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Leave taxation of tips unchanged – ITEP
Idaho

Leave taxation of tips unchanged – ITEP

As the next president faces a host of pressing tax policy decisions—from the expiration of much of the 2017 Trump tax law to international corporate taxation and more—a relatively silly idea has become the focus of the campaign: exempting tips from taxes. Although this policy idea is supported by candidates from both major parties, it would do little to help the roughly 4 million people who work in tipped jobs and create a whole host of problems.

The idea of ​​exempting tips from tax is not new. It has been proposed before and repeatedly rejected because it is practically impossible without creating new opportunities for tax avoidance.

Lower-paid service workers definitely deserve support. But changing the tax law like this is a very porous way to do it. It’s an approach that rich people with accountants and lawyers could certainly abuse. Fund managers, lawyers, and other highly paid professionals could easily reclassify their fees – or at least a percentage of them – as mandatory performance tips.

This proposal treats households with similar incomes differently depending on their occupation. Waiters and bartenders, for example, receive a large portion of their income from tips and would therefore receive a large tax exemption. Teaching assistants or health care workers might earn a similar total income but would not receive the same tax exemption.

Finally, these proposals create incentives to push even more low-paid service workers into the tipped category, harming many workers and their families. According to the Economic Policy Institute (EPI), tipped workers have more unstable incomes than non-tipped workers, are more likely to live in poverty, and are more vulnerable to wage theft.

The good news is that lawmakers have come up with far better ways to help working families. EPI and other labor and wage experts have proposed many ways to better help working families, from eliminating the minimum wage that allows tipped workers to make a measly $2.13 an hour to raising all minimum wages above the $7.25 they’ve been stuck at for a decade and a half to making it easier for workers to unionize. As for tax solutions, lawmakers who are rightly concerned about low-income earners should instead consider expanding the child tax credit and the earned income tax credit (and especially strengthening the latter for workers without children in the household).



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