Why Politicians Love It and Economists Don’t: NPR

Vice President Harris and former President Donald Trump disagree on much, especially when it comes to economic policy. But they both want to get rid of the tip tax.

At a campaign rally in Nevada, Harris joined Trump in supporting tax-free tips.

“My promise to everyone here is that when I am president, we will continue to fight for working families, including to raise the minimum wage and eliminate tip taxes for service and hospitality workers,” Harris told a crowd at the University of Nevada, Las Vegas on Saturday.

Trump has been campaigning on a “no tip tax” policy since June, after a Las Vegas waitress told him the government was taking too much of her paycheck in tips. Trump touted the policy in Milwaukee during the Republican National Convention.

But shortly after Harris promised to eliminate tip taxes this weekend, Trump criticized the move, claiming it was done for “political purposes.”

“This was TRUMP’s idea – He has no ideas, he can only steal from me,” Trump wrote on Truth Social. “Remember, Kamala proposed the BIGGEST TAX INCREASE IN HISTORY – It will not happen.”

In response, a representative for Harris’s campaign told NPR that the vice president’s policy proposal is different from Trump’s and that she intends to implement it.

“As president, he would work with Congress to craft a proposal that would include an income cap and stringent requirements to prevent hedge fund managers and lawyers from structuring their compensation in ways that seek to take political advantage,” said the official, who was not authorized by the campaign to speak publicly. “Vice President Harris would push for that along with a minimum wage increase.”

Regardless of its origins and ownership, the idea of ​​not taxing tips is gaining bipartisan political traction. On Capitol Hill, Sen. Ted Cruz, R-Texas, introduced the No Tax on Tips Act in July with the support of Democratic Sens. Catherine Cortez Masto and Jacky Rosen, R-Nevada., and the powerful Culinary Workers Union Local 226. A companion bill, introduced by Florida Rep. Bryon Donalds, is also making its way through the House.

But to Steve Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center, this idea is “bad.”

“We’re in a campaign season, a silly season,” quipped Rosenthal, who has years of experience drafting tax legislation for Congress. “A race to the bottom would be a better way to describe fiscal policy here.”

For Rosenthal, the idea fails on three counts: fairness, efficiency and revenue.

A national tip tax ban would disproportionately benefit, for example, a waiter in South Carolina who earns a low minimum wage and derives a large portion of his income from tips. A waiter in California, where tips make up a smaller portion of his income, would benefit less.

“Why treat employees who perform similar services very differently from a tax perspective, just because one earns tips and the other doesn’t?” the tax lawyer said.

Rosenthal went on to say that a law that excluded the tip tax would be extremely difficult to effectively administer, regulate and supervise.

“How are we going to know who’s getting a tip and when it’s over the salary limit?” Rosenthal said. “How are we going to stop investment bankers, for example, from getting tips? And if we impose income limits, well, wouldn’t we expect low-paid workers to just demand a tip instead of a paycheck?”

Ultimately, he said, it would distort the labor market. But the biggest obstacle for Congress is the money it would lose.

“The revenue from this proposed tip exemption is something like a couple hundred billion over a 10-year period,” he said. “That’s a lot for Congress to swallow.”

Garrett Watson, senior policy analyst at the Tax Foundation, largely agreed with Rosenthal.

“I think the underlying political basis is weak at best,” Watson said.

He also pointed to a recent study by Yale University’s Budget Lab, which found that only 2.5 percent of workers would benefit from a no tip tax policy.

Still, Watson said he was eager to get more details from both campaigns on how they plan to implement this relatively new tax proposal.

“A lot of the tax ideas that come out have years or decades of thinking behind them,” Watson said. “Here, not so much. So I definitely think there are versions of this that are more defensible than others in terms of policy design.”

While Vice President Harris expressed her support for the no-tip tax policy on Saturday, the Culinary Workers Union Local 226 endorsed the Democratic presidential candidate and her new policy position.

“As the largest working women’s organization in Nevada, the opportunity to elect the first woman president of the United States is both invigorating and historic, and we are ready to make history together,” the union said in a statement over the weekend. “The Culinary Union has led the fight for fair tip taxation for over 30 years, and our union supports a tip tax ban.”

So far, neither campaign has made public their full proposed tax-free tip policy.