During his presidential campaign, Donald Trump put forward a proposal that could dramatically alter the financial landscape of millions of Americans: eliminating taxes on tips.
While the idea of allowing service workers more control over their earnings may seem appealing, economists and policy experts are divided about its potential impact. They warn of unintended effects that could disproportionately harm the working class.
Tax cuts with strings attached? What are the benefits?
The policy’s supporters argue that it will provide much-needed relief for those who work in tipped industry.
According to a report by The Budget Lab at Yale University, families that are affected could save an average of $1700 annually on taxes if tip tax is eliminated.
The Yale report does note that this benefit will be concentrated in a relatively small number of Americans.
The report states that “About 4%” of families report their tips to the IRS. Those who do so are disproportionately younger, unmarried and lower income.
This means that many tip workers do not pay any income tax and would not be able to benefit from the new deduction.
Critics of the plan warn that it could have negative side effects.
Without careful safeguards the elimination of tip tax could exacerbate “tipping fatigue”, leading businesses to pressurize customers into tipping even for services that are not expected.
The Economic Policy Institute (EPI), suggests that this change may make it easier for business to demand higher gratuities. They could even add “recommended gratuity”, to invoices, in the hope that consumers will not speak up.
EPI also added that highly-paid professionals such as lawyers and financial advisers could abuse the system by reclassifying the fees they receive as tips in order to avoid paying tax.
The current disdain of tipping culture extends beyond young people and those on a tight budget.
According to a recent WalletHub survey, nearly 9 out of 10 Americans believe tipping culture has gotten out of control.
About 60% of respondents believe that businesses replace employee salaries with tips from customers.
The elimination of taxes on tips could encourage employers to lower the base wage for tipped employees.
Employers can pay tipped workers as little as $2.13 an hour under federal law if they “regularly and consistently” receive more than $30 in tips per month.
This dependence on tips creates financial insecurity for workers, and shifts responsibility of providing a wage that is sufficient to live from employers to consumers.
The fiscal impact
The federal revenue loss from eliminating tip tax is another potential downside to eliminating tip taxes.
Yale estimates that losses could exceed $100 billion in the next decade. This is even before accounting behavioral changes that may further erode tax bases.
The government is already strapped with cash, which could lead to further defunding social programs that benefit low-income, tipped workers.
According to the EPI
The tax benefits would be primarily for high-income taxpayers. However, the revenue losses would harm all of society, as the government would have less money to fund high-quality education, safe roads and public health programs, and anti-poverty initiatives for children and their families.
Kamala Harris, a Democrat, has backed Donald Trump’s call for the elimination of tip tax. These endorsements are often accompanied by caveats such as limitations on the policy’s scope and calls for an increase in the minimum wage.
As the debate continues over tip taxes, it is important to consider all the possible benefits and drawbacks to all stakeholders. This will ensure that any changes made to the system promote fairness, economic opportunity, and equity for all Americans.
This post Tax-free Tips: Trump’s Promise could save over $100 billion but at what cost This post may be updated as new information becomes available
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