How The US can Immediately Eliminate the IRS and get rid of personal income taxes

[00:00:00] [SPEAKER_01] Last week, Howard Lutnick, the Secretary of Commerce under Trump, said that Trump's goal is to eliminate the IRS. And by the way, Trump's also said this, Elon Musk has said this and tweeted this, that the IRS is going to be eliminated. But how can you do that?

[00:00:22] [SPEAKER_00] This isn't your average business podcast, and he's not your average host. This is The James Altucher Show.

[00:00:29] [SPEAKER_01] So the IRS raises $4.9 trillion a year. Personal income taxes raises $2.5 trillion per year. Is it possible to actually eliminate the IRS? Would we need to raise that money elsewhere? How would we raise that money?

[00:00:56] [SPEAKER_01] Is government spending going to be cut so much that we could eliminate the IRS? So I am going to answer these questions. Plus, I have a solution on how one could eliminate the IRS. And whether or not they use my solution, which I don't expect them to, I talk about other possible solutions and ways to eliminate the IRS. And in general, you're going to understand a lot more about the U.S. economy. And you're going to understand a lot more about taxes by the time you finish this podcast, within the next 30 minutes.

[00:01:25] [SPEAKER_01] So here we go. First off, I do think the IRS can be eliminated. You look at the example from the 1800s. And throughout the entire 1800s, the U.S. economy went from a tiny little gnat on the world economy to being a fairly large economy. It wasn't yet the largest in the world, but it was getting up there. And we had no taxes during this time. Actually, during the Civil War, there was a small tax.

[00:01:50] [SPEAKER_01] But other than that, before we talk about the current IRS, how did the U.S. government raise money during the 1800s? Well, primarily two mechanisms. One was tariffs, particularly on textiles and steel. And the other was on what's called excise taxes, meaning liquor, tobacco, kind of like a vice tax.

[00:02:12] [SPEAKER_01] Basically, the simplest way to run any government is to incentivize behaviors you like and put in, I guess, disincentives for behaviors you don't like. So vice is like alcohol and tobacco. Typically, the government has like a vice tax on those things to dissuade people from smoking and drinking and what other behaviors you want to punish. And tariffs, let's think about tariffs in that sense.

[00:02:41] [SPEAKER_01] Tariffs are a disincentive to buy the products from foreign countries because tariffs put an extra, let's say, sales tax on the products of foreign countries. So it's more expensive than domestic made products. And at the time in the 1800s, the U.S. was not the world's customer. You know, the Industrial Revolution was flourishing in the U.S. and the U.S. was growing as a manufacturer of goods.

[00:03:09] [SPEAKER_01] So they wanted other countries to buy U.S. products and they wanted U.S. consumers to buy domestic products. So there was big tariffs on foreign goods. And between big tariffs and excise taxes, these vice taxes, that was 90 percent of the revenues of the U.S. And also the U.S. occasionally sold public land and made revenues from that. Something that the U.S. doesn't really do right now.

[00:03:36] [SPEAKER_01] But that was about 10 percent of the government revenues was selling land. But then two things happened. One is in 1895, the federal government tried to impose a federal tax. Now, by the way, states could have taxes and the federal government could have a tax if the federal government didn't take the tax and gave the money to the states pro rata. Like if if New York state raised 10 percent of the taxes, then New York would get that share of the tax.

[00:04:04] [SPEAKER_01] But the federal government tried to put kind of a federal income tax that would fund the federal government. And the Supreme Court said that is unconstitutional because it goes against our property rights to have federal taxes on it. That's what the Supreme Court said in 1895. Just so you know, this brief history, 1913, the 16th Amendment was passed, which allowed the federal government to tax the population and use that money for its own purposes without giving it to the states.

[00:04:34] [SPEAKER_01] So that was in 1913. Guess what? That year, the first tax was imposed by Woodrow Wilson and it was a one percent tax on people making more than three thousand dollars. And it went up to six percent tax for the truly wealthy. And then taxes rose during World War One. And then in World War Two, the highest tax rate is in 1944 and 1945.

[00:04:57] [SPEAKER_01] The highest tax rate was ninety four percent on any dollar of income higher than two hundred thousand dollars. So almost all of your income, if you're wealthy, I mean, that two hundred thousand dollars is like two and a half million dollars in today's money. So if you were making a huge amount, almost every additional dollar was taxed. Taxes stayed pretty high for the next several decades. They went down a little bit and then Reagan in 1986 brought the highest tax rate down to 28 percent.

