Presidential candidate Donald Trump shocked the internet when he floated “the ultimate tax cut” – an end to income tax entirely. Economists and opinion makers ran to their keyboards to share their reactions.
Such a move would send shockwaves through every layer of the global economy – a system so intricate that even minor changes are difficult to predict.
Eliminating Income Tax: Unpredictable effects
To begin, replacing the income tax with tariffs would immediately increase the cost of imported goods across the board. Consumers would face higher prices on everything from electronics to clothing, applying inflationary pressure throughout the economy.
Tariffs are, in essence, taxes on consumption of foreign goods. With U.S. consumers heavily dependent on imports, from raw materials to finished goods, price hikes would be substantial.
Over time, the rate of inflation would slow as capital investment in American supply chains and manufacturing is re-established. However, that could take a long time, and it’s hard to predict just how intense price inflation could become in the meantime.
On the other hand, if individual income tax were to be eliminated at the same time, Americans would keep substantially more of their earnings, and would have much more money available to pay much higher prices.
The central question here is which of these effects – the rise in prices or the rise in income – would dominate people’s perceptions of the economy and of their personal financial wellbeing.
Shifting Time Preference
Bitcoin provides a critical lens through which to examine this potential shift – especially with its concept of time preference.
Time preference refers to an individual’s tendency to prefer immediate consumption over future rewards (high time preference) versus the preference to delay gratification in order to enjoy greater rewards in the future (low time preference).
This concept is embedded in the logic of bitcoin’s software. As it is a naturally deflationary currency, the purchasing power of a bitcoin tends to rise over long time periods. Each time you face a choice of whether or not to spend money on consumption today, your alternative is to save that money in bitcoin, with the payoff of consuming 10x or 100x or even more on some day far in the future.
If Americans suddenly find themselves with more disposable income, but also face higher prices for goods, they might start thinking more carefully about their consumption choices. For those with a lower time preference, the natural response might be to defer unnecessary purchases and instead focus on saving or investing. In a world of inflated goods prices, more prudent individuals may start to seek alternative stores of value to protect their wealth. This is where bitcoin could find a new sizable cohort of adopters.
Could Bitcoin Experience a Short-Term Boom?
If Americans suddenly find themselves flush with extra cash due to the elimination of income taxes, they might experience a short-term surge in speculative investment. This could mirror the crypto bull run seen during the COVID-19 stimulus period, when stimulus checks fueled a wave of retail investment in everything from Gamestop (GME), bitcoin, and other cryptocurrencies.
Bitcoin is much more accessible to consumers today than just a few short years ago with the advent of bitcoin spot ETFs and slicker user experiences. At the same time, the struggles of Ethereum since its migration to Proof of Stake, along with the failure of the NFT fad, means that bitcoin may be more easily distinguished from the noise of speculative bubbles in the minds of retail investors.
Elimination of income tax could lead to a glut of disposable income, which in turn could trigger a flurry of bitcoin demand that would drive up the price in the short term. However, as tariffs drive up consumer prices, people might liquidate some of their bitcoin holdings to cover rising costs of living. This could result in a sharp sell-off, or even an extended price correction, as we saw after the stimulus-driven bitcoin rally of 2020-2021.
Over the longer term, swapping income tax for tariffs would entirely remake the U.S. economy, with both positive and negative effects. If domestic manufacturers become more competitive as imported goods get more expensive, we could see a resurgence in American industry. This “reshoring” of production, where companies move their manufacturing operations back to the U.S. to avoid tariffs, could increase domestic job creation and spur overall economic growth.
As labor participation increases and domestic production ramps up, Americans might experience a greater sense of economic stability. With more consistent income streams and growing confidence in the future, people may begin to lower their time preference and invest in long-term stores of value – bitcoin included. Economic growth, combined with the realization that fiat currencies will always lose purchasing power over time, could lead to a long-term structural increase in demand for bitcoin.
Bitcoin’s Role After Eliminating Income Tax
Income tax is deeply embedded in the fabric of American financial life, shaping everything from personal budgets to national policy. Eliminating income tax entirely would be nothing short of a financial revolution. In the upheaval that would follow, and eventually the new status quo, what role would bitcoin play?
In the short term, we might see an impulse-driven spike in bitcoin prices, similar to what occurred with the COVID-19 stimulus checks. However, the longer-term trend could be a sustained increase in Bitcoin’s market capitalization, especially if the reshoring of American industry strengthens the domestic economy while inflationary pressures from tariffs push more people to seek sound money alternatives.
As Americans adjust to higher prices and more disposable income, there’s a good chance that many will lower their time preference, favoring savings and investments over immediate consumption.
In the end, this change could accelerate bitcoin’s rise as the ultimate store of value in a post-income tax United States. Here’s hoping the revolution prompts everyday Americans to understand and recognize the importance of sound money.