Presidential candidates Kamala Harris and Donald Trump have both proposed eliminating the tip tax, finding rare common ground.
For restaurant workers, tour guides, masseuses, and other tip earners, the benefits of this policy are clear: Lower taxes mean more money in their pockets. But for everyone else, this rare bipartisan proposal has several pitfalls: it takes money out of the Treasury, makes the tax system unfair, and creates more incentives to abuse the system.
Additionally, experts say both the Trump and Harris proposals are short on details.
“It’s easy to promise these things, but they haven’t followed through on the key parts, which is to say, they’re close to completing the policy,” said Keith Hall, a labor economist at George Mason University’s Marketas Center and a former director of the Bureau of Labor Statistics. “Tell me how we’re going to pay for this.”
The cost of the proposal is $100 billion and $250 billion The Committee for a Responsible Federal Budget estimates it will happen over a 10-year period.
Costs aside, this proposal would make sweeping changes to how tipped employees are paid and how the U.S. tax system operates, resulting in workers who make the same amount of money paying different levels of tax. If this policy becomes law, it would motivate millions of workers to give up a salary or hourly wage in order to reduce their income tax, and business owners would be happy to cut their own payroll taxes.
“Typically when you subsidize something, the amount goes up,” said Hall, who is an advisory board member for the Committee for a Responsible Federal Budget.
All of this raises one of the most contentious issues in civic life: fairness.
“Why are we just targeting restaurant workers,” Hall said. “People who don’t get tips are making the same amount, so why don’t they get a tax break?”
“It’s not an economic issue, it’s an equity issue.”
According to Hall, there are two principles that make an income tax system effective and fair: people who earn more pay more tax, and people who earn the same amount pay the same tax. “It’s not so much an economic issue, it’s an issue of fairness,” Hall says. “It’s also a factor in whether people are willing to pay tax.”
However, Child Tax Credit and Earned Income Tax Credit It allows parents to pay less tax to the government, reversing the inequality that has been so prevalent in recent decades. Fee The current tax law is Unfair. Pew vote A survey from 2023 found that about 60% of Americans believe corporations and the wealthy don’t pay their fair share of taxes. The tax system is riddled with legal workarounds for the wealthy, and the fact that many of America’s wealthiest people pay no taxes is a prime example of this. There is almost no federal income taxSometimes they don’t earn anything at all. The highest earners are Carried Interest LoopholeThis allows fund managers to Categorize A portion of your compensation is taxed as capital gains rather than income. Capital gains are taxed at up to 15% depending on your assets, while income is taxed at up to 37%.
And the chips are less likely to be misused, Report From the progressive think tank, the Center for American Progress. suggestion The tip tax repeal proposal by Sen. Ted Cruz (R-Texas) and Rep. Byron Donald (R-Fla.) could also be used by the wealthy to evade taxes, CAP said. “Higher income earners have a stronger incentive to reclassify wages and even profits as tips because of their higher income tax rates,” the report said.
Darin Miller, a spokesman for Cruz, rejected the idea that Wall Street executives and other white-collar professionals would take advantage of the bill. “When it comes to the hedge fund ‘loophole,’ the tax code doesn’t work that way,” Miller said in a statement. post Regarding X. “Tipping is optional and the IRS has reporting requirements. Reclassifying non-tip income as tips is called tax evasion.”
A spokesman for Harris said she plans to close such loopholes. “As president, she will work with Congress to develop a proposal that includes income limits and tough requirements to ensure that hedge fund managers and lawyers don’t create compensation structures that exploit the policy,” the spokesman said. The Trump campaign did not respond to a request for comment.
luck I spoke with several restaurant owners whose employees earn income through tips, and all of them supported the proposed policy but worried it could encourage similar abuses of the system. “Unscrupulous restaurant owners and their employees could try to tweak their compensation structure to pay more in tips than they earn in wages, and tips are still taxable,” said Carl Sobocinski, who owns five restaurants in Greenville, South Carolina.
“We need to be careful that people aren’t trying to get around the rules to pay less tax,” Sobocinski said.
If that were to happen, the federal government would miss out on both income taxes from workers and payroll taxes that businesses have to pay. That would be an even bigger hit to federal tax revenues, which are already in the red by $100 billion, according to Bernard Yaros, chief U.S. economist at Oxford Economics. “How much of a loss there is in terms of federal tax revenues will depend on the actions of businesses,” he said.
Tipping, especially cash tipping, has always been governed by an implicit “don’t ask, don’t tell” mentality. For decades, tips were primarily paid in cash, and most of them Not reported “Tips are notoriously not reported as income,” Hall said.
Lunch was $16.50? I’ll give you $20. No change. The movers carried your furniture up to the third floor in July? I’ll give you and your buddies a little something extra. But in an increasingly cashless society, all these small acts of kindness would be recorded on credit card transactions and would force tipped workers to report them. In that sense, abolishing the tip tax would be a return to a status quo that was once accepted, or even fully government-sanctioned.
Hall, the labor economist, sees such a dramatic change, affecting millions of workers, rippling through the economy. Tipped workers would see real wages rise, but they likely wouldn’t see the price hikes on everyday items that tend to come with any pay increase, Hall said. That sounds good in theory, but it doesn’t mean no one will pay, he said.
“The government will have to pay more,” he said, “and it may actually reduce the pressure on prices of things like food, but of course the cost is being borne by taxpayers.”
