"If any of my economics students had proposed this idea, they would have received a failing grade," writes Betsey Stevenson, Ford School professor and economist on the policy proposal to not tax tips. In an opinion piece for Bloomberg, she wrote that not taxing tips must be paired with raising wages for tipped workers to solve their economic uncertainty.
"Eliminating taxes on tips is an idea with bipartisan appeal," according to Stevenson, but she notes, "There is a far better way to do it." She continues, "Eliminating taxes on tips should be paired with a higher minimum wage and the elimination of the tipped minimum wage." Doing away with taxes on tips alone will not reduce uncertainty for tipped workers.
She writes this policy that both candidates are championing would be problematic in several ways. "Any tax policy should be judged across three dimensions: the incentives it creates, the fairness it promotes, and the distortions it generates." She notes, "It is rare to see a proposal that fails on all three," but this one does. It could create loopholes and start "a long cat-and-mouse game between companies searching for loopholes and the IRS." Additionally, "Why exempt one industry — leisure and hospitality — from income taxes on tips? What about health-care workers? Or pre-school teachers?" Tipped workers are not the only ones with low earnings, "Only 5% of workers in the bottom 25% of the earnings distribution earn tips. What about the other 95%?"
"The origins for this silly idea can be traced to a decision made many decades ago that some employers can pay less than the minimum wage if tips can make up the difference," writes Stevenson. So making tips tax-free, could be a good policy if "it were used to liberate Americans from the tyranny of tipping culture." But right now, "tips in America are often not just a token of appreciation; they’re part of the wages that workers depend on" so they should be given higher wages to help uncertainty.
This policy that "both Trump and Harris are championing could push tipped workers further into a world of income uncertainty" if not paired with higher wages, she says. So Stevenson concludes, "The devil, as always, will be in the details."
