Vice President Kamala Harris endorsed “no tax on tips” during a Las Vegas rally over the weekend, following weeks of former President Donald Trump bringing it up at his recent rallies and interviews.
Cue the disagreement over the singularity of the two presidential candidates actually agreeing on something:
“This was a TRUMP idea – She has no ideas, she can only steal from me,” Trump posted on Truth Social. “Remember, Kamala has proposed the LARGEST TAX INCREASE IN HISTORY – It won’t happen.”
In response, a Harris campaign official told NPR that the vice president’s policy proposal is distinct from Trump’s — and she intends to deliver on it.
“As president, she would work with Congress to craft a proposal that comes with an income limit and with strict requirements to prevent hedge fund managers and lawyers from structuring their compensation in ways to try to take advantage of the policy,” the official, who isn’t authorized by the campaign to speak publicly, said. “Vice President Harris would push for the proposal alongside an increase in the minimum wage.”
Regardless of its origin and ownership, the no tax on tips idea is gaining bipartisan political steam. On Capitol Hill, Sen. Ted Cruz, R-Texas, introduced the No Tax on Tips Act in July with the support of Democratic Sens. Catherine Cortez Masto and Jacky Rosen, from Nevada, and the powerful Culinary Workers Union Local 226. A companion bill — introduced by Florida Rep. Bryon Donalds — is also making its way through the House.
Just for the record, no tax on tips isn’t a new idea nor original to either candidate, and the modern debate over taxing of tips goes back to at least the Reagan administrations tax overhauls in the early 80s.
But is this bipartisan adventure in populist rhetoric good policy? Something that is even rarer than the opposing presidential candidates agree is ideologically opposed policy wonks agreeing. And there is bipartisan agreement that while a great stump speech line, no tax on tips probably isn’t good policy. Albeit, coming to that conclusion from different directions.
The combination of needing that endorsement and not wanting to have Trump outflank her on something that sounds vaguely populist led Harris to say these words on Saturday: “When I am president, we will continue our fight for working families of America, including to raise the minimum wage, and eliminate taxes on tips for service and hospitality workers.” A campaign official said these two concepts, which would need congressional approval, would travel together.
No taxes on tips is generally a poor idea where there are other good ones available. It would somewhat unfairly segregate people who make the same income by virtue of how that income is technically collected. It invites gaming of the system, where real estate and stock brokers, lawyers, or even hedge fund managers can recharacterize their income as tips and get a huge tax break. (The Harris aide said they would put income limits and “strict requirements” to prevent such gaming.)
No taxes on tips is generally a poor idea where there are other good ones available.
It would nullify efforts to improve reporting compliance on tips. And if this affected payroll as well as income taxes—which businesses would certainly push for on the employer side as well—it could catastrophically reduce what tipped workers pay into and get out of Social Security. Worker retirement income would be based only on their meager base wages, while Social Security and Medicare would lose something like $250 billion over a decade, hastening the insolvency of the trust funds.
A great number of workers don’t qualify to pay much, if any, federal income taxes, particularly in the service and hospitality sector. That means this tax break may not do much for current workers while potentially hurting them in retirement. If you do owe income taxes as a service worker, you’re on a higher end of the income scale, so the break is generally regressive.
From Tax Foundation and friend of OT Alex Muresianu:
By making one type of income (tips) exempt from income tax, while other types of income (most importantly, wages) remain taxable, the proposal would make more employees and businesses interested in moving from full wages to a tip-based payment approach. That would mean more service industries adopting the restaurant industry approach of a list price up front and an expected voluntary tip at the end of the transaction.
This kind of behavioral response makes it difficult to estimate the cost of the no-tax-on-tips proposal. A simple analysis of tipped income suggests a lower bound cost of around $107 billion over 10 years for an income tax exemption only, assuming tips as a share of total wage income remains as it was in 2018 and applying the marginal tax rate on wages faced by taxpayers making between $30,000 and $40,000 (waiters and waitresses earn a median wage of about $32,000 and a mean wage of $36,500).
Small behavioral effects, such as higher tips in existing tipped occupations, would incrementally raise that cost. More substantial behavioral responses, such as previously untipped occupations introducing tipping, could make the policy dramatically more expensive.
