Name: Harris and Trump Want to Make Tips Tax-Free. Economists Say It’s a Bad Idea.
Uploaded: 2024-09-05T04:00:00Z
Duration: 5 min 28 s
Description: Kamala Harris and Donald Trump both said on the campaign trail that they wanted to eliminate taxes on tips. We break down this idea, explain what it would mean for employees and employers and why it worries many economists.

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Kamala Harris and Donald Trump both said on the campaign trail that they wanted to eliminate taxes on tips. We break down this idea, explain what it would mean for employees and employers and why it worries many economists. Photo: Getty Images

https://m.wsj.net/video/20240903/c9f801c4-3d08-4e8b-98f8-7dd10aff1323/2/hls/manifest-hd-wifi.m3u8

Kamala Harris and Donald Trump both said on the campaign trail that they wanted to eliminate taxes on tips. We break down this idea, explain what it would mean for employees and employers and why it worries many economists.

Harris and Trump Want to Make Tips Tax-Free. Economists Say It’s a Bad Idea.

We are going to not charge taxes on tips, people making tips.

And eliminate taxes on tips for service and hospitality workers.

Narrator: Former President Donald Trump and Vice President Kamala Harris are both campaigning on this idea of cutting taxes on tips, which many policy experts say...

Violates some pretty basic principles of economic theories and pretty basic principles of tax policies. I think it'd be really hard-pressed to find a professional economist who would say that this policy is well-designed.

Narrator: Experts warn this policy could help employers more than workers, increase the federal budget deficit, and even accelerate tipping culture. Here's why. Right now, tips are treated as income and are subject to federal income, state and payroll taxes.

Income taxes are what we think of as your taxes, the federal tax return, the 1040s. Payroll taxes go towards social security and Medicare.

Narrator: The Trump campaign hasn't released the details of its plan yet. The Harris campaign says its policy would only exempt tips from income tax.

This could be, you know, 100, $150 billion over a decade, which is not the largest tax break out there. There's certainly plenty of other things that are just as large. But, you know, we're in a situation where the US is running regular deficits these days and there's a lot of concern about the country's fiscal future.

Narrator: Both candidates are pushing this tax policy to try to win Nevada, a swing state, with the highest concentration of tipped workers.

When I'm president, you are the ones I will be fighting for, and I'll be fighting for you very hard every single day.

Narrator: But this policy would only be available to about 3% of the US workforce, or roughly 4 million people, and not even everyone in that 3% would actually benefit, because more than a third of tipped workers earn so little that they already don't pay federal income taxes.

The standard deduction is the amount of money that you can make without having to pay any taxes at all. For 2024, it's $14,600 for an individual, and $29,200 for a married couple.

Narrator: Tipped workers are also more likely to be teenagers and young adults under 25.

I think a lot of people rightly feel a lot of sympathy and support for people who work in what are, you know, hard, you know, grueling jobs in the service industries. The problem is the policy and practice. It won't achieve what I think we would like it to.

Narrator: One of the issues economists have with the policy is that it would create unfair imbalances among low-wage workers.

One of the ways to make taxes fair is to make sure that people of the same income level are paying approximately the same amount of taxes, and in this case, you really wouldn't be doing that. So, for example, if you took a delivery worker who delivered food, they probably get tips, and so they would qualify for this tax benefit. If you took a delivery worker who delivered packages, they usually don't, so they wouldn't get a tax benefit. But I can't think of a good reason why you would want to give a tax break to the person who delivers food, but not to the person who delivers mail.

Narrator: Tipped workers represent a small percentage of those earning hourly wages, so the majority of low-wage workers wouldn't benefit from this tax cut. Some experts say employers would actually stand to gain the most from this policy. Right now, employers are required by law to pay tipped workers $2.13 an hour in wages. But if workers don't earn enough in tips to get them to the federal minimum wage of $7.25 an hour, the employer has to pay the difference.

This would basically be a subsidy for that part of tipped workers' income. If you create this subsidy, what you do is reduce the pressure to raise wages. It would push more of the responsibility for paying people for the work they do onto the customers directly rather than the employers who are supposed to be footing those bills.

Narrator: This leads to another concern, that it would result in a culture of even more tipping. According to a bankrate survey, many Americans view tipping negatively, and 35% think tipping culture has gotten out of control. Many policy experts worry this tax break would incentivize other industries to adopt a tipped model.

When you give someone a tax break for something, you're really encouraging that part of the economy, right? And, as a rule, I don't think we really want to encourage people's wages to be based on things like tips. There's so many ways that we could be helping people in the service industry, and this seems more like a sound-bite.

No tax on tips. Do we like that?

Narrator: There's also some concern among economists that higher-income professionals, like hedge fund managers and lawyers, could structure their compensation in ways to try to take advantage of this tax break. The Harris campaign says its policy would include income limits to avoid these types of abuses. The Trump campaign hasn't said if its plan will include these types of guardrails. Despite these red flags, this idea is gaining momentum in Congress.

I intend this coming week to introduce legislation, exempting tips from federal income tax.

Narrator: Senator Ted Cruz's bill has no income cutoff, and would provide a 100% deduction on federal income taxes for any earnings from tips.

I certainly wouldn't expect this legislation to pass standalone. I think you might see it slip into a larger tax bill, and one of those is going to be on the table.

Until a couple of months ago, this was a very low profile idea, and not something that candidates or lawmakers are really talking about, but now that you've got Vice President Harris and Donald Trump talking about it, it's got that kind of bipartisan agreement, "We'll push this forward, we'll put it on the table in some way in 2025." It's maybe not the most, you know, pristine, academically-grounded kind of policy, but it's a campaign.