It’s uncommon, especially in today’s political climate, to find an issue that both Republicans and Democrats agree on. The upcoming tax policy will be a priority for Congress in 2025 as the tax cuts from the Trump era are set to expire. However, when it comes to taxing tips, this may be an issue that divides politicians and experts.
Both candidates have been unclear on how they plan to stop taxing tips, but is their proposal realistic?
To get insight, Scripps News consulted tax expert Steven Rosenthal, who expressed skepticism, stating, “When I see both political parties in agreement, I become cautious because current agreements often involve fiscal giveaways. Tax policy professionals like myself always feel uneasy during campaigns, which we refer to as the silly season. This proposal may sound good and have political appeal, but it doesn’t fare well on our tax policy scorecard.”
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Rosenthal explains that from a tax policy perspective, this idea is not favorable in terms of equity, efficiency, and revenue.
“In fact, it’s more of a revenue raiser. Estimates suggest it could generate a few hundred billion dollars over the 10-year congressional budget window, which is a significant amount. This number doesn’t even consider the additional losses that might occur as more workers classify their earnings as tips, exempting them from wages,” he said, highlighting that these cuts will contribute to the deficit while benefiting only a small percentage of workers.
According to the Budget Lab, a nonpartisan policy research center, about 4 million U.S. workers were in tipped occupations last year, representing around 2.5% of all employees. More than a third of them already had incomes low enough to not pay federal income tax.
SCRIPPS NEWS’ SERENA MARSHALL: Would a better solution be to increase taxes on corporations to provide those employees with sustainable and livable wages?
STEVEN ROSENTHAL: I believe a large portion of the service industry doesn’t earn enough to pay income taxes. So, if the goal is to support lower- and middle-class workers more than higher-income earners, we should focus on raising the minimum wage instead of exempting tips.
The federal minimum wage has remained at $7.25 per hour since 2009, which is 29% lower in real terms compared to the wages of similar workers 50 years ago.
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