The Trump administration’s latest tax policy quasi-proposal, announced by Commerce Secretary Howard Lutnick in an interview with CBS News, is for the elimination of taxes for folks making less than $150,000 per year.
Trump’s previous major tax initiative, the Tax Cuts and Jobs Act (TCJA) of 2017, slashed the corporate tax rate from 35% to 21% and provided rate reductions across the board, but a closer examination reveals who really won with the new policy: corporations and the wealthy.
High-income earners benefited massively, with the top 1% seeing a 2.2% increase in after-tax income, while all other taxpayers got some short-term relief in the form of a larger standard deduction—but were also hit by state and local tax (SALT) deduction caps.
If, along with extending the TCJA tax cuts that disproportionately benefit high income earners, the Trump administration intends to eliminate the income tax for individuals making less than $150,000, it raises the obvious question of who will be left shouldering the tax burden. The answer is either the middle class or no one—because both Social Security and Medicare will be shut down.
The Illusion of a “Tax Free” System for the Working Class
At first glance, Lutnick’s proposal to eliminate taxes for those earning under $150,000 sounds like a windfall for working taxpayers. However, as with most tax policy promises, the devil is in the details.
It is worth noting that most Americans in this income range pay more in payroll taxes than income taxes—payroll taxes fund Social Security and Medicare. When Lutnick speaks of eliminating “taxes” on individuals making less than $150,000, one must assume then that this includes both income taxes and payroll taxes, as the latter is the larger burden on individuals in that income range. It would make little sense to assume in his broad pronouncement of an elimination of “taxes,” he means only the lesser-burden of the federal income tax.
You Can’t Fund Social Security and Medicare Without Taxpayers
If the Trump administration truly intends to eliminate both income and payroll taxes from those earning under $150,000 and extend the TCJA tax cuts—we will be facing an existential crisis for the programs that working and retired Americans rely on.
Social Security and Medicare are funded almost entirely through payroll taxes. If you eliminate them for the vast majority of workers, you’re not reforming these programs—you’re eliminating them entirely.
In 2023 alone, payroll taxes generated $1.23 trillion, accounting for roughly 90% of Social Security’s revenue and a significant portion of Medicare’s funding. The entire system is predicated on there being workers paying in, so that retirees and the disabled can get paid out. Benefits do not continue in the absence of ongoing payroll taxes. Put differently, if you exempt enough income brackets from payroll taxes, you functionally deprive these programs of funding entirely.
With the TCJA cleaving off the upper income brackets for preferential treatment and Lutnick’s quasi-proposal suggesting those making less than $150,000 will not have to pay in—one of three things will need to happen. First, massive and permanent deficit spending could be used to continue paying out Social Security and Medicare benefits. Essentially, disabled and retired persons could continue to be provided with benefits through the issuance of more debt—which will be a tough political sell.
Second, benefits could be cut or the retirement age could be raised to the point where Social Security and Medicare essentially become meaningless. There is an age threshold at which essentially no one would qualify for benefits and the issue would be functionally resolved. You’ll be free to retire with full Social Security benefits three days after your 125th birthday.
Third, a national consumption tax, like a value-added tax, or higher local taxes could be implemented to make up the shortfall—shifting the burden back onto the middle class and essentially playing a shell game with economic incidence.
There is no serious economic model in which you eliminate payroll taxes for the groups that are most responsible for funding these entitlement programs without fundamentally dismantling those selfsame programs. While Republicans have flirted with privatizing Social Security for years, this tax proposal might be the most aggressive backdoor attempt yet.
Will the Ultra-Wealthy Pick Up the Slack?
Short answer: No. They never have, and the TCJA wasn’t intended to make them start. There is no reason to believe any policy broadly extending the TCJA will be any different.
The TCJA slashed the corporate rate permanently, while individual tax cuts—those that had a modicum of a chance of benefiting middle-class earners—were set to expire by 2025. That tells you exactly who these policies are designed to benefit: corporations and the ultra-wealthy, whose tax breaks remain locked-in.
This new plan will follow the same playbook. If the proposal to eliminate income taxes for those earning under $150,000 moves forward, it won’t be the ultra-wealthy making up the difference—it’ll be the middle class.
If your income is just a tick above $150,000, congratulations—you’ll now be in the last significant tax-paying bracket. To the extent Medicare receives funding from the states, expect higher state and local taxes, property taxes, and consumption taxes like sales and use taxes, to cover the shortfall. The latter is notoriously regressive.
The math is simple: if no one is paying in, no one gets benefits out. And that’s the part Trump’s allies don’t want to say out loud.
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