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OPINION: Both Harris and Trump are now courting tip recipients
Idaho

OPINION: Both Harris and Trump are now courting tip recipients

The fact that both former President Donald Trump and Vice President Kamala Harris used their campaign appearances in Las Vegas to call for the elimination of the federal tax on employee tips is a pretty clear sign that #WeMatter.

It is also quite clear that both camps are more concerned with political pandering than with developing well-thought-out and detailed policies to solve the problems facing our economy.

When Trump unveiled his plan to exempt tips from income taxes, there was widespread speculation that his promise was nothing more than a clumsy attempt to win the loyalty of Las Vegas’ service industry workers. And that assessment is probably quite justified.

After all, it is an election year.

The proposal was also notable for its lack of detail. So far, Trump has not outlined what spending cuts or detailed budget measures would be implemented to offset the expected decline in federal revenues resulting from such a tax break. Nor has he apparently considered how such a measure might further complicate the tax code and distort market incentives.

For those interested in fiscally sound policy, such details should matter. In 2018, the most recent year for which we have data, the Internal Revenue Service (IRS) reported about $38 billion in tip income for 6.1 million American taxpayers. Much of the taxes currently levied on such income are payroll taxes that fund social programs like Social Security—programs that are already headed directly toward a budget crisis in the coming years.

If “tax-free” means that no more income tax is levied on tip income, the crisis will only come more quickly.

Of course, no one who has followed politics since 2016 would have seriously expected Trump’s campaign to grapple with such nuanced policy details. Much like his promise to have Mexico fund a big, “beautiful” border wall, his promise to Nevada’s service members was designed solely to appeal to voters – the practical challenges of actually keeping his word were irrelevant.

Still, the proposal sounded good to many voters who earn their living in the service sector – which is why the Harris team decided to essentially plagiarize the proposal at a campaign event in Las Vegas just a few months later.

But like Trump, Harris was cautious about specifics. And like Trump, this lack of specificity is no doubt intentional. After all, why get bogged down in politics when voters only seem to be interested in bumper sticker slogans?

In practice, however, such details will matter enormously when either candidate takes office next year. And while tipped workers may be looking forward to a massive tax break in the near future, they should brace themselves for the inevitable complications that will arise.

First, many tipped workers are already among the taxpayers most likely to be audited by the IRS. Despite assurances that additional funding would increase the agency’s focus on high earners, a whopping 63 percent of IRS audits targeted households earning less than $200,000, according to a Wall Street Journal Analysis of U.S. Treasury Department reports. Other analyses have shown that deductions and credits designed to help the working poor, such as the Earned Income Tax Credit, also target low-income earners at a much higher rate than other Americans.

Unfortunately, tipped workers often fall into both categories. And the likelihood of a tax audit is made even greater by the fact that tips are already one of the least reported income categories, according to the IRS, with only 55 percent of the amounts likely owed being remitted to the federal treasury. This low compliance rate means that the IRS currently has a strong incentive to scrutinize the reported income of tipped workers even more closely than other taxpayers—which is one reason the IRS has increased its efforts to more accurately record tips.

While it is tempting to assume that exempting such income would eliminate this increased scrutiny, the opposite is more likely.

If tips suddenly become a tax-free source of income, employees and employers alike will be strongly motivated to restructure their pay schedules and incomes to reduce their tax burden. In effect, tip income would become a kind of tax haven – and more and more taxpayers would try to protect as much of their income as possible by classifying it as part of this new tax-free income category.

For consumers, this would mean even more touchscreens asking customers to tip 30 percent on every purchase. But for IRS tax auditors, it would be an additional incentive to scrutinize tax returns that report a large percentage of income as tax-free. Combined with the IRS’s long history of targeting low- and middle-income families rather than lawyer-assisted high-income tax evaders, such an audit could be a nightmare for the many service workers who rely heavily on cash tips in the service industry.

Concerns that tax breaks disproportionately target low-income taxpayers are just one of countless questions that plague both candidates’ policy proposals. How such tax breaks would be balanced in the federal budget, how it would affect funding for social programs, and how the market would adjust are other basic details that neither candidate is willing to elaborate on.

And we probably shouldn’t hold our breath for such pragmatic policy discussions to happen any time soon. In our era of cat lady commentary and “mood” driven political strategy, arguments over crowd size and personal attacks will make up the majority of what we see in the next few months. A realistic look at the economic, social and market impacts of tax-free tips is simply too rich and nuanced for two campaigns that simply want to appease a critical group of workers in the all-important swing state of Nevada.

Of course, as a Nevadan, it’s nice to know enough about #WeMatter to give both candidates a leg up—but it would be even nicer if the candidates occasionally felt that their promises needed to be detailed and practical.

Michael Schaus is a communications and branding expert based in Las Vegas, Nevada, and founder of Schaus Creative LLC — an agency that helps organizations, companies and activists tell their story and inspire change. He has more than a decade of experience in public affairs commentary and has worked as a news director, columnist, political humorist and most recently as communications director for a public policy think tank. Follow him at SchausCreative.com or on Twitter at @schausmichael.

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