Harris, Trump Plans to Exempt Tips From Taxation Could Change Remuneration, Dampen Wage Growth_ Tax

And in rare agreement, both Vice President Harris and former President Trump want no tax on tips. But interestingly, now economists say this is not a good idea. So let's find out more. We're bringing in Pete Sepp. He is the president of the National Taxpayers Union. Good morning, Pete. Great to have you to talk about this. Let's start with some context first, though. What is the current policy on money earned as tips? Currently, money earned as tips can be subject to federal income tax. It depends on the income level of the individual, but it is fully taxable under the current laws. Both President Trump and Vice President Harris now want to make tip income exempt from income taxes. Some have said making it even exempt from payroll taxes. So you're saying it also depends somewhat on the income level, obviously, and how much you're taxed. On top of this no tax on tips policies promised by Harris and Trump, there's actually a bipartisan bill also passing through Congress. So before we get into the bigger picture here, what would the new proposed policies do for the tip workers as individuals? Well, we need to remember that even though there are plenty of workers we see in restaurants or driving rideshare cars and whatnot who might accept tips, it's still a pretty small percentage of the workforce. Around two and a half percent of total employment consists of tip workers. So a very small number of taxpayers. And even there, their wages, again, might fall below the taxable income level. And so they're not paying tax on the tips anyway. Total revenue impact is about one hundred seven billion dollars over 10 years, according to Tax Foundation. That is not a huge amount to use one of President Trump's words, but neither is it inconsiderable. It's a pretty significant revenue hit. And that's a concern among many economists who are saying, well, maybe we ought to focus on broader based tax policies like extending the 2017 tax cut law instead of taking a revenue hit on something that affects only a pretty small number of people. So tell me more about this. Why economists say this might not be a good idea, not even if, let's say, this is part of the policies besides something else, other tax cuts. So tell me, can you go in a bit more detail on that? Sure. Many economists believe that what you might see in a situation where tips are not taxed is that more and more tip income is going to be declared. In other words, people like attorneys or pilots even might end up asking for gratuities and employers would be all the happier to do it because that means, well, they don't have to necessarily increase the base wage. So that's one problem. And you have to remember, as my colleague Andrew Wilford explained in an op-ed he recently wrote, it doesn't matter to the charging business whether they charge 15 bucks for a good or service upfront or charge 12 bucks with the expectation of a $3 tip for the employee, same price. And so you could get situations where a lot of current workers who don't accept tips suddenly start accepting them and the revenue hit again becomes much bigger than that $107 billion. So that's interesting. You're saying that low income workers might not necessarily benefit from it and higher income workers could take advantage of that. From another perspective, what would that mean for government revenue? How much money would they lose and why is that important? Yeah, the current estimate of $107 billion, as I was just saying, might go higher if this shifting effect toward more tipped income takes place. And when you look at the trillion, even $3 trillion that will be required in order to extend the 2017 tax cut law depends upon how much of it you want to extend, what kind of modifications you want to make. When you put it in that perspective, even $107 billion is nothing to sneeze at. It's not something you do lightly. Absolutely. Well, thank you so much for your insights this morning to break this down for us. Pete Sepp, I appreciate it. My pleasure.