likely would see a faster shift to companies hiring more lower-priced workers abroad, where possible,” Stranger said. “The lack of [business] tax deductions and incentives would be a race to the bottom for the cheapest workers worldwide. This would cause it to be tougher for people to get hired or get raises when others will work for cheaper.”
Some employers could shift the tax savings from the elimination of income taxes into other forms of compensation, such as bonuses or benefits, instead of raising salaries.
“Employers would have maximum flexibility and creativity in the entire compensation arena,” Miller said. “Job seekers could benefit from creative compensation plans and more freedom to negotiate an attractive job offer on both sides.”
More opportunities for creative negotiation for salary and benefits could especially be helpful for those working in fields or companies where awarding commissions and bonuses is standard practice.
“[Employees] would potentially reap significant benefits in terms of how those commissions or bonuses are structured,” Miller said. “Higher paying jobs would be especially impacted, but even lower wage situations could be improved significantly.”
President Trump isn’t the only politician pushing for tax cuts. According to a recent Associated Press report, more states are considering tax cuts this year on everything from income, sales and property taxes.
Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers, told the Associated Press that states are working with tighter budgets, but legislators and governors are still looking to offer tax relief.
Tax cuts work well when state governments are flush with cash, such as during the post-COVID-19 pandemic period, when many states received federal government aid. However, eliminating federal income taxes coupled with cuts in state taxes could mean less money for essential government services, like public schools and health services.
Some states could make up the difference by implementing higher state sales taxes on everyday items, often referred to as a “consumption tax.”
According to data from the Tax Foundation, 45 states and Washington, D.C. collect sales taxes. With state and local sales taxes at 9% or higher, Louisiana, Tennessee, Arkansas, Washington and Alabama have the highest sales tax rates.
“A consumption tax alternative would have to be structured in a way that does not penalize lower wage earners if income taxes do not exist,” Miller said. “Even without an income tax, lower wage employees still have a harder time managing their limited cash flow, and this would need to be factored in.”
Editor’s note on political coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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This article originally appeared on GOBankingRates.com: Trump Wants To Eliminate Income Taxes: 5 Ways This Could Impact Your Salary in 2025
