What a "no taxes on tips" policy could mean for U.S. tipping culture
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Illustration: Sarah Grillo/Axios
If you think tipping culture is already out of hand, think about what would happen if workers no longer had to pay taxes on tips — something both Vice President Harris and former President Donald Trump are now proposing.
Why it matters: Typically, ideas like these are tough to turn into reality, but next year when the Trump tax cuts expire, Congress will likely pass some kind of new tax bill.
- That creates an opportunity to put new policies in place, says Brendan Duke of the Center for American Progress Action Fund.
The big picture: A no-tax-on-tips policy would incentivize workers to push harder for more tips.
- And their employers would be into it, happy to shift the burden of wages onto customers.
- Businesses, then, would have every reason to figure out more ways to push customers to tip.
Where it stands: You can't buy something to eat or drink in these times without getting asked for a gratuity, often by an iPad screen.
- "As pervasive as things seem now, I have to imagine that it will only get even more pervasive should this pass," says Ernie Tedeschi, of the Yale Budget Lab, who recently wrote an analysis of the policy.
The intrigue: Where things start to get wild is outside the restaurant industry, as Americans try to figure out ways to classify more of their income as tips. Think bankers' bonuses or sales commissions — or even pay for a Substack writer or freelance podcaster.
- The U.S. tax code already has different rules for different kinds of income — capital gains, for example, are taxed at a lower rate than payroll income.
- When those kinds of divides happen, you create enormous incentives for people to game the system, says Howard Gleckman, a senior fellow at the Tax Policy Center.
- Those kinds of shenanigans typically happen with higher earners — think of the carried interest tax loophole, for example.
For the record: An official from the Harris campaign said the policy would include "strict requirements to prevent hedge fund managers and lawyers from structuring their compensation in ways to try to take advantage of the policy."
- Trump's campaign hasn't offered much in the way of detail.
The bottom line: Knowing that tipped income isn't taxed, people might decide to give a little less money.
- "I'm a pretty religious 20% tipper," says Tedeschi, who until recently was chief economist at the White House Council of Economic Advisers. "But, quite frankly if my dentist started asking me for tips, I would be like, 'hell no'."
Who would benefit
Eliminating taxes on tips would not likely have a huge impact on tipped workers. A lot of these workers don't make enough money to owe federal income tax, though estimates vary.
By the numbers: More than a third of tipped workers, including those working in restaurants, barbers and bartenders — didn't pay income tax in 2022, per an analysis of tax data from the Current Population Survey from Ernie Tedeschi, at the Yale Budget Lab.
- He didn't account for tax credits, which can give some of these folks a negative tax rate — or lower their tax liability.
- A separate analysis from advocacy group One Fair Wage, looked at different government survey data that included self-reported income, narrowed in on restaurant workers and found that two-thirds don't pay income tax.
These proposals would only help a very small slice of workers. Tedeschi estimates that last year roughly 4 million workers were in tipped occupations — 2.5% of all employment.
- On top of that, the Harris campaign tells Axios that, if elected, she'd work to craft a proposal that has an income limit — cutting the number of potential beneficiaries even more.
