Here’s a Tip: Keep the Taxation of Tips As-Is

While the next President faces a wide range of pressing tax policy choices to make — from the expiration of much of 2017’s Trump tax law to international corporate taxation and beyond — a relatively silly idea has become the tax focus on the campaign trail: exempting tips from taxes. Despite its embrace by the candidates from both major parties, this policy idea would do little to help the roughly 4 million people who work in tipped occupations while creating a host of problems.

Exempting tips from taxes isn’t a new idea. It’s been proposed before and always abandoned because it’s practically impossible to do without creating new avenues for tax avoidance.

Lower-paid service employees definitely deserve support. However, altering the tax code in this manner is a very leaky way of achieving that. It’s an approach that rich people with accountants and lawyers would surely be able to abuse. Fund managers, attorneys, and other high-paid professionals could easily reclassify their fees — or at the very least, some percentage of them — as mandatory tips for performance.

This proposal treats households with similar levels of income differently based on profession. Servers and bartenders, for example, receive a large portion of their income through tips and thus would receive a large tax exemption. Teaching assistants or health care workers might receive similar overall income but would not receive the same exemption.

Finally, these proposals create incentives to drive even more low-paid service employees into the tipped worker category, harming many workers and their families. Tipped workers have more unstable incomes than non-tipped workers, are more likely to live in poverty, and are more vulnerable to wage theft, according to the Economic Policy Institute (EPI).

The good news is that lawmakers have designed way better ways of helping working families. EPI and other experts on work and wages have put forth many ways to better help working families, from eliminating the sub-minimum wage that allows workers who receive tips to be paid a paltry $2.13 an hour, to raising all minimum wages above the $7.25 where it has been mired for a decade and a half, to making it easier for workers to unionize. In terms of tax solutions, lawmakers rightfully concerned about low-wage workers should instead consider expanding the Child Tax Credit and Earned Income Tax Credit (and especially making the latter stronger for workers without children in the home).

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