Vice President Kamala Harris and former President Donald Trump disagree on many issues, but both have called for eliminating the tax on tips. Harris came out in favor of the policy this week, while Trump has been floating the idea since June. In both cases, however, the details are unclear, as neither camp has explained who exactly the policy would be made available to or what specific taxes would be eliminated.
One aspect of the “no tips in the tax” argument is confirmed: Economists generally think this measure is a bad idea. Such a rule would only apply to about 2.5% of workers traditionally considered tipped. This figure is based on the inclusion of waiters and hairdressers, according to a recent analysis by Yale University’s Budget Lab, and would apply to about 4 million people.
Trump and Harris are portraying the tip change as a pro-worker measure that could help increase the take-home pay of service sector workers in the short term. But in the long run, workers will run into problems, experts say. If they don’t pay taxes on their income, their earned income will be lower. That will affect Social Security and Medicare, and it will also mean they have less to show for it when they try to get a mortgage or other loan that takes income into account.
“This is short-term relief that will have long-term effects on workers,” says tax strategist Karla Dennis. “When it comes to collecting benefits, these workers will be at a disadvantage because they will receive fewer benefits in the years to come.”
And it’s not clear how many would benefit in the short term. Even among low-income earners, not taxing tips is unlikely to do much good, economists say. “Many workers who receive tips earn so little that they pay little or no income tax anyway,” writes Howard Gleckman, senior analyst at Urban-Brooking’s Tax Policy Center. While waitstaff at upscale restaurants could see a much larger benefit, the typical waiter or waitress — who earn $32,000 or less annually, according to the Bureau of Labor Statistics — would be unaffected.
There is nothing stopping workers in other industries from changing their compensation structure to receive more tips, says Ganesh Pandit, professor of accounting and law at Adelphi University.
“What will happen if employees in department stores or grocery stores start working for tips and get less taxable wages? That will really complicate things,” says Pandit. “And what if some salespeople start receiving part of their commission as ‘tips,’ making that amount non-taxable?”
But even if the measures ultimately result in limiting the occupations to which they apply, as Harris’ campaign team has suggested, there is no reason from a tax fairness perspective to treat tipped workers so differently.
“A tax exemption for tips violates all rules of tax fairness,” says Gleckman. “Why should a service worker avoid the tip tax while a warehouse worker who earns exactly the same income has to pay taxes on his wages?”
The big business boost
Overall, such a policy would be more of a stimulus for the economy than a populist way to help lower-income Americans. There is nothing stopping companies that want to pay their employees less from moving toward a tip economy. This way, employers can move to a wage below the minimum wage, assuming that employees will make up the difference through tips.
“It’s a win-win for the entrepreneur,” says Dennis. “Maybe more of his employees will want to do jobs that pay tips, and maybe it will help get more people into these service-oriented jobs.”
With consumers already fed up with the tipping culture in the U.S., there could be an even bigger backlash as more workers ask for tips. And the rule could hurt movements to raise the minimum wage, Gleckman says, which would help workers more than not taxing tips. “Back-of-the-line workers,” like dishwashers, would be especially at risk.
