Bipartisan & Bizarre: No Taxes on Tips

Ryan Heshmati

August 16, 2024

Yes, taxes are loathsome. Seldom do Americans celebrate tax hikes or the coming of April 15th. However, taxes are also a necessary means of paying for government programs and services that Americans enjoy daily. In an apparent bid to win over service and hospitality workers for the  2024 presidential election, both Former President Donald Trump and Vice President Kamala Harris have come out supporting what is being dubbed “no tax on tips.” The Democratic and Republican candidates might agree on this proposal, but that does not necessarily mean it is good.

First and foremost, the idea entered the 2024 race recently when Former President Trump proposed it in Las Vegas, as Maya Marchel Hoff of USA Today points out. Soon afterward, Vice President Harris did the same. While Trump has criticized Harris for taking his idea, Hoff notes that suggesting an exemption from taxes for tips pre-dates Trump’s 2016 entry into US politics (in 2007, Ron Paul proposed legislation on the issue in the House).

Regardless of who proposed the idea first, why should tips be distinguished from other federally taxable income? Sure, tips are paid by customers rather than employers, but ultimately, tips are obtained from successfully performing a service or task, just like pay from salaried employees. In that sense, tips are not much different from other taxable income; thus, there is not much sense in excluding them from taxation.

Beyond questioning why tips are worthy of avoiding taxation, designating tips as non-taxable income seems destined for abuse by the tax management industry. Why would a CEO accept millions in taxable income when they could accept a small base salary and the remaining millions as a self-designated, non-taxable tip? This may not be what Trump and Harris have in mind when they promise no taxes on tips, but it is easy to see how the policy could evolve beyond its intended purpose.

Even if the policy is not abused, a major “if” considering the diligence of tax management professionals, it would still cost the country tax revenue, exacerbating our annual deficit and national debt.

Bipartisan agreement, especially between figures like Former President Trump and Vice President Harris, is rare in the current political environment. It could be tempting to get behind a concept that boasts support from both figures, but “no taxes on tips” raises serious questions upon critical analysis. Why are tips above taxation? What is to stop others from abusing such a tax exclusion? And can we afford to give up more tax revenue? Whether Harris or Trump wins in November, it looks like the fate of the proposal could be decided in Congress. Until then, tipped workers will have to be content with the hope that Trump or Harris will follow through once in the White House.