In his record-long address to Congress, President Trump reiterated his aspiration to have taxes on tips and overtime pay eliminated, a position that has enough bipartisan cachet that it also forms part of Andrew Cuomo’s mayoral run agenda. We disagree.
This falls into the bucket of a policy that sounds excellent on paper — wage earners in tipped professions giving less of their hard-earned cash to the government, what’s not to like — but starts fraying on closer scrutiny. Income is income. Working for a fixed hourly wage or a set weekly salary should make no difference to your tax rate, which is progressive, as the higher income folks pay a higher percentage.
If some of that income is from tips shouldn’t matter to the taxman (and certainly a good chunk of tips are not reported as income). And many people who work for a tip credit in the service sectors already make so little that they have zero tax liability. And there’s always been a problem of tipped workers not getting their tips from unscrupulous bosses.
So the advantages to exempting tips from taxation quickly fall away.
If it was enacted on the federal level, there may be a movement to shift more employees into tipped positions, with all of those inherent problems. And also there’s the loss of revenues for the government.
If you think the proliferation of tipping for myriad non-traditional services and even goods is getting out of hand now, wait until it becomes non-taxable income. You’ll see that tipping screen at the dentist, at supermarkets, at the pet shop, everywhere.
This isn’t all an entreaty for Congress and local leaders to do nothing. It’s frankly unconscionable that the federal minimum wage has been stuck at $7.25 an hour since July 2009, some five months before the release of the first “Avatar” film.
There have been some valid concerns raised about the elimination of the tipped sub-minimum wage — a paltry $2.13 an hour — but several states have done so without their restaurant industries collapsing. If cities, states and the federal government want to reform the tax system, they should reform it instead of nibbling around the edges on things like this.
Of course, the tax system as a whole requires enforceability. Trump is once again pushing this idea at the same time as his ill-advised slash-and-burn of the government workforce and services is turning its sights on the IRS, with the agency reportedly drafting plans to reduce headcount by up to half, just as this revenue-gathering arm of the government was finally making up lost ground in its battle to hold wealthy tax cheats accountable.
The billions invested into the IRS as part of Joe Biden’s Inflation Reduction Act were already producing enormous return on investment, with estimates pointing to over half a trillion dollars in additional revenue over 10 years.
Undermining tax collections and the IRS goes hand in glove with Trump’s absurd belief that the U.S. federal government can or should try to fund itself primarily via tariffs, which have now fortunately been partially rolled back as some adults in the room realize that they’re lighting a fuse on the global economy. No amount of untaxed tips are going to make up for skyrocketing grocery prices.