One could imagine a scenario in which, say, highly compensated lawyers or accountants begin to receive some of their income as voluntary tips. Lawmakers could design the exemption to prevent or minimize exploitation, such as restricting the tax exemption to taxpayers below a certain income threshold or only to tipped income received in traditionally tipped occupations. Additionally, for tip income to be tip income, the payment must be made voluntarily by the customer and cannot be previously agreed upon (among other restrictions), so arrangements to agree upon a “tip” before providing, say, legal services would be illegal, but that could prove challenging for the IRS to enforce. Additionally, lawmakers could reduce the incentive to recharacterize income by placing a cap on the amount of tip income that could be exempted.
The existing no-tax-on-tips bills do not offer much in terms of safeguards to prevent potential abuse. But even with safeguards, the policy would be poorly targeted at low- and middle-income earners, given the relatively small share of the population working in tipped occupations. Worse, the exemption itself, and any safeguards added, would add to the complexity of the tax code overall.
So, what say you?
There’s one vaguely irritating thing about the whole campaigning thing that gets me: “If re-elected, I will do X!”
“Why didn’t you do X when you were in office?”
But I’m pleased that President Harris will do something about the border. I understand that the old administration’s Border Czar wasn’t very good.Report
https://www.npr.org/2024/08/11/nx-s1-5071144/no-tax-on-tips-campaigns-trump-harrisReport
“How will we prevent investment bankers, say, from getting tips?”
Is the worry that investment bankers pay an appropriate amount of tax now and the worry is that, if the law changes, they’ll find ways to hide income in nooks and crannies of the tax code?Report
No, the worry is that low wage workers – who rely on tips to make up the difference in compensation – will simply demand nothing but tips from their employers which will then not be tracked in the IRS system. Even if you are taking tips (as income) to a zero tax rate, you are theoretically required by the tax code to report them. The quoted economist is using exaggeration to try and prove his point.Report
And the probability of tip earning employees pushing customers more and more to tip more and more (just like those domino’s commercials) will likely continue and escalate.Report
Sure it will, because we as a nation continue to labor under the toxic myth that our fellow citizens don’t all deserve a living wage simply because they exist.Report
Reporting tips (and paying taxes on them) also means that if there’s a situation where an employer’s wage insurance kicks in, your coverage includes the tips.Report
Treating income in different ways panders to different groups. Investment bankers have lots of pull so they were able to get their income treated differently by the tax code. Waiters and waitresses, and anyone else who might work for tips (judges and politicians now?) don’t have a lot of pull except in election years, so this is their turn.
Let’s treat all income the same. Tax it as ordinary income. R’s always say they’re for less regulation, so let them put their money where their mouths are.Report
Unfortunately, Harris now has adopted this policy.
Since D’s always say that they want more regulation, we’re stuck.Report
Time for R’s to differentiate themselves! No one seems to have any fixed principles these days anyway, so why not go for it?Report
Because Nevada is a swing state and Las Vegas is the swingiest city.
Congrats, Nevada! You are now Iowa in the 90’s!Report
Lordy, politics is stupid.Report
Well it is, oddly, an improvement because tax free tipping is much less destructive policy (still bad tho) wise than corn/ethanol subsidies. So maybe those can get axed in time.Report
It’s a bad idea for all of the above and more!
It’s also a free 7.65% reduction in payroll taxes for whatever portion of wages companies can shift to tips. There will be perverse incentives for more businesses to move wages to tips… and ring-fencing by industry won’t last for more than a cycle or two.
What’s the recourse for ‘wage thievery’ when customers don’t tip? Nothing.
I for one, being a rational tipper will discount all of my tips by appox 20% to account for the reduction in tax burden.
Dumb idea and any politician who proposes it is dumb.Report
A bad, bipartisan idea and BSDI pandering, so, politically, a wash.Report
We should just pay people living wages and get rid of tipping.
Also stop normalzing Trump, the man doesn’t have ideas beyond his own self-interest, he has grunts and gestures in search of that sometimes.Report
It almost makes you wonder why Harris is stealing (PLAGIARIZING!) Trump’s ideas.
(Though I’m pleased enough to see “this is bad” instead of “You know, Harris has a point and this is why I support her, the Democratic Party, and Black Women in general.”)Report
Dotson. We got Dotson!
https://tenor.com/view/meme-movie-jurassic-park-nobody-cares-gif-18292839Report
Hey, if a policy is good, it’s worth implementing whether it’s implemented by a Republican or by the PERSON WHO IS IN OFFICE RIGHT FREAKING NOW.Report
I wasn’t aware that the Vice President of the United States has unilateral authority over tax policy with regards to tipping. Where’s my pocket constitution.
Also, it’s a bad policy.Report
Oh, so she won’t be able to pass it if elected?