[00:05:25] [SPEAKER_01] Right now, the highest tax rate is 37 percent. Again, if every kind of tax is either an incentive to do some behavior or a disincentive to not do some behavior, what is the behavior that taxes are encouraging? Well, basically, taxes are encouraging people to not spend money. And this is going to be a critical part of how I think you can get rid of the IRS and completely eliminate personal income taxes.

[00:05:54] [SPEAKER_01] So just to put everything into context, the U.S. government last year spent six point seven trillion dollars, but the U.S. government only made four point nine trillion dollars. So we had to borrow or print one point eight trillion dollars. That's the budget deficit. And of that four point nine trillion, a lot of that is corporate income taxes. Some of that is Social Security taxes. And then there's other smaller ways for the U.S. government to make money.

[00:06:23] [SPEAKER_01] But the bulk of that four point nine trillion, almost half of it or a little more than half it, two and a half trillion dollars is from personal income taxes. If you're thinking about it in terms of incentives and disincentives, income taxes is a disincentive to spend money because instead of you spending money on clothes or a house or a car or starting a business or hiring people, you just give that money to the government.

[00:06:51] [SPEAKER_01] And then you have to ask who is a better allocator of money, the U.S. government or you? Who creates more jobs, the U.S. government or do you? Now, you might not create jobs directly by starting a business and hiring people. But if you spend money at a clothing store, then that clothing store, if it does well, presumably if a lot of people spend money there, then they can hire more people and open up more stores and it benefits the U.S. economy. Now, let's get rid of the IRS.

[00:07:20] [SPEAKER_01] And I am not going to recommend a flat tax, nor am I going to recommend a flat national sales tax, which doesn't work for reasons I'll explain. But the first thing you have to understand, and this is a very important concept, which nobody talks about. The first thing you have to understand is the concept of money velocity.

[00:07:43] [SPEAKER_01] So if I give you a dollar and you spend it, how much does that increase the national economy? And by that, I mean the gross domestic product, which is basically the value of everything sold in the U.S. economy. You might think if I give you a dollar, then it increases the economy by a dollar. But if you thought that, that would be wrong. Let's say I have a dollar and with my dollar, I buy a newspaper.

[00:08:09] [SPEAKER_01] Well, now the next day, the newspaper guy goes to the coffee shop and buys a coffee for a dollar. Now, my one dollar that you gave me, that let's say I made in an income, has just increased the economy by two dollars because I bought a newspaper and the newspaper guy bought a coffee. Now, the coffee guy the next day could buy flowers for his spouse.

[00:08:31] [SPEAKER_01] So now one dollar, that dollar had what's called velocity and it increased the number of dollars in the U.S. economy by three dollars. So if this doesn't make sense somehow, just go with me. Conceptually, it makes sense because a dollar moves around the economy. And so three dollars has just been added to the U.S. economy because with my one dollar, three dollars worth of items were just bought. So that's the concept of money velocity.

[00:08:56] [SPEAKER_01] And the average money velocity in the U.S. is 1.5, meaning every dollar of income you make adds about a dollar 50 to the U.S. economy. This is a very important concept to know. When you pay that dollar to the government, the money velocity is zero. It doesn't add to the economy at all. Again, the U.S. government spends it, but they might not spend it efficiently. It basically does not add to money velocity.

[00:09:22] [SPEAKER_01] But if I keep my dollar, the economy grows accordingly. People always think, oh, we got out of the Depression because of World War II. GDP goes up when the government sends money. This is not true because the government does not allocate money efficiently. Which is why every invention comes from the private sector and not the public sector. The reason it's important to understand this is because I'm trying to express the importance of eliminating income taxes.

[00:09:51] [SPEAKER_01] Again, the personal income tax raises $2.5 trillion per year. So if the money velocity in the U.S. is 1.5, that means if you stop income taxes, not only are you adding another $2.5 trillion to the economy, you multiply that by 1.5. You're actually adding $3.75 trillion to the U.S. economy.

[00:10:16] [SPEAKER_01] So the U.S. economy, it was growing by about 12 or 13% per year if you get rid of personal income taxes. Now, the problem, of course, is that you're no longer raising $2.5 trillion. And I already said how we have a budget deficit and we have $36 trillion in debt. So you're going to need to raise $2.5 trillion. So how can you raise $2.5 trillion?

[00:10:44] [SPEAKER_01] Well, one thing you can do is cut government spending. But we already spend $6.7 trillion and we collect the $2.5 trillion in taxes. So you would have to eliminate the deficit. You'd have to cut spending by at least $1.8 trillion to break even with the government raising taxes. And then you'd have to eliminate another $2.5 trillion.

