Right now, Americans are locked in an increasingly fierce presidential election battle. Partisans on both sides are calling it the most important election of our lives. Rhetoric is growing hotter on social media platforms like Facebook and X, or whatever Elon Musk is calling Twitter these days. Some extremists are calling for violence if their side loses, with others actually fearing we may be headed towards civil war. Joe Biden’s withdrawal last month—barely three weeks ago!-—has been just the latest shakeup. But screenwriters in charge of 2024 are full of surprises. They’re clearly making plot twists, rather than character development, the hallmark of the season.
Wouldn’t it be great if Democrat Kamala Harris and Republican Donald Trump could find at least one thing they both agree on? They have—and it has to do with a surprising slice of our increasingly bitter-tasting tax code.
Back in June, Trump was having dinner at his hotel in Las Vegas, a town where tips drive the economy. As he tells it, his server came up to him to make small talk. Then, she complained, “The government’s after me all the time on tips, tips, tips.” Trump said, “Let me just ask you a question, would you be happy if you had no tax on tips?” To nobody’s surprise, she said yes, and a campaign promise was born.
More recently, Kamala Harris copied Trump’s pledge. On August 10, she told a crowd of 12,000 at the University of Nevada Las Vegas, “It is my promise to everyone here: When I am President, we will continue our fight for working families, including to raise the minimum wage and eliminate taxes on tips for service and hospitality workers.”
How, exactly, would that work? Code section 61, which defines gross income, says, “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items.” That pretty clearly includes tips earned at a bougie Vegas steakhouse. But it shouldn’t be too hard to pass a bill exempting tips from that general rule. In fact, Senator Ted Cruz has already introduced it.
Of course, as with all things tax, the devil is in the details. Eliminating income tax on tips won’t help low-income tipped workers who don’t pay them to begin with. Eliminating payroll tax would be a bigger deal for most—but would also cost Social Security benefits. And who, exactly, should benefit? Wait staff, bartenders, and baristas seem like obvious candidates. But what about hair stylists, nail technicians, and bellhops? Valet parkers, movers, and scuba instructors? Congress will have to define “tips” very carefully. Otherwise, you can expect lawyers, lobbyists, and even tax planners to expect tips as part of their compensation. (Surely you’d be happy to duke us 15% of whatever we save you—right?!?)
What sort of effect would the proposal have on the broader economy? According to the Pew Research Center, about 47% of Americans have worked a job where they earn tips, and 4.3 million do so now. The Congressional Budget Committee estimates that exempting tips from income and payroll taxes could cost the Treasury $150 to $250 billion in revenue over the next 10 years.
These days, it’s hard to get politicians on both sides to agree to something as basic as “ice cream tastes good.” Eliminating tax on tips may not be a genius policy, but the proposal is a rare point of agreement in what promises to be an unusually ugly election. And we’ll be here to help you make sense of it all. We’re here all week and beyond, folks. Try the veal. And tip your servers!