Well, good.Report
She has no power to enact it now and that eviscerates your “person who is in office critique”. Which is my point.Report
She won’t have power to enact it later either.
We’re all good.Report
This is actually another reveal of the Hack Gap in action.
1. Harris proposes no taxes on tips;
2. Democratic or Democratic leaning wonks state why it is a bad idea/bad policy and what would be better policy;
3. Trump comes out with the idea, screams incoherently like a Fox News Grandpa about how Harris’ stole the idea from him like it is his bagged lunch from home;
4. Republican wonks stay silent about whether it is a good idea or not and troll types blast Democrats because Trump mentioned it first or something so he can’t be that bad because he and Harris have at least one overlapping proposalReport
I’m confused by #3. It seems to imply that Trump came out with the idea after Harris did.
Is that what you are intending to imply?Report
Yeah, didn’t Trump propose this one first?Report
He proposed a hedge fund tax cut with this thrown in and the media goes along with it because they don’t know how to not normalize Trump.
JB trolls because that is how he rolls.Report
So…yes, Trump proposed it first?Report
Tipping is unfortunately deeply embedded in American culture and society and attempts to get rid of it get push back from both customers and workers. Ideally Harris is setting hers up to smash Trump for more tax cuts for hedge fund managers.Report
Jaybird also probably believes Trump when he says Harris is using AI to generate her crowd sizes.Report
No, I’m more of a “Hey, if a policy is good, it’s worth implementing whether it’s implemented by a Republican or by the PERSON WHO IS IN OFFICE RIGHT FREAKING NOW” guy.Report
A lot of us thought that about the ACA – what with its significant Heritage Foundation origins and 13 months of negotiations with the GOP – and 72 GOP-sponsored amendments included. Funny how they still talk about repealing it …Report
There’s no contradiction between trying to improve a piece of legislation and voting against the ultimate version.Report
Yeah there is – Democrats started with Republican ideas, added more Republican ideas onto it at the request of Republicans after spending over a year meeting publicly with Republicans and then Republicans voted against it. On a good day they are hypocrites.Report
Well, that’s part of what makes it so special. Written by Republicans and Republican think tanks, passed without a single Republican vote.
The talk about Obamacare repeal should be laughed out of the room. They sent up “repeal Obamacare!” bills to be vetoed every week for years until the *SECOND* a Republican president sat in the chair. Suddenly…
Well, it’s the best we could imagine having passed, right?
Written by Republicans and Republican think tanks.Report
Hey Phil, question: Which version of the PPACA included a public option, and which legislators insisted it be removed?Report
From memory, so suspect, but two Democratic Senators from states where the private health insurance companies are a disproportionately large part of the state economy. From time to time, Senators still favor their states’ perspectives.Report
No, I didn’t want you to help him; I wanted him to find it out for himself.Report
Mick and Keith had a song about that.Report
Also Trump’s policy is a gift to hedge fund managers in disguise.
So D – for trolling againReport
Harris’s policy, Saul.
*BOTH* sides are doing it.Report
^^Came here to say this.Report
The obvious solution which makes tip workers and economists both happy is to get rid of tips altogether, and pay restaurant workers the wage they would get with tips. Restaurant owners can add this to the price, since the customers would have paid it anyway through tips, so it doesn’t even hurt them that much, except that the many, many bar and restaurant owners who are currently not paying their FOH workers would have to actually start paying them.Report
I agree in principle… there are, however, legitimate service oriented issues that tipping is supposed to address. A better approach that I advocated for when I was in restaurant/wine service would have been a commission approach based on check averages or just raw sales – plusses and minuses to both. Basically your tips correlated to sales already, but the key to success was both increasing the sale and the experience simultaneously.
The negative would be the server who ignores the experience to simply drive sales/commission… but this is a known sales issue that can be solved for with pre-existing management and evaluation criteria.
Ultimately, customer experience drives sales (increasingly in all the new business models) and it becomes a win/win for an industry change on front-of-house wages.