[00:11:06] [SPEAKER_01] So you'd have to eliminate $4.3 trillion out of the $6.7 trillion in spending if you want to eliminate income taxes and not get into more debt. So it's not enough to just borrow more money because the debt will sink under the debt. But you do see the benefits, which is that the economy will grow faster. And the disadvantage is the government has a lot of expenses. You can't just eliminate. You have to make back the money. So I want to introduce another number.

[00:11:33] [SPEAKER_01] And by the way, I'll provide a little cheat sheet to these numbers so you don't have to remember everything that I'm saying. It's important to know the U.S. consumer spends about $19 trillion on consumer products. So things like food, things like your utilities in your house, things like cars, and so on. So we spend about $19 trillion in domestic consumer products.

[00:12:02] [SPEAKER_01] I'm not counting foreign-made products because then the dollars leave the U.S. and the velocity goes away and there's no benefit to the U.S. economy. Focus on that $19 trillion that consumers spend in the U.S. Now, right now, a lot of states, basically 45 out of the 50 states, have some form of sales tax at the cash register. So if something has a 5% sales tax and it costs a dollar, you're spending $1.05.

[00:12:31] [SPEAKER_01] But there's no national sales tax. There's no federal sales tax. Now, Europe has national sales taxes and it shows me that we can do it, but with some caveats. Some people out there are proposing a flat sales tax. So again, if there's $19 trillion in spending and then if you give people an extra $2.5 trillion because there's no income taxes,

[00:12:56] [SPEAKER_01] it'll add about $2 trillion to personal consumer spending. It's officially the number is personal consumer expenditures. I'll say personal consumer spending. So why won't it add $2.5 trillion to personal consumer spending? It'll only add $2 trillion. Well, because I'm applying the money multiplier, the money velocity, but I'm also subtracting, okay, we spend some money on foreign goods. So that's not part of domestic personal consumer spending.

[00:13:25] [SPEAKER_01] We also put some money in savings. Some people, depending on your income, some people put money into their businesses and they invest and so on. So basically, if you give people an extra $2.5 trillion a year, there'll be about $21 trillion per year that's spent. And in order to raise $2.5 trillion to make up what you lost in cutting taxes, you would need to have roughly a 12%.

[00:13:52] [SPEAKER_01] It's more like 11.9, but roughly a 12% sales tax. And that would be on top of the sales taxes in each state. So if New York State has a 6% or 6.5% sales tax, you add in the 12% sales tax, that's like an 18% sales tax, which is too high for many products. And I'll explain why. By the way, Europe, their sales tax, what they call their VAT tax, is higher than 15%, but we don't want to go that high.

[00:14:22] [SPEAKER_01] And the reason you don't want to go that high is, I'm going to introduce another concept. It's called price elasticity. Basically, a product is price elastic if you could increase the price and people still want to buy it at the same percentage, the same number of people want to buy it. Then a product is price elastic. So if somebody has a Rolls Royce and they bought their Rolls Royce for a million dollars,

[00:14:50] [SPEAKER_01] and you tell them, hey, we're raising the price to $1.2 million, we're giving a 20% hike, Rolls Royces are price elastic. Like a billionaire doesn't care if he or she spends, I mean, a million versus 1.2 million. So something like that is price elastic. But like the price of gasoline for many low-income people is not price elastic. So when it goes from $3 a gallon to $4 a gallon, a lot of people start carpooling or taking public transportation

[00:15:19] [SPEAKER_01] because they don't want to spend that extra money for gasoline. So gasoline is price inelastic and Rolls Royces are price elastic. So if you just have a flat additional 12% federal sales tax across every product, it kind of defeats the purpose because then you're giving a disincentive to spending again, the same disincentive that personal income taxes had. So what I propose is, and I don't think anyone's ever proposed this,

[00:15:48] [SPEAKER_01] but what I call a progressive sales tax. So on necessities, a necessity is food, utilities, rent, and so on. On necessities, you just have a 5% sales tax. On most standard goods, like if I books, clothes, furniture, whatever, I would say put a 15% national sales tax because it's a little bit more price elastic, like standard goods.

