Trump and Harris Propose Tax-Free Tips, Experts Warn of Complications

In a rare moment of policy alignment, former President Donald Trump and Vice President Kamala Harris have both proposed eliminating federal taxes on workers' tips. However, experts caution that this seemingly straightforward idea could lead to significant complications and unintended consequences.

James Hines Jr., a professor at the University of Michigan's Ross School of Business, warns that implementing such a policy would be complex and costly. He states, "There's no way that it wouldn't be a mess." The proposal could potentially encourage higher-paid workers to restructure their compensation, classifying portions as "tips" to avoid taxation.

Both candidates unveiled their plans in Nevada, a state with a high concentration of tipped service workers. Trump announced his proposal on June 9, 2024, while Harris followed with a similar announcement on August 10, 2024. However, details from both camps remain sparse, leaving many questions unanswered.

The Harris campaign has indicated they would work with Congress to draft a proposal including income limits and provisions to prevent abuse by wealthy individuals. However, experts like Hines suggest that even with such safeguards, millions of workers might seek to reclassify their compensation to include tips.

"The Internal Revenue Service has a precise definition for tips and reclassifying wages would be considered fraud."

Despite the proposal's aim to help low-wage workers, many experts argue it would provide limited benefits. The Budget Lab at Yale estimates that in 2023, there were 4 million U.S. workers in tipped occupations, representing about 2.5% of all employees. These workers tend to be younger, with a median weekly pay of $538, compared to $1,000 for non-tipped workers.

Importantly, many tipped workers already have a lower income tax burden. In 2022, 37% of tipped workers had incomes low enough that they paid no federal income tax at all. Experts suggest alternative methods to support low-income taxpayers, such as expanding the Earned Income Tax Credit or adjusting tax rates and deductions.

The proposal could also have significant financial implications. The Committee for a Responsible Federal Budget estimates that exempting all tip income from federal income and payroll taxes could reduce revenue by $150 billion to $250 billion between 2026 and 2035.

As the 2025 expiration of Trump-era tax cuts approaches, tax policy will be a key focus for Congress. However, implementing such a complex change to the tax code may face significant legislative hurdles.

It's worth noting that the U.S. tax system has a long and complex history. The current tax code is over 74,000 pages long and has been amended more than 5,900 times since 1986. The IRS processes over 240 million tax returns annually, highlighting the scale of any potential changes to the system.

While the proposal to eliminate taxes on tips may seem appealing on the surface, the potential complications and limited benefits for low-income workers suggest that alternative approaches to tax reform may be more effective in addressing income inequality and supporting working Americans.