Is tips exemption from income taxes a possibility in the US?

Former President Donald Trump, if re-elected, has promised that no taxes could be charged on tips, as reported by Reason on June 6, 2024. 

The idea was introduced by Trump during a campaign rally in Las Vegas, pledging to halt the IRS from tapping into workers’ tip earnings to finance government expenses and claiming it as a novel proposition that would benefit workers in the hospitality sector.

While the notion resonated with the crowd, the practical implications and potential ramifications of tips tax exemption merit careful examination.

Specific spending reductions have not been outlined to counterbalance the loss of federal revenue from this move. Consequently, without such measures, this proposal could either escalate the federal budget deficit or simply amount to campaign rhetoric.

Despite this, the idea warrants serious consideration given the likelihood that Trump could implement this vision in slightly over seven months, if re-elected.

Potential Impact:

• On the face of it, exempting tip earnings from income tax would mean about 6.1 million Americans retaining roughly $38 billion annually that would have otherwise been taxed. 
• Nevertheless, this could lead to an increase in reported tip income, potentially altering compensation practices.
• From a fiscal perspective, this plan would reduce federal revenue (by $38 billion or more) without corresponding spending cuts, possibly exacerbating borrowing. 
• This is especially concerning given the existing substantial deficits and the projected annual deficits of over $1.5 trillion for the next decade.

Concerns: 

• While Trump’s campaign advocates for more direct control over federal spending, specifics on proposed cuts remain elusive.
• There also is the matter of whether Trump could implement the tips tax exemption immediately upon taking office, which does not seem to be feasible.
• Implementing this proposal would necessitate congressional approval and could pose logistical challenges for enforcement. In reality, this would need to be part of the tax package that Congress approves next year, as lawmakers will have to address the expiration of the 2017 tax cuts.
• Moreover, it could create disparities among different worker groups, favoring some over others.
• Ultimately, there is a general sentiment that politicians should avoid pledging tax cuts for specific demographics or interests. 
• A preferable suggested approach involves maintaining a balanced budget, simplifying the tax code, and reducing government intervention in citizens’ earnings, regardless of their source.

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