Tax Policy Proposal for Service Workers
American politics is evolving rapidly, and in this context, two of its most prominent figures have put forward a recent proposal that has garnered considerable attention: both former President Donald Trump and current Vice President Kamala Harris have suggested that the federal government should stop taxing tips earned by service and hospitality workers. Given the current state of the economy and the worrisome trend of inflation, what might this proposal mean for the economy as a whole, and for the workforce in particular? And why has this proposal—so seemingly simple, and in some respects so clearly advantageous—become an object of division in our increasingly polarized political discourse?
This article argues that the intention behind exempting tips from income tax may seem noble, but it is a fundamentally flawed policy. It could make existing inequalities worse, undermine fair wage practices, and ultimately harm the very workers the policy aims to help.
Economic Implications and Concerns
The tax exemption proposed for gratuities is not merely a matter of dollars and cents; it reflects societal values we hold about labor, compensation, and economic fairness. The Economic Policy Institute estimates that almost 70% of tipped workers are women, and many of them belong to racial and ethnic minority communities. The consequences of this policy are not limited to the individuals who receive and report tips; it touches upon systemic issues of wage disparity and the precariousness of low-wage work.
What does this policy proposal mean for the federal budget? It could result in a revenue loss of about $150 billion over 10 years. At a time when many public services and social safety nets are under great fiscal strain, is it responsible for Congress to propose a policy that can’t pay for itself?
Impact on Tipped Workers and Wage Disparities
Right now, tips are treated as income for tax purposes. This is true not just for federal income tax but also for state income taxes and payroll taxes, too. When Congress passed the Tax Cuts and Jobs Act in December 2017, it increased the amount of the standard deduction for individuals and for married couples filing jointly. However, the Act also limited some itemized deductions that many taxpayers had used in the past. As a result, many taxpayers now find that they are better off having fewer deductions and taking the standard deduction instead, which is good for them but bad for the folks who usually rely on itemizing for their tax returns.
The main objection to this policy is that it creates an unfair situation among low-wage workers: a delivery worker who receives tips is helped by this exemption, while a delivery worker who doesn’t get tips is not. Economists argue that policies like this should be based on and promote equity—that is, they should ensure that people with similar incomes are in similar situations. The situation that this policy creates among delivery workers is not equitable. Furthermore, by exempting tips from taxation, this policy could be interpreted as doing the opposite of what it claims to do: rather than increasing employers’ incentives to pay their employees more, it shifts the financial burden onto customers, which is an incentive to perpetuate the low-wage, tipping economy.
Bipartisan Support and Legislative Momentum
The proposal could also make the problematic tipping culture in the U.S. even worse. A survey by Bankrate found that 35% of Americans think tipping has gotten out of control. By incentivizing tipping through tax breaks, the policy could push other industries to adopt similar models, further entrenching a system that often leaves workers beholden to the whims of consumer generosity. And without stringent limits on who can take advantage of these tax breaks, the proposal could also allow well-to-do professionals to use the tax break as a way to structure their compensation. The Harris campaign says it intends to impose income limits, but the Trump campaign has offered no guidance on this crucial question.
Supporters of the tax exemption assert that it would furnish low-wage workers with essential relief. They contend that it would allow these workers to hang on to more of their income. However, this favorable take seems to neglect the wider effect the policy would have. Sure, it might help some workers in the here and now. But I think it is far more likely that the policy would have the longer-term effect of keeping wages low and the economy unhealthy, and that it would do this by increasing working people’s dependence on tips; when you depend on tips to make your living, your economic health is precarious.
For most readers, this matter highlights the intricacies of tax policy and its immediate effect on everyday life. If granted, the proposed exemption would surely do all that the president’s plan foresees. But it could also dramatically change the service sector, putting not just low-wage but also tipped employees in a world where the government’s economic preferences for high-tipping service jobs could make a real difference in their standard of living, while also increasing the pressure of tipping on the consumer.
To sum up, even though the idea behind making tips exempt from the income tax might be popular with voters, the policy itself is hard to make sense of. It could very well exacerbate, instead of alleviating, some big problems that low-wage workers in the service sector face. As a policy proposal, making tips tax-exempt is not what it seems and is not what it should be.
As we face a pivotal moment in our economic destiny, we should not allow ourselves to be dazzled by the glitter of fast solutions. The right policies for fairness, equity, and dignity for all workers transcend partisan lines. They are laws that should and must be passed because they are the right thing to do.