Back of house wages are a different kind of disaster, and 100% should be tied to revenues, volume, throughput.Report
Part of why I would want to get rid of tips is to avoid the sorts of emotional labor that are involved in tip-based jobs, and I don’t think a commission-based system would do that. I’d be OK with wage levels differing based on the time of day or day of the week a person was working, with the caveat that all restaurant workers should be paid a living wage. This would solve for the vast differences in the amount of work required for, say, working weekday lunch at a restaurant in a residential neighborhood and working weekend brunch or Friday/Saturday dinner in the same restaurant, and incentivize people to work those more labor-intensive shifts, without the strong incentives for emotional labor.Report
I can get behind this.Report
I can appreciate the sentiment; but disagree with the idea of ’emotional labor’ as a disqualifier; especially since changing to a factual/data/revenue commission system is already a reduction in the ’emotional labor’ quotient. As I say, I can appreciate the sentiment, but I think it’s a misapplied criticism in this case, and beyond a certain point a misguided and undefinable objective.Report
I don’t know how one could pull out emotional labor from the larger context of service industry as a high stress job. Anecdotal but I worked in restaurants for years at a variety of chain joints, starting as a line cook then going up to busser, food runner, and eventually server. The crazy peak shifts were certainly exhausting. But if I had to pinpoint the real frustrating days it would be the supposedly easy lunch shifts where I had to politely handle old ladies angrily sending back the chicken Alfredo because it had noodles in it or tables of people on a dead Tuesday night splitting an app between 5 guests then drinking water for 3 hours.Report
At least in the academic literature, emotional labor has a pretty specific meaning, and it is a type of labor heavily affected by the tip system (gotta smile and ignore people being an asshole to get a good tip). A good way of thinking about it less formally though is, I want American FOH workers to be able to act like Parisian FOH workers without it affecting their pay.Report
Gotcha. I don’t have a particularly strong opinion about it, especially since it’s all in the rear view mirror for me.
Thinking about the cast of characters I worked with in that phase of my life I can imagine opinions on the idea being all over the map. My recollection is that you had a lot of people like me for whom it was transitory, a lot for whom it wasn’t but treated it as a kind of hustle, a handful for whom it was a stepping stone to management and/or some other, higher status industry role, and then another chunk who seemed.. kind of lost and/or only there for lack of other options. That last group is the one that would have the most upside in theory, assuming staffing patterns didn’t change but hard to say whose attitudes are predominant. It’s also been a million years for me so no idea how it is now or how representative my experience was.Report
Maybe I’m just a weird freak but I’ve never included “did not smile” in my calculation of a tip. I suppose I might short someone who I felt was going out of their way to be a jerk, but I haven’t had that happen yet (I kind of assume that anyone who acted that way would be fired before I had a chance to encounter them.) If someone were low-affect and disengaged then I’d chalk it up to “they’re having a rough day in a tough job” and tip the same twenty percent I always do.Report
At least when I was doing it there were plenty of servers who believed eating a little sh*t with a smile was part of the job. Ability to do it well part of the skill set even that helped you make bank. I suppose where one stands on that is a matter of personal philosophy.Report
It’s good that you have that attitude. Unfortunately, as many servers will tell you, many people do not share it.Report
Anyone I’ve ever known who’s worked in a restaurant is a fairly lavish tipper and really forgiving of less than good service.Report
I was always surprised at how different my daughter’s attitude towards wait staff was after she had spent a semester working as one. Not just in tips, but she never forgets their name and she always has something they did worth praising.Report
One thing you quickly learn is that 90% of the things that regularly go wrong during service are not the wait staff’s fault, but as the face of the experience, they end up taking the brunt of the guests’ frustrating.Report
Like, did you get a yearly bonus at your salaried job? If so, then you got a “tip”! (And it was reported on your taxes, natch.)Report
Heh, not really. Tips by definition are supposed to work outside of the baseline compensation. They should, by custom, be small… and semi-definitionally outside the taxing paradigm as a ‘gratuity’ paid in untraceable cash. Really, the next iteration should be your server’s venmo account at the bottom of the check. (But remember, Biden proposed the IRS track all ePayer accounts above $600 total revenue IIRC).
If you are being paid in a fully traceable transaction… and/or one of the parties has to account for the expenditure as an expense and tag you in the process — the income will be flagged.
As we’ve moved to a nearly cashless economy, (most) all tips are fully traced and therefore taxed.
The answer really is to raise prices and compensate workers according to sales/revenue. But, whenever this model is tried (and it has been) several things happen — usually all at once — your prices are no longer competitive (they are, but the Tip ‘fees’ of competitors are hidden), you’re out-of-step culturally, so customers are confused as to what they are supposed to do, staff actually like the lottery system of tips because you get lucky more times than unlucky; and lastly a combination of everything above where your business stands alone culturally out-of-step with higher prices and indifferent staff.
But I agree with you that there will be large perverse incentives to call more and more things ‘tips’ or even to drive business paradigms that aren’t tip based to becoming more tip based — and this is happening to everyone’s chagrin *without* tax incentives. Add tax incentives to a purely fictitious category of ‘invisible’ income? It will drive behavior in horrible directions.Report
“I agree in principle… there are, however, legitimate service oriented issues that tipping is supposed to address.”
