“No Tax On Tips” No Big Deal Says Davidson College Economics Professor

Is this a good idea or just a product of a competitive campaign season?

It sounds cute — it’s even alliterative — but ultimately, this is pretty small potatoes. Only about three or four percent of the workforce actually works for tips. And only a third of them make enough income to pay federal taxes. 

Now, it feels like there are more tipped workers because it's the part of the workforce we interact with all the time, right? Every time we get coffee or a haircut, you're going to be in a situation where someone asks for a tip.

But overall, eliminating taxes on tips affects a relatively small percentage of the workforce and population.

But the people who work for tips must like this proposal, right?

If I was someone who worked for tips, I would probably think this is a great idea. We all want to pay less taxes and have more money. 

But if you think you’re asked for tips all the time now, I worry that a policy like this would exacerbate that. Because if I don't have to pay tax on tips, everyone would want to earn tips. It would be free money. 

And I assume employers would be eager to shift the burden of paying their workers on to customers?

Yes, this policy would incentivize employers to set up systems where employees can have tips.

And it could quickly get away from the initial policy goals because what is a tip if not a bonus? Think about all the people who get bonuses at the end of the year. Sometimes those bonuses are very large and the biggest bonuses often go to investment bankers and people in finance. 

I think a pretty savvy accountant could turn a bonus into a tip for tax purposes.

Is there a reason in particular to give tipped workers a tax break? 

Sometimes the government uses taxes to make certain activities more attractive or more affordable. There's a tax credit for a mortgage interest reduction because we want to make it easier for people to own homes. The government allows deductions for charitable giving. These are activities that we, as a society, have decided are important enough to use the tax code to support. 

But there's no real reason why the government should give preferential tax status to jobs with tips versus a job that produces a valuable service that doesn't get tips. If we want to support low-wage workers or people in the service industry, there are much more efficient ways to do it.