Kamala Harris and Donald Trump want to exempt tips from income taxes — even though everyone else who doesn’t earn tips would have to keep paying taxes on their income. That proposal would increase a $2 trillion budget deficit that is already near record levels.
Does it make sense to exempt tips from income taxes? No, explains Catherine Rampbell in the Washington Post:
Both major-party presidential nominees [are] pledging lower taxes to bribe important voting blocs, including all the tipped service workers in Nevada….Both candidates have pledged to make earnings on tips tax-free. Unsurprisingly, both made the promise at campaign events in Las Vegas, where 1 in 4 jobs are in the tip-heavy leisure and hospitality industries.
Setting aside the grotesquerie of this transparent tit for tat, this is a bad idea — whether you care about equity, or the federal budget deficit, or the integrity of markets and tax administration. Tipped earnings are already relatively likely to evade taxation since they’re often transacted in cash and less traceable by Uncle Sam. Making all of these earnings legally tax-free raises even more serious questions of fairness.
Why should a waiter or blackjack dealer who gets most of their income from tips be exempted from taxes, when an employee at a nearby Walmart or a bus driver earning the same income — or perhaps much less — must pay taxes on all their hard-earned wages?
The proposal would also cost quite a bit of money. Exempting all tip income from federal income and payroll taxes…would lower federal revenue by $150 billion to $250 billion over the course of a decade, the Committee for a Responsible Federal Budget estimates….The payroll tax exemption would starve the Social Security and Medicare trust funds of needed revenue in particular, potentially hastening benefit cuts.
But even those huge sums likely understate the cost, since those estimates assume the tax policy doesn’t change anyone’s behavior. Which is a fairly rosy assumption. This new loophole would open up tons of ways to game the tax system by reclassifying more earnings as supposed “tips.” However many workers receive gratuities now — Yale’s Budget Lab estimates about 4 million people are in tipped occupations — we should expect that number to balloon….Plus, consumers are already aggravated by the proliferation of tip requests, as Tax Policy Center researcher Steven M. Rosenthal points out. Do we really want to encourage even more tin-can shaking, by cable companies, dental practices and clothing retailers, too?
By increasing the budget deficit, exempting tip income could also fuel inflation. Massive debt-financed government spending has increased the inflation rate under President Biden. President Biden’s policies caused inflation, according to even Democratic economists like Harvard’s Larry Summers — who was Treasury Secretary under President Clinton — and Obama economic advisor Steven Rattner. As Rattner noted in the New York Times, Biden has spent “an unprecedented amount” of taxpayer money, which resulted in “too much money chasing too few goods.”
The federal budget deficit doubled to roughly $2 trillion from 2022 to 2023, noted the Tax Foundation. That doubling was “basically unprecedented in U.S. history during relative peace and prosperity,” noted economist Brian Riedl in September 2023. This was due to a “massive spending spree” by President Biden, soaring interest rates on the national debt that resulted from Biden’s policies, and continuing increases in entitlement spending, noted Riedl:
This year’s 7.6% of GDP budget deficit has been exceeded only during the depths of World War II, the great recession, and pandemic. Deficits didn’t even hit these heights during the Great Depression, Korean War, Vietnam War, or Reagan defense build up.
Deficits are supposed to rise during war & recessions and then fall during peace & prosperity. A $1 trillion jump in a single year with no war or recession has long been considered nearly impossible.
