Harris and Trump’s ‘no tip tax’ proposal is the rare idea that is both unifying and unfair

Presidential contenders Kamala Harris and Donald Trump found a rare point of agreement when they both proposed getting rid of tip taxes.

For restaurant workers, tour guides, masseuses, anyone who tips, the benefits of the policy are obvious. Less taxes, which of course means more money in your pockets. But for everyone else, the rare bipartisan proposal comes with more pitfalls: less money in the Treasury, an unfair tax code and even more incentives for people to game the system.

In addition, Trump’s and Harris’ versions of the proposal were both light on details, experts note.

“It’s easy to promise something like that, but they’re not doing what’s an important part, and that’s kind of finalizing the policy,” said Keith Hall, a labor economist at the Mercatus Center at George Mason University and a former commissioner of the Bureau Labor. Statistics. “Tell us how you’re going to pay for it.”

The proposals would cost between $100 billion and $250 billion over 10 years, the Committee for a Responsible Federal Budget estimates.

Even setting costs aside, the proposal would represent a sea change in how tipped employees are paid and how the U.S. tax system works, with workers making the same amount of money paying different levels of taxes. If the policy becomes law, millions of workers would be incentivized to forgo wages or hourly wages to lower their income taxes, and business owners would gladly oblige to lower their own payroll taxes.

“Typically, if you subsidize something, you get more of it,” said Hall, who serves on the advisory board of the Committee for a Responsible Federal Budget.

All this raises one of the most controversial questions of civic life: fairness.

“Why single out restaurant workers?” Hall said. “You have people who don’t earn tips making the same amount of money. Don’t they get the tax break?”

It’s not “an economic issue, it’s an equity issue”

There are two principles that make an income tax system efficient and fair, according to Hall. One, that people who earn more money pay more in taxes, and two, that people who earn the same amount of money pay the same amount in taxes. “It’s not so much an economic issue, it’s an equity issue,” Hall said. “It’s also an important part of people’s willingness to pay their taxes.”

That said, tax breaks like the Child Tax Credit and the Earned Income Tax Credit allow parents to pay less tax to the government, and rampant inequality in recent decades has renewed accusations that the current tax code is unfair. A 2023 Pew poll found that about 60 percent of Americans believe that corporations and the wealthy do not pay their fair share of taxes. The tax system is also full of legal solutions for the rich, best embodied by the fact that many of the wealthiest people in the US paid very little federal income tax—and sometimes none at all. The biggest winners do this through maneuvers like the interest loophole, which allows fund managers to classify some of the compensation as capital gains rather than income. Capital gains are taxed at up to 15% depending on the asset, while income is taxed at up to 37%.

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And the tips are no less likely to be gamed, according to a report by the progressive think tank Center for American Progress. A proposal to eliminate tip taxes from Sen. Ted Cruz (R-Texas) and Rep. Byron Donald (R-Fla.) could also be used for tax abuse by the wealthy, CAP found. “The incentive to recharacterize wages or even profits as tips is stronger for high earners because the income tax rate is higher,” according to the report.

Cruz spokesman Darrin Miller dismissed the idea that Wall Street executives and other white-collar professionals would take advantage of the bill. “Regarding the hedge fund ‘loophole’, that’s not how the tax law works,” Miller wrote in a post on X. “Tips are voluntary and the IRS defines the reporting requirements. Reclassifying non-tip income as tipped has a name: tax fraud.”

A Harris spokesman said he would close such loopholes. “As president, she will work with Congress to craft a proposal that comes with an income cap and strict requirements to prevent hedge fund managers and lawyers from structuring their compensation in ways to try to profit from politics “, they said. The Trump campaign did not respond to a request for comment.

wealth spoke to several business owners whose employees earn money from tips, all of whom supported the proposed policy but worried it could encourage similar gaming of the system. Unscrupulous business owners and their employees could try to retool their compensation structures to pay workers more tips than wages, which would still be taxed, said Carl Sobocinski, who owns five restaurants in Greenville, SC.

“We should be careful to make sure people aren’t trying to bend the rule to pay less tax,” Sobocinski said.

If this were to happen, the federal government would lose both the income tax from the worker and the payroll tax that the business would have to pay. That would mean an even bigger blow to the already $100 billion hole in federal tax revenue, according to Bernard Yaros, chief economist at Oxford Economics. “How much would be lost in terms of federal revenue really depends on the behavior of businesses,” he said.

Tipping, especially cash tips, has always been subject to an unspoken “don’t ask, don’t tell” mentality. For decades, tips were mostly cash payments that, for the most part, went unreported to the IRS. “Tips are known because no income is reported,” Hall said.

Was lunch $16.50? Look twenty, keep the change. Did the movers carry your furniture up three flights of stairs in July? Here’s something extra for you guys. But in an increasingly cashless society, all those small acts of kindness are recorded in a credit card transaction log, forcing tipped workers to report them. In this sense, eliminating tip taxes is a return to what was once an accepted, if not entirely government-sanctioned, status quo.

As a labor economist, Hall sees ripple effects throughout the economy from such a drastic change affecting millions of workers. Real wages for tipped workers would rise, but probably without an increase in the cost of everyday goods, which tends to happen whenever wages rise, Hall said. That sounds like a good thing in theory, he says, but that doesn’t mean no one pays.

“The government would pick up more of the tab,” he said. “There might actually be less pressure on the price of things like food, but of course taxpayers pay for that.”

This story was originally featured on Fortune.com