Posted on: August 18, 2024, 08:59.
Last updated on: August 18, 2024, 08:59.
Both Donald Trump and Kamala Harris promised during their election campaigns in Las Vegas to abolish the tax on tips for service workers.
The requirement to make tips tax-free has been well received in Nevada, the state with the highest concentration of tipped workers. But a prominent law and economics professor doubts whether the two presidents are capable of pushing through such a tax reform. That decision ultimately rests with Congress.
In conversation with the Related PressJames Hines Jr., a professor of law and economics at the University of Michigan and research director of the Ross School of Business’ Office of Tax Policy Research, says changing how service employees are taxed would burden the IRS with complications and cost the federal government hundreds of billions of dollars.
“It would have been chaos for sure,” said Hines Jr.
Michigan’s law and business schools are consistently ranked among the top 15 in the country by US news and world report.
Tip of the iceberg
Hines believes such a change would result in many workers trying to reclassify their income as tipped wages.
For example, a contractor could convert a $2,000 service invoice into a $1,000 contract and collect a mandatory $1,000 tip. Employers could also reclassify annual bonuses as tips to reduce their payroll taxes and allow employees to keep more of their pay.
There will be taxpayers who will pressure their lawyers to classify their wage and salary income as tips,” Hines said. “And some will inevitably succeed because it is impossible to formulate foolproof rules that cover every situation.”
Budget estimates suggest that eliminating the IRS tip tax could cost the federal government as much as $25 billion annually. Hines believes the change would ultimately benefit the rich and high earners, not the low-income earners Harris and Trump want to help.
“If you’re concerned about low-income earners, there are much better ways to address this problem,” Hines said, suggesting that better approaches would be to increase the Earned Income Tax Credit or lower tax rates.
“It’s good policy, but it’s bad strategy,” added Erica York, a senior economist and research director at the Tax Foundation, a think tank based in Washington, DC.
In the United States, approximately four million people work in tipped jobs, representing about 2.5 percent of the country’s working population.
Union supports Harris’ promise
While both Republican and Democratic presidential candidates agreed that employees who receive tips should not pay taxes on their tips, the leading casino union in Las Vegas is only endorsing Harris on Nov. 5. Culinary Union Secretary-Treasurer Ted Pappageorge expressed a different opinion on the candidates’ tip tax guarantees.
When Trump first promised to repeal the tip tax in June, Pappageorge said, “Tip earners definitely need relief, but Nevada workers are smart enough to know the difference between real solutions and the wild campaign promises of a convicted felon.”
But after Harris made a similar promise this month, Pappageorge responded that the vice president “recognizes the hard-working men and women of the hospitality industry.”
On the political betting exchange Polymarket, Harris and Trump are neck and neck at the time of writing.
