If voters re-elect him, former President Donald Trump has pledged to prevent the IRS from taking money from workers’ tip jars to fund government spending.
However, he has not yet outlined any specific spending cuts that would offset the decrease in federal revenues. Without this, the proposal is essentially a promise to increase the federal budget deficit—or simply campaign rhetoric.
Trump initially mentioned this idea during a campaign rally in Las Vegas. He stated, “This is the first time I’ve said this, and for those who work at hotels and people that get tips, you’re gonna be very happy. When I get to office we are going to not charge taxes on tips, on people making tips.” The announcement was well-received by the audience, as taxes are generally unpopular. While Trump may not be an expert on policymaking, he understands the appeal of reducing taxes, especially to a crowd likely comprised of working-class individuals who rely heavily on tips for income.
Even if this proposal is viewed as mere pandering, it should be taken seriously. This campaign has lacked substantive policy discussions, and Trump could potentially implement this plan in the future.
Removing the requirement for workers to pay income tax on tips would mean that approximately 6.1 million Americans could retain around $38 billion in income that would have otherwise been taxed. While this may sound beneficial, it could also lead to an increase in reported tip income. Anytime the government favors certain economic activities with tax breaks, there tends to be a rise in that activity. This could result in changes to how workers are compensated.
From a fiscal policy perspective, Trump’s plan would reduce federal revenue by $38 billion annually, potentially more. While empowering workers to decide how to spend their money is positive, without corresponding spending cuts, it would simply lead to increased borrowing. This is concerning given the country’s current trajectory of running significant deficits each year.
Implementing Trump’s plan would require congressional approval and could pose challenges in enforcement. As such, it would likely be part of a broader tax package considered by Congress in the future.
While the idea of eliminating taxes on tips may benefit many Americans, it could also have drawbacks. Ideally, the tax code should impose minimal burdens and distribute them fairly. Trump’s proposal could create unequal advantages for certain workers, undermining fairness in taxation.
Politicians should avoid promising tax cuts for specific groups, focusing instead on achieving a balanced budget, simplifying the tax code, and reducing the overall tax burden on all Americans, regardless of income source.