[00:16:17] [SPEAKER_01] And for luxury items, let's say items that cost more than $50,000, or you could define this in case by case, I would have a 50% sales tax. The Rolls Royce won't be a million dollars. It'll be $1.5 million. The billionaire doesn't care. For high-end items, low-income people aren't buying a Rolls Royce. Low-income people aren't buying a yacht. Billionaires are buying yachts. They'll either spend, some percentage of them will have no problem

[00:16:45] [SPEAKER_01] with the 50% sales tax. So again, on necessities, 5% sales tax. On standard goods, 15% sales tax, which is equivalent to what you would find in Europe on a VAT tax. And in Europe, we already see when they added a 15% national tax, sales of standard goods went down by about half a percent. So no big deal. Same thing with a luxury tax. There's a lot of evidence that when you put a luxury tax on a high-end item,

[00:17:13] [SPEAKER_01] sales go down, but only like a half a percent or 1%, no big deal. If you do this, now about 40% of spending is necessities. 50% of spending is standard goods. Only 10% of spending is luxury goods. So if you break this down on the $21 trillion of personal consumer spending that we do, you would raise $2.8 trillion with the method I just outlined, which is $300 billion more than you need to raise. So I'm going to throw in one more thing.

[00:17:41] [SPEAKER_01] If somebody is a senior citizen or living on Social Security or Medicare, they show their card, oh, I have Medicare or Social Security, and they don't pay any sales tax. So now you claw back that $300 billion and you've raised exactly $2.5 trillion. By the way, people have asked me, well, what about enforcement? How do you collect it? Well, you're collecting this at the cash register, which is very different from income taxes. So income taxes is what's called volunteer compliant.

[00:18:10] [SPEAKER_01] So basically, you're required by law to pay your income taxes, but also it's semi-volunteer. Like you fill out your taxes, you have to get an account, you have to send the money. So it's not like, you know, taken from you and you don't get a bill from the IRS or anything. You have to volunteer all the information and pay your taxes legally. But a sales tax is collected at the cash register, so it's forced compliance, which is a good thing. So there's no loopholes. There's no way to get out of it. You don't have to hire an accountant.

[00:18:40] [SPEAKER_01] The IRS doesn't really have to do anything. Just every store is legally required to, you know, send the money. And they all do. People go to jail if they don't. This would be much more collectible. Now, how does this benefit society? And people ask me, well, wouldn't prices go up? And the answer is prices wouldn't go up because, well, prices would go up by the value of the sales tax, but the underlying price of the product would not go up

[00:19:08] [SPEAKER_01] because companies don't want to provide further disincentive on top of the sales tax for people to buy their products. And you have to make more money to buy things with the new prices because, again, the national sales tax will be added to the state sales tax, will be added to the price of a product. The answer is no. And I'll give you an example. Right now, let's say my tax rate is 30% and I want to buy a $100 product.

[00:19:36] [SPEAKER_01] Before I pay taxes, I have to make $133 to buy the $100 product. Why? Because $133 with a 30% tax rate is $100 after taxes. But in the sales tax method I've outlined before, if I want to buy $100, I need to make $115 because the price goes up by the amount of the sales tax. And let's say it's a standard good, which most goods are. It's a 15% sales tax.

[00:20:04] [SPEAKER_01] So I actually need to make less money if there's a 15% sales tax on most of the items that I buy. And again, on necessities, I have to make less money because instead of paying a dollar for an egg, I'd have to spend a dollar five. As opposed to, again, I'd have to make $1.33 to buy a $1 egg if there's in an income tax world. So people will get to spend more money. The economy will be boosted.

[00:20:31] [SPEAKER_01] You'll enjoy the product of your work more because you'll be making more money. The main difference is you're still getting taxed. I mean, you're still responsible for paying the sales taxes on everything you buy, but you're getting taxed less and you have more choice of how to spend your money. Meanwhile, guess what? The government is still making $2.5 trillion, but the economy just grew by over $3.7 trillion. So overall, the economy will grow.

[00:21:00] [SPEAKER_01] And I'm not talking anything about corporate taxes. More corporate taxes will be collected by the US government. So this benefits the US government by having the economy grow fast. Ultimately, this is the way the US could, should, would be able to pay down the $36 trillion in debt because they'll end up collecting more in corporate taxes. They'll end up collecting possibly more in sales taxes as the economy continues to grow and grow and grow.

[00:21:28] [SPEAKER_01] And you, the taxpayer, will feel better about making money and you won't pay any income taxes. You'll just pay on what you spend. And everybody spends differently. Some people spend less than others. And again, there's some precedent here. The EU has enormous VAT taxes. 15% is the minimum across the EU or across Europe. And also there's ways that even these sales tax rates could go down. One is if more corporate taxes are being collected

[00:21:58] [SPEAKER_01] because now the economy is bigger, so corporations are making more money, you could start to reduce these national sales tax rates. The other thing is, is obviously if there's tariffs, you could reduce further. And of course, if government spending is further reduced, you could reduce these sales tax rates even further. So in summary, I just want to mention, $2.5 trillion gets spent each year on personal income taxes. That's what we, the consumer, give to the government from our income taxes before we have a chance to spend it.

