First, some good news: In an otherwise polarizing and divisive election, there is at least one policy proposal that is emerging as a unifying issue. The bad news is that most experts think it’s a terrible idea.
The proposal in question is to abolish the federal tax on tips. Basically Donald Trump Brainstorming at a campaign rally in June, and it gained enough traction that “No Tax on Tips” signs began appearing regularly at Trump campaign events and the Republican National Convention. Now, even his opponent, Vice President Kamala Harris, has endorsed the idea. “Here’s my promise to everyone: When I’m president, we’ll continue our fight for America’s working families, including raising the minimum wage and eliminating taxes on tips for service and hospitality workers,” he said. A crowd said at the weekend
In a series of social media posts, Trump accused Harris of stealing his ideas, that says “He sounds more like Trump than Trump, faking almost everything.”
On the surface, the tax exemption may sound like a pro-worker proposal with a populist appeal, potentially increasing take-home pay for service sector workers who rely on tips for a living. But the policy is not really put under any scrutiny. And that’s because, at best, “no tax on tips” looks a lot like a tax cut for low- and middle-income families and a lot more like a subsidy for big business.
“I’m not at all saying that workers will get nothing,” said Heidi Schierholz, president of the Economic Policy Institute. “But I think that’s a meaningful share [federal] The cost of such tax exemption will go to the employers of the tipped workers.”
That’s why industry lobbyists supported the proposal. “It’s not a surprise that the National Restaurant Association likes it,” notes Schierholz. Lobbying groups that represent Many of the country’s major restaurant chains.
At worst, the tax policy could even put downward pressure on service sector wages by allowing employers to keep the baseline pay of their workers low because tax cuts could instead increase workers’ take-home pay.
“I think there’s no question that it will lower wages,” Schierholz said. The only question, he said, is exactly how much.
So while “no tax on tips” might make a good sound bite or campaign slogan, it doesn’t necessarily translate into wise policymaking.
Tipped workers don’t need a tax cut. They need a raise.
The problem with tipped wages is not that they are taxed too much; It’s how little they tend to pay, and how much tipped workers have to rely on the kindness of strangers to make ends meet. In 2023, for example, the median annual wage for waiters was just under $32,000. According to the Bureau of Labor Statistics.
actually, As the Tax Policy Center puts itEliminating income taxes on tips would do little for many tipped workers, whose incomes are so low that they are already exempt from paying federal income taxes.
“It’s very hard to dispute that the vast majority of middle- and low-wage workers are left out,” said Brendan Duke, senior director of economic policy at the Center for American Progress. “We know that 95 percent are low and middle wage workers Don’t get tips, and about a third of tipped workers pay income tax and benefit from it.” (The Duke was speaking specifically Texas Senator Ted Cruz proposed legislation In this regard.)
One of the reasons tipped workers are paid so little is that the federal government only gives them a guarantee The minimum wage is $2.13 an hour. If, including tips, a worker’s earnings are still below the federal minimum wage of $7.25 an hour, employers must make up the difference. (Many states and municipalities have wage requirements above the federal minimum, but those Also often includes carving-out with lower hourly minimums for tipped workers.)
Which is why there are a handful of states Minimum wage has been abolished For tipped workers. Because by allowing employers to pay tipped workers less, businesses essentially pass the burden of their wages directly onto their customers. And while most Americans are accustomed to tipping, those who don’t — or who at least threaten not to tip — create a hostile environment for workers and make it harder for workers to make fair wages. something Research has also shown That tipped wages encourage workers to discriminate against people of color, providing them with worse service because of racist stereotypes about who is more likely to leave a generous tip.
The tax exemption on tips is a handout to businesses, not employees
One of the biggest concerns about eliminating the federal tax on tips is that it would discourage businesses from paying more competitive wages. This is because if the tax cut increases workers’ take-home pay, employers will not be required to pay higher base-line wages to tipped workers. In fact, it’s a tax cut that subsidizes most businesses’ payroll costs, not workers’ living costs.
“This will reduce the need for employers to raise wages,” said Schierholz of the Economic Policy Institute.
There’s also the possibility that creating a tax carveout for tipped employees could create a big loophole for employers who want to pay people less. Some sectors, for example, may become part of a tipped economy, with most of their workers relying on tips rather than the minimum wage.
The policy would “encourage employers to keep more workers in tipped occupations,” Schierholz said. “[Employers] Under the guise of doing something for the workers, they can reduce the basic wages they pay their workers. They might say, ‘We’re tipping you because you don’t have to pay tax,’ and then in the fine print, it’s like, ‘Oh, you’re going to make $2.13 an hour on base wage.’ “
This is why pursuing other policies, such as eliminating the minimum wage, will do more to raise workers’ wages than eliminating the tax on tips. Poverty rates for workers in states without a minimum wage, for example, Less than the state including minimum wage.
“If you really want to help tipped workers, there are a lot of other ways that are much better,” Schierholz said, adding that federal dollars would be better directed toward programs like the Child Tax Credit or the Earned Income Tax Credit, which would be more targeted to those in need. good
So if politicians want to pursue a pro-worker agenda, they should point to policies that actually raise people’s wages, such as the minimum wage increase Harris approved. Otherwise, they might be pushing for another tax cut for the rich. After all, that could be why Major business lobbying groups Allowed “no tax on tips” – to avoid raising workers’ wages.
