President Donald Trump has once again made headlines with his proposal to eliminate income taxes — he wants to replace them with alternative revenue sources like tariffs or a national consumption tax. This might sound like something worth celebrating to many Americans who dread tax season, but the potential economic consequences could be far-reaching, especially for prospective homebuyers.
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Removing income taxes means the government will have to change the way it collects revenue, which could potentially lead to higher interest rates and shifts in housing demand that could make it harder for average Americans to afford a home.
One of the biggest concerns around eliminating income taxes is the higher interest rates it would create. According to the Tax Policy Center, individual income tax has been the largest single source of federal revenue since 1944, and in 2022, it comprised 54% of total revenues. This means that removing income taxes will require a pretty significant restructuring of the tax system.
“Once the income taxes are removed, this will create a hole in the federal revenue and could result in fiscal deficits,” said Alexander Kalla, a realtor at Keller William Bay Area Estates. “This could lead to the government increasing their borrowing, which may increase treasury yields and mortgage rates, which then will impact the majority of the homebuyers.”
Even a tiny increase in mortgage rates can have a big impact. For example, depending on the loan amount, a 1% increase in mortgage rates could add hundreds of dollars to a monthly mortgage payment and price some buyers out of the market entirely.
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Eliminating income taxes might initially sound like it would put more money in Americans’ pockets, but the reality is more complicated. If Trump were to implement a national consumption tax to replace the revenue from income taxes, and we’re all paying zero in income taxes and a 10% tax on what we buy, “we might make up the difference and collect enough to remain at the status quo,” said Anthony Termini, a seasoned investment advisor and expert contributor for Annuity.org.
“Being able to replace the government’s sources of income with a system that would collect taxes every day, all year round with little risk of noncompliance (bartering will likely continue to take place unnoticed) and less complexity to calculate might make the whole process more efficient,” he explained. “But it would also make everything more expensive. That means that inflation won’t abate and that the Federal Reserve will be disinclined to easy monetary policy. So interest rates on mortgages could stay at around 7% to 8% for a generation. That would be a drag on home sales.”