[00:22:28] [SPEAKER_01] As soon as we make it, we got to send it into the government. With a progressive national sales tax, you'll completely replace the $2.5 trillion previously raised from income taxes. You get to spend the money you make and you're taxed at the cash register. The economy grows an extra $3.7 trillion per year. So the economy will grow much faster, meaning corporations will grow and make more money and pay more taxes. So that could help to further reduce the burden on the consumer.

[00:22:56] [SPEAKER_01] And again, people who are completely in poverty or living off social security, they will be able to defer or not pay sales taxes by showing their social security card or whatever. This would enormously reduce red tape. There would be no audits of people. You don't need all the infrastructure to collect all the taxes and so on. So yes, the tax industry would change, but it would refocus itself on finding other ways to raise money and on the sales tax rate.

[00:23:25] [SPEAKER_01] I'll cover tariffs and the national debt in another episode. A lot of people have been arguing, are tariffs good? Are tariffs bad? We could take a good look at it and come to a conclusion. The other thing is, I just want to mention, it's not always a bad thing for a country to be in debt. Sometimes you want a country to be in debt, particularly a country that's as powerful as the US. I'll explain why in another episode,

[00:23:52] [SPEAKER_01] but if the US is willing to take on debt each year, which it currently does, but you want to reduce it somewhat, but it's not so bad for a country to borrow money, you can further reduce the national sales taxes, particularly if combined with cutting government spending. And I also want to add, some people have said to me, oh, well, won't this increase inflation? No. When you add a sales tax, yes, if something costs a dollar and you add a 5% sales tax, it's now $1.05.

[00:24:22] [SPEAKER_01] But that is not the same as inflation. Inflation is when the demand for products at a certain price is too high, so people charge more because the demand is high. So inflation primarily, I would say in 99 out of 100 cases, inflation occurs when the government prints money. And the government prints money when it borrows money from the Federal Reserve, which is a weird thing.

[00:24:50] [SPEAKER_01] When the U.S. government borrows money from the Federal Reserve, it's borrowing money from itself because the Federal Reserve is part of the U.S. government. But on the balance sheet, what happens is banks that sell the treasury bills, the Federal Reserve just magically makes more money appear at the bank. That is called printing money. And the Federal Reserve buys the bonds by just giving the banks money that never existed before. They buy U.S. treasury bills with money that never existed before.

[00:25:19] [SPEAKER_01] That is printing money. So if you print money, but the economy is not growing, then the value, again, value is always supply and demand. So suddenly you have more dollars in the economy, but the same demand for those dollars. So the value of the dollar goes down, which means people need more dollars to buy a McDonald's hamburger. So because the value of the dollar goes down, you could think of it in this way, less hamburgers are required to buy one dollar because the value of the dollar is going down. That's inflation.

[00:25:49] [SPEAKER_01] If previously it was $3 to buy a hamburger, now it might be $3.20 to buy a hamburger. And that's when inflation occurs, when there's too many dollars being printed without the U.S. economy growing. But in the method I described, it's the reverse in that you don't need to print any money. In fact, you can get out of debt and the U.S. economy is growing. So actually the dollar will become incredibly strong in the method that I outlined.

[00:26:16] [SPEAKER_01] So in summary, yes, we could eliminate the IRS, at least in terms of personal income taxes. You could eliminate the $2.5 trillion in personal income taxes. You could bring the income tax rate to 0% and you could still collect all the $2.5 trillion and actually grow the economy faster using this idea of a progressive sales tax. So 5% on necessities, 15% on standard goods, 50% on luxury goods,

[00:26:45] [SPEAKER_01] 0% personal income tax rate. If you like this, share this with your friends. Hey, share this with the government. If you're friends with Trump or the Secretary of Treasury or anybody, let's get this going so that we could have to pay no income taxes. I think this would be better for everybody. Nobody could argue that it'd be better to keep the money you work hard for than to give it to the government. So let's do this. Thanks very much for listening. If you like this kind of podcast, let me know on Twitter. I'm at Jay Altucher.

[00:27:14] [SPEAKER_01] Also happy to answer any questions. And if you want kind of a summary of everything I've talked about, including the numbers, I did a Twitter thread. You could look on my profile at Jay Altucher and look at the Twitter thread that I did about this.