Presidential candidates Kamala Harris and Donald Trump found rare common ground when they both proposed deliverance taxes on tips.
For restaurant workers, tour guides, massage therapists, any For anyone who tips, the benefits of the policy are obvious. Less taxes, which naturally means more money in their pockets. But for everyone else, the rare bipartisan proposal comes with several pitfalls: less money in the Treasury, an unfair tax code, and even more incentives for people to game the system.
Moreover, Trump and Harris versions Experts note that both proposals lack details.
“It’s easy to promise something like that, but they’re not doing what’s important, which is sort of wrapping up the policy,” said Keith Hall, a labor economist at George Mason University’s Mercatus Center and a former commissioner of the Bureau of Labor Statistics. “Tell us how you’re going to pay for it.”
Offers will cost from 100 billion dollars And 250 billion dollars more than 10 years, estimates the Committee for a Responsible Federal Budget.
Even without the cost, the proposal would represent a massive change to how tips are paid to workers and how the U.S. tax system operates, with workers who make the same amount of money paying different levels of taxes. If the policy becomes law, millions of workers would be incentivized to give up wages or hourly wages to lower their income taxes, and business owners would likely be happy to reduce their own payroll taxes.
“Typically, if you subsidize something, you get more out of it,” said Hall, who is a member of the advisory board of the Committee for a Responsible Federal Budget.
All this raises one of the most contentious issues in civil life: justice.
“Why single out restaurant workers?” Hall said. “You have people who don't get tips but make the same amount of money. They don't get a tax break?”
It's not an “economic issue, it's a fairness issue”
Hall said there are two principles that make the income tax system efficient and fair. First, people who make more money pay more in taxes, and second, people who make the same amount of money pay the same amount in taxes. “It’s not so much an economic issue as it is a fairness issue,” Hall said. “It’s also an important part of people’s willingness to pay taxes.”
However, tax incentives such as child tax credit And earned income tax credit allow parents to pay less tax to the state, and in recent decades, glaring inequality has returned accusations what is the current tax code unfair. Bench vote Since 2023, it has been found that about 60% of Americans believe that corporations and the wealthy do not pay their fair share of taxes. The tax system is also rife legal workarounds for the rich, best embodied in the fact that many of the richest people in the US paid very low federal income tax— and sometimes nothing at all. The highest paid do this through maneuvers such as interest loopholewhich allows fund managers classify part of their compensation as capital gains rather than income. Capital gains are taxed at up to 15% depending on the asset, while income is taxed at up to 37%.
And tips are no less susceptible to fraud, according to report from the progressive think tank Center for American Progress. offer CAP found that a proposal by Sen. Ted Cruz (R-Texas) and Rep. Byron Donald (R-Fla.) to eliminate tip taxes could also be used for tax abuse by the wealthy. “The incentive to recharacterize wages or even profits as tips is stronger for high-income earners because their income tax rate is higher,” the report said.
Cruz spokesman Darrin Miller dismissed the idea that Wall Street executives and other white-collar professionals would take advantage of the bill. “As for the hedge fund loophole, that's not how the tax law works,” Miller wrote in mail on X“Tips are voluntary, and the IRS determines reporting requirements. Reclassifying non-tip income as tips has a name: tax fraud.”
A Harris spokesperson said she would close such loopholes. “As president, she will work with Congress to develop a proposal that includes income caps and strict requirements to prevent hedge fund managers and lawyers from structuring their compensation in ways that attempt to take advantage of the policy,” they said. The Trump campaign did not respond to a request for comment.
Luck I spoke with several business owners whose employees make money from tips, and they all supported the policy proposal but worried it could encourage similar gaming of the system. Unscrupulous business owners and their employees could try to rework their compensation structures to pay workers more in tips than in wages, which would still be taxed, said Carl Sobocinski, who owns five restaurants in Greenville, S.C.
“We're going to have to be careful and make sure people don't try to circumvent the rule to pay less tax,” Sobocinski said.
If that happened, the federal government would lose both the employee income tax and the payroll tax that businesses would otherwise have to pay. That would mean an even bigger blow to the already hundreds of billions of dollars in federal tax revenue, according to Bernard Yaros, chief U.S. economist at Oxford Economics. “How much would be lost in terms of federal revenue really depends on how businesses behave,” he said.
Tipping, especially cash tips, has always been subject to a silent “don’t ask, don’t tell” mentality. For decades, tips were primarily cash payments that went incommunicable to the IRS. “Tips are notorious for not being reported as income,” Hall said.
Lunch cost $16.50? Here's a twenty, and keep the change. Did movers lug your furniture up three flights of stairs in July? That's a little something extra for you and the boys. But in an increasingly cash-based society, all those little acts of kindness end up in the credit-card transaction log, forcing tipped workers to report them. In that sense, eliminating tip taxes is a return to what was once the accepted, if not entirely government-sanctioned, status quo.
As a labor economist, Hall sees ripple effects across the economy from such a radical change, affecting millions of workers. The real wages of tipped workers would rise, but likely without the cost of everyday goods increasing, which typically happens whenever wages rise, Hall said. That sounds like a good idea in theory, he said, but that doesn’t mean no one is paying.
“The government will be shouldering most of the costs,” he said. “In fact, there may be less pressure on prices for things like food, but of course taxpayers are paying for it.”