Dem
51
GOP
49
One of Donald Trump's few clear and potentially achievable policy positions is his pledge to exempt tips from being taxed. It's not hard to understand why he embraced that plan; Republicans love to cut taxes (though usually on people wealthier than service professionals), and there are a LOT of people in the swing state of Nevada for whom tips are their main source of income.
The Democrats would very much like to win Nevada, too. One way to help with that is for Kamala Harris to also adopt Trump's no-taxes-on-tips plank, which she has. An even better way would be for a no-taxes-on-tips law to be passed before the election. Not only would that take away Trump's campaign plank, it would also allow the Democrats to claim credit for getting the legislation passed, since Joe Biden would have to sign it into law. In case anyone was wondering if the President is willing to do that, the White House made clear yesterday that he most certainly is.
Of course, initiatives that are politically popular sometimes aren't sound policy. That appears to be the case here, as economists and other tax experts, both right- and left-wing, are warning of the potential unintended consequences of such a law. While recognizing that the plan is largely vaporware right now, and it would matter exactly how it is written, the number-crunchers fear a disaster.
To be more specific, waiving taxes on tips would have an obvious impact on federal revenues. The Committee for a Responsible Federal Budget estimates that the loss would be somewhere between $100 billion and $250 billion over a decade, which is a pretty big chunk. It would be even worse if payroll taxes on tips were also exempted; the last thing that Medicare and Social Security need right now is to be taking in even less money.
An even bigger problem, potentially, is that if a particular form of income is extremely tax-privileged, then some people, the type that tend to have hotshot accountants, will likely try to find ways to re-classify their income as tips. "I only earned $1 in salary this year for my work as CEO of Acme, Inc., but the company was so happy with my work, they tipped me $10,000 every week." That sort of thing. Obviously, the IRS would try to prohibit those kinds of abuses, but it's hard to know how successful they would be. And because one-third of tipped workers do not pay any income tax at all, and another third pay very little, the large potential loophole means that the lion's share of the benefits might end up going to wealthy people who aren't in the service industry at all. This may just be another reason why Trump has embraced the plan.
The people who are experts in what would help lower-income workers—say, the leaders of labor unions, or professors of public policy—assert that it would be better policy to pass laws that help all lower-income workers instead of laws that only help some. Increasing the federal minimum wage is an obvious possibility, while expanding the child-tax credit is another. However, those sorts of things have virtually no chance of getting through the current Congress, while no-taxes-on-tips might, since both parties want to claim credit, while neither party wants to be blamed for blocking it. If so, as we note above, it won't be the first time that politics made for bad policy. (Z)