In the fiercely contested US presidential campaign, an unexpected point of agreement has surfaced between Trump and Harris, the belief that workers’ tips should not be taxed.
While the move is seen as a populist, it has drawn criticism for being economically irresponsible.
Trump introduced his proposal during a rally in June. Harris, his Democratic opponent, voiced her support for the idea this weekend, prompting the Trump campaign to dub her “copy cat Kamala.”
Both candidates disclosed their proposals in Nevada, a critical battleground state with the highest proportion of waiting staff in the country, according to the US Labor Department.
What is tips on tax?
In the United States, tipping culture is unique, with customers expected to tip generously for services ranging from take-out coffee to cocktails.
A typical tip is between 15 and 20 percent of the bill at restaurants. Some states still allow employers to pay tipped workers as little as $2.13 per hour, provided their tips bring their earnings up to the federal minimum wage of $7.25.
Given the major portion of service-sector wages that come from tips, the proposal to eliminate taxes on tips has wide appeal, although it is not favored by many economists and think tanks.
“There’s no particular reason that, in general, people in the service industry should pay lower taxes than somebody on the factory line or somebody that’s providing nursing care,” Marc Goldwein, senior vice president of the nonpartisan Committee for a Responsible Federal Budget (CRFB), told AFP.
“This creates an equity issue where two people doing similar work that the market has deemed is worth the same amount of money pay different levels of taxes. That doesn’t make any sense.”
Who stands to gain?
There are about four million tipped workers in the United States, roughly 2.5 percent of all employment, as estimated by the Yale University Budget Lab.
This group includes waiting staff, bartenders, and hairdressers. Tipped workers typically have lower weekly wages, and the Budget Lab estimates that around 37 percent of them did not pay any federal income tax in 2022.
Once tax credits are considered, the situation becomes more complex, according to Goldwein from CRFB. The United States offers several refundable tax credits, allowing eligible taxpayers to reclaim these credits even if they do not earn enough to pay income taxes.
“In other words, just because you pay no taxes doesn’t mean you won’t benefit from a plan to exempt taxes from tips.”
How will it impact?
The financial impact remains uncertain: While some congressional proposals target income tax alone, others aim to exempt tips from both income and payroll taxes.
The candidates themselves have been unclear on the specifics. According to the Tax Foundation, any such change could cost at least $107 billion over the next decade, with other estimates suggesting even higher figures.
Despite the political appeal of eliminating taxes on tips, some analysts caution that it may not be sound policy. They argue that this move could unfairly shift the tax burden onto workers who don’t receive tips. Additionally, it might lead to tipping spreading to new professions, potentially resulting in a much larger financial impact than initially anticipated.
While the move is seen as a populist, it has drawn criticism for being economically irresponsible.
Trump introduced his proposal during a rally in June. Harris, his Democratic opponent, voiced her support for the idea this weekend, prompting the Trump campaign to dub her “copy cat Kamala.”
Both candidates disclosed their proposals in Nevada, a critical battleground state with the highest proportion of waiting staff in the country, according to the US Labor Department.
What is tips on tax?
In the United States, tipping culture is unique, with customers expected to tip generously for services ranging from take-out coffee to cocktails.
A typical tip is between 15 and 20 percent of the bill at restaurants. Some states still allow employers to pay tipped workers as little as $2.13 per hour, provided their tips bring their earnings up to the federal minimum wage of $7.25.
Given the major portion of service-sector wages that come from tips, the proposal to eliminate taxes on tips has wide appeal, although it is not favored by many economists and think tanks.
“There’s no particular reason that, in general, people in the service industry should pay lower taxes than somebody on the factory line or somebody that’s providing nursing care,” Marc Goldwein, senior vice president of the nonpartisan Committee for a Responsible Federal Budget (CRFB), told AFP.
“This creates an equity issue where two people doing similar work that the market has deemed is worth the same amount of money pay different levels of taxes. That doesn’t make any sense.”
Who stands to gain?
There are about four million tipped workers in the United States, roughly 2.5 percent of all employment, as estimated by the Yale University Budget Lab.
This group includes waiting staff, bartenders, and hairdressers. Tipped workers typically have lower weekly wages, and the Budget Lab estimates that around 37 percent of them did not pay any federal income tax in 2022.
Once tax credits are considered, the situation becomes more complex, according to Goldwein from CRFB. The United States offers several refundable tax credits, allowing eligible taxpayers to reclaim these credits even if they do not earn enough to pay income taxes.
“In other words, just because you pay no taxes doesn’t mean you won’t benefit from a plan to exempt taxes from tips.”
How will it impact?
The financial impact remains uncertain: While some congressional proposals target income tax alone, others aim to exempt tips from both income and payroll taxes.
The candidates themselves have been unclear on the specifics. According to the Tax Foundation, any such change could cost at least $107 billion over the next decade, with other estimates suggesting even higher figures.
Despite the political appeal of eliminating taxes on tips, some analysts caution that it may not be sound policy. They argue that this move could unfairly shift the tax burden onto workers who don’t receive tips. Additionally, it might lead to tipping spreading to new professions, potentially resulting in a much larger financial impact than initially anticipated.
Source : Times of India
