It’s uncommon, especially in today’s political climate, to witness agreement between Republicans and Democrats on an issue. Regardless of the winner in 2025, tax policy will be a top priority for Congress next year as the Trump era tax cuts come to an end. However, when it comes to taxes on tips, this may be an issue that divides politicians from experts.
While both candidates have been vague on the specifics of the proposal to eliminate taxing tips, the question remains – is it feasible?
To get some insight, Scripps News consulted tax expert Steven Rosenthal, who expressed skepticism, saying, “When I hear both political parties agreeing, I become wary because our current agreements often involve financial giveaways. As tax policy professionals, we are always uneasy during campaigns – what we refer to as the ‘silly season.’ This proposal may sound appealing and resonate politically, but it falls short on our tax policy evaluation.”
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Rosenthal clarifies that from a tax policy perspective, this idea is unfavorable in terms of fairness, effectiveness, and revenue generation.
“Well, this is quite a significant revenue loss. The most reliable estimates suggest a loss of around a couple of $100 billion over the 10-year congressional budget timeframe, and that’s a substantial amount. This doesn’t even consider the losses resulting from more workers reclassifying their compensation as tips and being exempt from wage taxes,” he explained, highlighting how the cuts would contribute to the deficit while benefiting only a small portion of workers.
According to the Budget Lab, a bipartisan policy research center, there were 4 million U.S. workers in tipped occupations last year, accounting for about 2.5% of all employees. More than one-third of them had incomes low enough to already be exempt from federal income tax.
SCRIPPS NEWS’ SERENA MARSHALL: Would a better solution be to increase taxes on corporations to provide these workers with sustainable and livable wages?
STEVEN ROSENTHAL: I believe that much of the service industry does not earn enough income to pay income taxes. So, if the goal is to benefit lower- and middle-class workers over higher-income earners, exemptions for tips would not be the best approach. Instead, raising the minimum wage would be more effective.
The federal minimum wage has remained at $7.25 per hour since 2009, adjusted for inflation, this represents a 29% decrease compared to what their counterparts earned 50 years ago.
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