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Trump proposes a policy that could make tipping more annoying for everyone

Katherine Tangalakis-Lippert   

Trump proposes a policy that could make tipping more annoying for everyone
  • Donald Trump on Sunday floated the idea of eliminating taxes on income earned from tips.
  • Such a move could result in employers paying lower wages and customers tipping more.

During a rally in Nevada on Sunday, former President Donald Trump proposed eliminating taxes on income earned from tips.

"For those hotel workers and people that get tips, you're going to be very happy, because when I get to office, we are going to not charge taxes on tips," Trump said, according to The Wall Street Journal. "We're going to do that right away first thing in office because it's been a point of contention for years and years and years, and you do a great job of service."

The proposal would require congressional approval but, if passed, could create what an economist and tax-law experts who spoke with Business Insider said would quickly become a two-tiered labor market.

Under a tax-free-tip system, employees who work for tips — such as waiters, bartenders, drivers, and some hotel staff — would have a financial advantage over other low-wage workers, such as those who work in fast food, because they could avoid taxes for Social Security, Medicare, and income.

It could also mean consumers — many already experiencing tipping fatigue as tipping culture pervades more industries — would be asked to tip in additional situations so workers could receive untaxed income.

A spokesperson for the Trump campaign told BI that, if elected, Trump planned to ask Congress to eliminate taxes on tips. The spokesperson added, "Joe Biden has aggressively stepped up the IRS going after tip workers."

Though the IRS announced a program last year to encourage voluntary compliance with reporting rules, none of the tax experts who spoke with BI could identify a new Biden administration policy targeting tipped workers.

While the Trump campaign did not provide details about the proposal, an economist and two tax-law experts told BI it would insert more complexity into the tax code without offering any substantial benefits to tipped workers — or anyone else.

The policy would create a massive tax loophole

"If you think you get asked for tips a lot now, just wait until tips aren't taxed," Martha Gimbel, the executive director of Yale University's Budget Lab, told BI. She added that a new system would create "an incentive for employers to try to get more of their workers' compensation in the form of tips."

If passed, Gimbel said, such a proposal could allow business owners in industries such as hospitality — in which Trump has made millions — to essentially shift the responsibility for workers' salaries onto consumers and claim tax breaks for themselves in the form of lower fees on payroll and Social Security.

"The potential effect is that the average person is no better off, except the argument would be that they might be better off because it's not taxed, but the tax savings they would get will be captured by the employer who's lowered their pay," Steven Bank, a tax-law expert and professor of business law at the UCLA School of Law, told BI.

David Kamin, a tax-law and -policy expert at New York University and a former economic-policy advisor to the Biden and Obama administrations, told BI that this proposal was "not the way to do it" if you really wanted to offer a tax break to low-wage workers.

"The right way, if you want to give someone a tax cut, is not to have them evade the law," Kamin said. "It's to have them abide by the law and to give them a tax cut that's available irrespective of whether you're making a wage or making a tip."

Rather than a well-considered platform position that could further enrich him or business owners like him, Bank said, Trump's proposal seems more akin to an "elementary-school political promise to have candy in the vending machines and no school on Fridays."

"This is just really opening up the door to tax evasion," Bank said, "and it's very much pandering to the casino crowd in Nevada."

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