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First, the good news: In an otherwise polarized and divisive election, at least one policy proposal is emerging as a unifying issue. The bad news: Most experts think it’s a terrible idea.
The proposal seeks to repeal the federal tax on tips. Proposed this idea At a campaign rally in June, the proposal gained enough support that “No Tax on Tips” signs began to appear regularly at Trump campaign events and at the Republican National Convention. Now, even his opponent, Vice President Kamala Harris, is supporting the idea. “This is my promise to all of you in this room: When I’m elected president, we will continue to fight for America’s working families, including by raising the minimum wage and eliminating taxes on tips for service and hospitality workers,” she said. Tell the crowd weekend.
In a series of social media posts, Trump accused Harris of stealing his idea. explain “She sounds more like Trump than Trump does and has plagiarized almost everything.”
On the surface, eliminating the tip tax may sound like a pro-worker proposal with populist appeal that could boost the net income of service workers who rely on tips. But the policy does not withstand any scrutiny. That’s because, at best, a “tip tax exemption” looks less like a tax cut for low- and middle-income families and more like a subsidy for big business.
“I’m not saying workers will get nothing,” said Heidi Shierholz, president of the Economic Policy Institute. “But I think a fair amount of tax-free spending like this is going to employers of tipped workers.”
That may be why industry lobbyists support the proposal. “It’s not surprising that the National Restaurant Association likes this proposal,” Shierholz said, referring to represent Many of the country’s large restaurant chains.
In a worst-case scenario, tax policy could even put downward pressure on service sector wages, as tax cuts would boost workers’ take-home pay, allowing employers to keep their base wages lower.
“I think there’s no doubt that this will” depress wages, Shierholz said. The only question, she said, is how much.
So while “no tax on tips” might make for a great slogan or campaign tagline, it doesn’t necessarily mean smart policy making.
Tipped workers don’t need a tax cut. They need a pay raise.
The problem with tipped wages is not that they are too heavily taxed, but that they are often paid very little, and tipped workers have to rely on the kindness of strangers to make ends meet. For example, in 2023, the median annual wage for waiters was just under $32,000. According to the Bureau of Labor Statistics.
In fact, As the Tax Policy Center puts iteliminating the tip income tax would make no sense for many tip recipients because their incomes are so low that they are already exempt from federal income tax.
“There’s no question that the vast majority of middle-income and low-income workers are being left out,” said Brendan Duke, senior director of economic policy at the Center for American Progress. “We know that 95% of low- and moderate-income workers No tips, and only about a third of tipped workers pay income taxes and benefit from them.” (Duke specifically talked about Legislation introduced by Texas Senator Ted Cruz Regarding this issue.
One reason tipped workers’ wages are so low is that the federal government only guarantees them $2.13 an hour minimum wageIf, with tips, a worker still makes less than the federal minimum wage of $7.25 an hour, then the employer must make up the difference. (Many states and municipalities have wage requirements that are higher than the federal minimum wage, but those states and municipalities have wage requirements that are higher than the federal minimum wage. Also often includes exemption clauses Tipped workers have a lower hourly minimum wage.)
That is why a few states Abolish the minimum wage By allowing employers to pay tipped workers less, businesses are effectively passing their wage burden directly onto their customers. While most Americans are accustomed to tipping, those who don’t tip — or at least threaten not to tip — create a hostile environment for workers and make it harder for employees to earn a fair wage. Some The study also showed Tipped wages encourage workers to discriminate against people of color and provide them with worse service because of racist stereotypes about who is more likely to leave generous tips.
Eliminating the tip tax is a benefit to businesses, not workers
One of the biggest concerns about eliminating the federal tax on tips is that it would discourage businesses from offering more competitive wages. That’s because if workers’ net pay increases as a result of the tax cut, employers won’t need to offer tipped workers a higher floor wage. In effect, the tax cut could primarily subsidize payroll costs for businesses, rather than the cost of living for workers.
“It will reduce the need for employers to raise wages,” said Mr. Shierholtz of the Economic Policy Institute.
Additionally, creating a tax exemption for tipped employees could create a significant loophole for employers who want to pay less. For example, some industries could simply become part of the tip economy, with more employees relying on tips rather than the minimum wage.
The policy would “incentivize employers to put more workers in tipped jobs,” Shierholz said. “[Employers]can lower the base wage they pay their workers under the guise of doing something for them. They can say, ‘We give you tips because you don’t pay taxes,’ and then in the fine print, ‘Oh, and by the way, your base wage is going to be $2.13 an hour.’”
That’s why other policies, such as abolishing the minimum wage, are more likely to raise workers’ wages than eliminating the tip tax. For example, in states without a minimum wage, the poverty rate for tipped workers is Lower than the states Below minimum wage.
“If you really want to help tipped workers, there are other, better ways to do it,” Shierholz said, adding that federal funds would be better spent on programs like the child tax credit or the earned income tax credit, which would do more to help workers who need the help.
So if politicians want to promote a pro-worker agenda, they should point to policies that would actually raise people’s wages, as Harris has done by supporting a minimum wage hike. Otherwise, they may just be pushing for yet another tax cut for the rich. After all, this is probably why Major business lobby groups Support “no tax on tips” – to avoid actually raising workers’ wages.
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