Isn’t this true in pretty much all fields? Why make it specific to food service?Report
Well for one thing, if servers are being paid entirely in wages then the sleepy day shift on Wednesday and the busy friday evening shift suddenly both invert in desirability.Report
I think stating they agree is a bit too much. Trump’s plan is mainly about letting hedge fund managers keep more money with a sop to servers. Harris’ plan is not. This seems like a bit of a false equivalence: https://x.com/Brendan_Duke/status/1814140258407133264
Under the Cruz/Trump plan, fees can be characterizied as tipsReport
How much income tax does the $28K hairdresser pay? Is there any current rule that allows hedge-fund managers to classify their wages as tips?Report
Question from ignorance… How do payroll taxes (eg, Social Security) work for tips?Report
“Poorly”?
They’re supposed to be deducted, but they’re reliant on accurate reporting.Report
Speaking from my experience at the restaurant: We had a jar next to the cash register.
Now, it was the 90’s and so more than half of our business was cash. They’d hand us a $20, we’d give them back $8.73 and they’d throw the .73 in the jar.
This happened approximately once a minute for 90 minutes in the mornings and once a minute for 90 minutes around noon.
It’d happen every five minutes or so the rest of the time.
At the end of the day, we’d divvy up the cash based on who was on the shift (and add the credit card tips) and then we’d all walk out the door with cash in our pockets.
I cannot recall if I ever declared any of this to the government.Report
It’s an interesting point that since we’ve been moving cash-free, reporting is probably getting a lot better. But I’m thinking mostly of restaurants and cabs/Uber.Report
I waited tables at the end of the ’80s. When a server would settle at the end of the shift the system would report an amount for tips based on the total sales. It was always way less than what I actually pocketed.Report
Tips are both recorded electronically and declared by the individual and are taxed per usual. Basically, you walk home with the tips, but your paycheck is smaller because your tips are taxed on top of your hourly salary so your ‘paycheck’ is proportionally much smaller.
As JB mentions, cash tips and informal tip jars are honor system… servers are supposed to declare their cash tips either daily in the server system or failing that, they are liable at the end of the year.
In practice tips are ‘under-reported’ rather than not reported at all. That is, if you sold $1000 that night, you probably take home $250 in tips… but, let’s say $200 was cc and $50 was cash, you’d only report the $200 — and that would be basically audit proof as 20% on $1000 is undetectable.
The caveat here is that there are thousands upon thousands of small tips based businesses that have cash-based or very rudimentary business systems. BUT, those businesses aren’t giant Casinos and those businesses weren’t paying taxes on much of the tips any way.
This legislation specifically announced in Nevada is to eliminate Taxes on fully documented tips. I’m not 100% sure if the proposals are *only* for FED Income or if they include FICA.Report
The practice when I did this was never to report $0 in cash, at least on a busy night. Lore had it that was suspicious to the IRS to report less than around 10% of sales, and IIRC managers would give you a hard time about it. So you’d report something, just way less than what you may have actually walked with in cash.Report
Right.. we always looked at sales then targeted 10% – 15%… BUT, we always had to cover the credit card tips first. That was back when it was probably 65-35 cc to cash. Now?
Nowadays, most of the tips are credit card… and if the tips are shared, many businesses record what they tipped you out… so no discretion at all.Report
Yea, same deal, the manager would run checks at close out and the credit card tips were built in with no way to hide. My guess is now it’s probably like 95-5 credit card to cash for anything outside of adult entertainment.Report
The current rules do better than that by the hedge fund managers. They allow them to treat their commissions on profits earned on clients’ invested capital as capital gains.Report
Hey, everyone, here’s my new political idea: We take a system in our society that is just completely broken, like, is an actual bad idea in every possible way, and, hear me out, we make it trivially better in a very specific way. Often in a way that does not actually change anything.
And don’t think this tip thing is the end. Next, I’m proposing adding a lane to the busy highway near you! Yes, a single lane, added to that one highway! Imagine how much better that will be!Report
Back when I worked (in part) for tips, my boss explained that cash tips are better because no one knows squat about them so it is pretty hard to be taxed on them. If I got tipped on the credit card, it had to get processed in all sorts of ways that made it taxable.
I may have been somewhat of a unique case… I was a delivery driver so was paid above minimum wage. It may work different for those who are paid below that on the assumption they’ll make it back in tips.Report