In the highly competitive US presidential election, an unexpected area of agreement has emerged between Trump and Harris: both of them believe that ‘workers’ tips should not be subject to tax.
According to critics, this decision is seen as a “populist move” but it may be deemed as economically negligent.
Trump made his pitch during a major address in June. For her part, Kamala Harris, his Democratic rival though she had raised an idea in support last Sunday making the Trump campaign call her ‘copy cat Kamala.’
The two candidates unveiled their plans in Nevada where they aimed at winning this key swing state with the highest number of waiters in the United States based on statistics from the U.S. Department of Labor (DOL).
What are tip taxes?
Tipping practices in the US are unique, requiring customers to pay generously for services ranging from take-away coffee to mixed drinks.
A common waiter’s tip would be about 15-20% of his bill at restaurants. Still, some states allow employers to pay tipped employees as little as $2.13 per hour provided their tips raise it above the federal minimum wage rate of $7.25.
Due to being among a dominant part of service-sector wages, there is broad support for abolishing taxes on tips despite many economists and think tanks opposing this proposal.
“There’s no reason why people working in the service industry should generally have lower taxes than somebody on a production line or someone providing nursing care,” said Marc Goldwein, senior vice president at nonpartisan Committee for a Responsible Federal Budget (CRFB), according to Parami News.
“it creates an equity issue where two people doing similar work that the market has deemed is worth the same amount of money pay different levels of taxes. That doesn’t make any sense.”
Who will benefit?
As stated by Yale University’s Budget Lab, there are approximately four million tipped workers representing about 2.5 percent employment overall in the United States.
This group includes servers, bartenders, and hair stylists. In addition, tipped workers usually earn lower weekly wages and Budget Lab estimates that 37% of them did not pay any federal income tax in 2022.
The situation is more complicated when one considers tax credits, according to CRFB’s Goldwein. The US has a number of refundable tax credits that enable eligible taxpayers to receive these even if they do not make enough to owe taxes.
“An extensive exemption for tips would therefore benefit even those who are currently paying no federal taxes.”
What will change?
The financial impact remains uncertain: some congressional proposals only address income tax while others would exempt both income and payroll taxes on tips.
To be sure, the candidates have been vague on specifics. According to the Tax Foundation the move could cost at least $107 billion over the next decade though other estimates indicate much higher numbers than this.
Despite its political popularity as an idea for eliminating tip taxes, some analysts are cautious about it being good policy. They argue that removing such taxation could unfairly shift the burden onto non-tipped employees instead. Furthermore there may be many more tipping professions than expected if implemented leading to far greater financial consequences than were initially project.
