Tax Those Tips

Not taxing tips is a really stupid idea. Let me offer a half dozen arguments against this.

It’s just rank pandering for votes in Nevada. It’s almost certain that a tax exemption on tips will soon become law. It’s part of Trump’s “big, beautiful bill” and even the Democrats support it. That’s not because it’s good public policy. It’s because of Las Vegas. Once Nevada became one of seven swing states, politicians rushed to pander to its voters, a high number of whom work in the hospitality industry. It’s as simple and as stupid as that.

It’s income, why shouldn’t it be taxed? I don’t understand how tip income is different from any other kind of income. For industries in which workers make most of their money from tips it means that most of their income will be tax free. Why? Because you want to help low-income workers? Well, for one thing, a lot of tipped workers in nice restaurants, for example, do just fine. But also, let’s take two restaurant workers. They both get paid about the same, but one works at McDonald’s while the other works at a local burger joint. One gets no tips and must pay taxes on all of her income while the other has the same take home pay, but two-thirds of it is now untaxed. How is that fair? I don’t mind further easing the tax burden on low-income workers, but if that’s really the goal then this is a really inefficient and poorly targeted way to do it.

Consumers are fed up with getting asked to tip everything. This will make it worse. I don’t have any trouble tipping waiters. But the guy who takes my money and directs me to where I can pour my own coffee? Really? You think it’s bad now, You ain’t see nothin’ yet.

Professionals will come up with creative ways to scam the system. Expect people in all kinds of jobs that have not been traditionally tipped to come up with ways to define a part of their income as tax free gratuities. Your mortgage lender would be happy to clear the title to your new home in exchange for a 20% gratuity. Your dentist did a nice job removing that old crown. He’d be happy to replace it with a new one, but could you first recognize his good work with an 18% tip? Those may be far-fetched, but you really think things akin to this aren’t going to happen?

It could wind up hurting the workers it claims to want to help. There are three likely unintended consequences. Employers will use this as an excuse not to increase wages. With income off the books, retirement benefits based on income will be reduced. Contributions to Social Security and Medicare will go down at a time when both are facing funding crisis’.

It will add to the national debt. Estimates are that this will add $100 billion to $200 billion to our debt. In light of that, I’m against tax cuts, even those that would benefit me.