You’ve got to give credit to former President Donald Trump for being the first to bring up what has become a politically popular proposal to eliminate the federal income tax on tipped wages. It was a smart political move. Republicans, long maligned as the party of billionaires and multinational corporations, could use more policy proposals aimed at helping lower and middle class workers and small businesses. This proposal would do both, and it also, on the surface at least, aligns with conservative fundamental principles of shrinking taxes and the overall size of government, generally always a good thing.
You’ve also got to laugh at Vice President Kamala Harris for doing a complete copycat of Trump’s idea, and doing it in Nevada no less, the place where Trump himself launched it. Sure, there is an overabundance of tipped service workers in what promises to be a pivotal swing state come November, but proposing the exact same idea as Trump when Democrats otherwise have never seen a tax they don’t like just comes off as shameless pandering and nothing more. Hopefully enough Nevadans will see that.
But let’s go deeper than election promises and take a gander at the proposal itself, especially because of the very real possibility that it could be enacted regardless of the party that wins. Is eliminating the tax on tips even a good idea? What might some of the unintended consequences be?
Before we dive in here, I do want to recognize the generally true principle that lowering taxes on anything is a step in the right direction. However, while in principle lower taxes are good, in practice it needs to be seen by the overall population as fair, at least to some degree. For example, if a politician suggested that you should pay a higher tax rate than a billionaire, you might raise an objection. You might also get a little miffed if you were told that your neighbor, a construction foreman who makes the same or more than you, is exempt from the same taxes you will continue to pay simply because of his chosen profession.
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Of course, neither party goes that far. But, because of the Electoral College system we have in place, they do tend to pander to voters in swing states. What if, for example, Trump or Harris made a campaign stop in Michigan and promised to eliminate federal income taxes for auto workers? What if one or both went to Pennsylvania and promised to allow steel workers to pay zero taxes? I mean, they work hard, right?
Should the overabundance of certain types of workers in certain swing states merit a tax policy shift so one or the other party can win an election? If you think it’s fine, did you support the elimination of student loan debt for irresponsible college kids at the expense of taxpayers, including those who worked hard and paid for their own education or even skipped college altogether? Of course you didn’t, and neither did I. So why is this OK? It’s one thing to propose policies that would work broadly to better the prospects of lower and middle class families, it’s quite another to pick and choose winners based on the state or subset of people you’re trying to win politically.
Of course, the pandering might not be so bad if the policy being proposed righted some previous wrong or would actually make things better. This one, unfortunately, doesn’t fit the bill. Sure, tipped employees have all-too-often found themselves on the receiving end of more IRS scrutiny than any lower-income worker should ever be. But there are other ways to right that wrong that would help everyone, like, I don’t know, maybe reining in the IRS.
As for the making things better part, I suppose it might make some things better … IF you love tipping culture and want it to continue its trend towards infecting every public financial interaction you have. Because if you thought having virtually everyone who conducts a transaction with you having their hand out was annoying before, just wait until ALL tips are tax free. Things you never imagined would require tipping would require tipping almost overnight as business owners discover they can pay lower wages and bolster them, and attract workers, with ridiculous tipping expectations. Which would ultimately result in far less revenue collected than originally projected, and a federal, state, and local governmental imperative to find that revenue somewhere else. In other words, YOUR taxes will go up so THEY can live tax-free.
And finally, it’s not fair - at all. Not even a little bit. Tipped employees, particularly servers, already make more money than most are willing to let on, especially with expected tipping percentages creeping to 20 and even 30 percent of already rising restaurant prices. (Before you blast me with a comment, yes, I’ve done the job - for almost two years in college - and I know full well what every aspect of it is like.) Making the vast majority of their income tax free is a slap in the face to every lower-wage and entry-level worker who toils just as hard or harder for their wages. Why should factory workers or retail associates have to pay taxes while servers skate free? Lowering taxes is great, but do it for everyone below a certain income threshold, not just a certain occupation.
Given all the above, it’s hard to believe anyone is taking this proposal seriously, but they are. Sadly, the power of political pandering, especially in swing states, is such that any politician is susceptible to it, especially when it seems to be a reasonably popular idea. But just because an idea is popular doesn’t mean it’s good. For my part, I’m hoping this stinker dies a quick death after the election, no matter who wins.
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