Presidential candidates Kamala Harris and Donald Trump found a rare point of agreement when they both proposed getting rid of taxes on tips.
For restaurant workers, tour guides, masseurs, anyone who makes tips, the benefits of the policy are obvious. Fewer taxes, which of course means more money in your pocket. But for everyone else, the rare bipartisan proposal comes with more pitfalls: Less money in the treasury, an unequal tax code and even more incentives for people to game the system.
What’s more, Trump’s and Harris’ versions of the proposal have both been light on details, experts note.
“It’s easy to promise something like that, but they don’t do what’s an important part, and that’s kind of finalizing the policy,” said Keith Hall, a labor economist at George Mason University’s Mercatus Center and former commissioner of the Bureau of Laboratory. Statistics. “Tell us how you’re going to pay for this.”
The proposals will cost between $100 and $250 billion over 10 years, the Committee for a Responsible Federal Budget estimates.
Even setting costs aside, the proposal would represent a wholesale change to how tipped employees are paid and how the U.S. tax system works, where workers earning the same amount pay different levels of taxes. Should the policy become law, millions of workers would be encouraged to forgo salary or hourly wages to reduce their income taxes, and business owners would likely happily commit to lowering their own payroll taxes.
“Typically, if you subsidize something, you get more of it,” said Hall, who is a member of the advisory committee of the Committee for a Responsible Federal Budget.
All this raises one of the most contentious issues in civic life: justice.
“Why Excrete Restaurant Workers?” Hall said. “You have people who don’t earn tips who earn the same amount. Don’t they get the tax break?”
It’s not “an economic issue, it’s an equity issue”
There are two principles that make an income tax system efficient and fair, according to Hall. One, that people who earn more money pay more in taxes, and two, that people who earn the same pay the same in taxes. “It’s not so much an economic issue, it’s an equity issue,” Hall said. “It is also an important part of people’s willingness to pay their taxes.”
That said, tax breaks like the Child Tax Credit and Earned Income Tax Credit allow parents to pay less tax to the government, and stark inequality in recent decades has renewed accusations that the current tax code is unfair. A 2023 Pew survey found that about 60% of Americans believe that corporations and the wealthy do not pay their fair share in taxes. The tax system is also riddled with legal solutions for the wealthy, best exemplified by the fact that many of the wealthiest people in the United States paid very little federal income tax—and sometimes none at all. The highest earners do so through maneuvers like the carrying rate loophole, which allows fund managers to classify a portion of their compensation as capital gains rather than income. Capital gains are taxed up to 15% depending on the asset, while income is taxed up to 37%.
And tips are no less susceptible to being gamed, according to a report from the progressive think tank Center for American Progress. A proposal to eliminate taxes on tips from Sen. Ted Cruz (R-Texas) and Rep. Byron Donald (R-Fla.) could also be used for tax abuse by the wealthy, CAP found. “The incentive to recharacterize wages or even profits as tips is stronger for high-income earners since their income tax rate is higher,” according to the report.
Cruz spokesman Darrin Miller shot down the idea that Wall Street executives and other white-collar workers would benefit from the bill. “As for the hedge fund ‘loophole,’ that’s not how tax law works,” Miller wrote in a post on X. “Tips are voluntary and the IRS defines reporting requirements. Reclassifying non-tip income as tips has a name: tax fraud. ”
A spokesman for Harris said she would close such loopholes. “As president, she would work with Congress to craft a proposal that comes with an income cap and with strict requirements to prevent hedge fund managers and lawyers from structuring their compensation in ways that try to take advantage of the policy,” they said . The Trump campaign did not respond to a request for comment.
Assets spoke with several business owners whose employees earn money from tips, all of whom supported the proposed policy but were concerned 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 tips than wages, which would still be taxed, said Carl Sobocinski, who owns five restaurants in Greenville, S.C.
“We had to be careful to make sure people don’t try to skirt the rule to pay less tax,” Sobocinski said.
If that were to happen, the federal government would miss out on both the income tax from the worker and the payroll tax the company would have to pay. That would mean an even bigger hit to the already hundred billion hole in federal tax revenue, according to Bernard Yaros, chief US economist at Oxford Economics. “How much would be lost in terms of federal revenue just really depends on business behavior,” he said.
Tipping, especially tips, has always been subject to a tacit ‘don’t ask, don’t tell’ mentality. For decades, tips were largely cash payments that were mostly not reported to the IRS. “Tips are notorious for not being reported income,” Hall said.
Lunch was $16.50? Here’s a thief, keep the change. Movers dragged your furniture up three flights of stairs in July? Here’s a little extra for you and the guys. But in a society that is becoming increasingly cashless, all of these small acts of kindness are recorded in a credit card transaction log, forcing the tipped employees to report them. In that sense, eliminating taxes on tips is a return to what was once an accepted, if not entirely government-sanctioned, status quo.
As a labor economist, Hall sees ripple effects across the economy from such a drastic change affecting millions of workers. Real wages for tipped workers would increase, but probably without an increase in the price of everyday goods, which tends to happen when wages rise, Hall said. It sounds like a good thing in theory, he says, but that doesn’t mean no one pays.
“The government would pick up more of the tab,” he said. “There may actually be less pressure on the price of things like food, but of course taxpayers pay for that.”