In the race for the upcoming United States presidential election in November, both former President Donald Trump and his Democratic rival, Vice President Kamala Harris, are outlining their policies and platforms to win over voters. Despite their differences on numerous issues, they share a common stance on one initiative: eliminating taxes on tips.
At a rally on the campus of the University of Nevada, Las Vegas on Saturday, Harris voiced her support for tax-free tips. Her remarks follow a similar proposal made by Trump about two months earlier, also during a rally in the same service-oriented city.
“It is my promise to everyone here, when I am president, we will continue to fight for working families, including to raise the minimum wage and eliminate taxes on tips for service and hospitality workers,” the Democratic presidential nominee stated.
“It’s a large, large group of people that are being hurt badly,” Trump said during his July speech at the Republican National Convention. “They make money—let them keep their money.”
“Tipped occupations” refer to jobs in the U.S. where receiving tips is customary, including positions like waitstaff, bartenders, barbers and hairstylists. Approximately 4 million Americans were employed in tipped occupations last year, accounting for about 2.5% of the total workforce, according to estimates from the Budget Lab at Yale University.
Leisure and hospitality is the dominant industry in Las Vegas, accounting for 26% of total employment as of January 2023, reported Nevada’s Office of Workforce Innovation.
If enacted, this tax-free tip policy could cause significant unintended consequences in the marketplace, potentially leading to the exploitation of loopholes and tax avoidance at large scale.
The Pros And Cons Of Untaxed Tips
With any federal policy change, there are both pros and cons to consider.
This could be a huge win for low-income service workers who depend upon tips for their livelihood, potentially alleviating tax burdens for these Americans families. The exemption would simplify tax reporting and may facilitate more generous tipping behavior from customers.
However, the policy could also create a bifurcated workplace, benefiting tipped workers over those in similar roles who remain untipped. It could unleash a shift toward tipped occupations, potentially disrupting the labor market.
Eliminating taxes on tips may result in a radical change to how compensation is structured. The movement will likely encompass an array of industries in addition to the service, frontline and hospitality sectors that were intended by Trump and Harris.
For example, ultra high-income earners and businesses may reclassify compensation as tips to game the tax exemption. Wall Street financial firm professionals could label their well-paid, lucrative, six-figure bonuses as “tips” to avoid taxation.
Following her speech, Harris’ campaign clarified that if elected president, she would collaborate with Congress to develop a proposal that incorporates an income cap and additional safeguards to prevent high-earning professionals like hedge fund managers and lawyers from manipulating their compensation to exploit the tax-free tip policy.
Trump and Harris’ proposal could lead to a substantial loss in tax revenue, which would likely accelerate cuts in government services. For Americans, this could also mean increased taxes in other areas to offset this potential new rule.
If enacted, U.S. lawmakers will have a lot of work to do, facing administrative challenges. To start, the government will need to clearly define what actually constitutes a tip, and who will enforce this new law.
Wage Negotiations And Job Security
If tips become tax-free, it could lead to a depression in base salary wages, if employers were to adopt this compensation structure on a broader scale. Companies could exploit this pay model to incentivize staff to work harder. Employees would have to outperform in order to receive enough tips to replace a lower compensation rate.
This would lead to financial insecurity, as tips are not a guaranteed form of compensation. There would be more income volatility for workers, as gratuity fluctuates.
It is possible that the policy could make some tipped occupations more attractive, due to the potential for higher take-home pay. This could lead to a shift in the labor market, with more workers gravitating toward tipped positions.
Source: Forbes
