‘No tax on tips’ is a really bad idea. Though I have been meaning to write on this topic since it was first proposed by Donald Trump in June of 2024, time… The good news is, a group called the Economic Policy Institute (EPI) recently issued a report on this proposed policy that neatly organizes a lot of my argument. Nevertheless, I have additional vilification to pile on.

Before I get started, let me share that EPI’s angle on No Tax on Tips (NToT) is grounded in their vision of a just and equitable economy ‘where every job is good, every worker can join a union, and every family and community can thrive.’ My angle has no ideology other than pragmatism.

Also, let’s remove any further political inferences. Though ‘No Tax on Tips’ (NToT) was first proposed by Donald Trump in June of 2024, the idea was quickly adopted by his opponent in the presidential race, Kamala Harris. Frankly, I don’t know what’s worse: the idea itself or the embracing of it by his rival. At the time, all I could think of was how the movie title ‘Dumb or Dumber’ best described this pair on this topic. There was very little else that they did agree on.

What is the economic rationale for NToT? A: There is none. The reason Trump proposed it and Harris seconded it was simply due to pandering. Trump was in the battleground state of Nevada, which Biden had won in 2020, when he first shared the idea. Not incidentally, Nevada has the highest concentration of tipped workers in the country. Harris was boxed in: she needed the same hard-to-win votes and trying to explain ‘if we cut taxes for one group we need to raise taxes for another’ is a losing proposition. If you have to explain it…

The EPI report debunks any rationale for NToT from a leftist perspective, stating that it “would help few low-wage workers, while potentially undercutting pay for more.” Here I will do so from the pragmatic perspective. In July of 2024, the NToT Act was proposed in Congress by Ted Cruz in the Senate and Byron Donalds in the House. The bill exempts “cash tips”—cash, credit and debit card charges, and checks—from federal income tax by allowing taxpayers to claim a 100% deduction at filing for tipped wages.

Rep. Donalds said, “For far too long, Washington’s focus has been on how much of your paycheck politicians and unelected bureaucrats will take to fund their destructive agendas. Americans deserve to take home more of what they have earned, especially given the self-inflicted economic hardships created by the Biden administration. That is why Senator Cruz and I have introduced the ‘No Tax on Tips Act.’ Our bill allows taxpayers to claim a 100% deduction at filing for tipped wages. Policymakers must put the needs and financial interests of hardworking Americans first.”

According to the Yale Budget Lab “there were roughly 4 million workers in tipped occupations in 2023. That’s about 2 ½ percent of all employment.” What about the needs and financial interests of the other 97 ½% of hardworking Americans? We will have to make up the difference, so NToT might very well mean more taxes for you.

Other than the biased (EPI) or political (Cruz/Donalds) reasoning above, there is no fundamental basis whatsoever that taxes on tips should be treated any differently than other earned income. This lack of basic tax logic should be enough to kill the idea. Alas.

Where EPI and I do start to find some common ground, is in the belief that this proposal will vastly expand the use of tipped work. Potentially leading to consumers being asked to tip on virtually every purchase. As well-described by EPI:

“It’s easy to imagine businesses automatically adding “recommended gratuity” to invoices with the expectation that many consumers won’t be willing to speak up in protest. Do people really want to be asked to tip on their oil change? On their cable or broadband installation? On their dental cleaning? On their child care? There are virtually no guardrails, other than consumers’ tolerance, to prevent tip requests from showing up everywhere.”

Now we’re really starting to hit home, and all very familiar territory with the rise in tipping culture since the pandemic. In addition to the vast expansion of tipped work, the lack of transparent pricing that increased ‘tipping culture’ elicits would severely crimp the fluidity of our economy.

Worse, what I fear the most, and what other similar criticisms of this anticipated expansion fail to take to their logical conclusion, is that the risk of ‘tipping culture’ would inculcate the rise in ‘bribing culture.’ And the latter becoming part of the firmament of the U.S. In order to get anything done, bakshish would need to change hands, otherwise known as corruption. The risk of this becoming endemic in our country would bring the end of growth and exceptionalism.

The final argument against NToT is also neatly summed up by EPI: “Every new tax exemption creates new strategies for tax avoidance, particularly for higher earners with the means to pay for accountants and tax attorneys. It’s easy to imagine many highly paid professionals (e.g., lawyers, consultants, accountants, financial advisors, investment bankers, etc.) opting to have their clients denote a portion—maybe even all—of their fees as “tips” in order to avoid paying taxes on them.” In other words, instead of 97 ½% being affected by NToT, only 96 ½% would be. Whatever the actual percentages would be, this is a very bad idea, whose ultimate negative impact would affect everyone in the U.S.

“No tax on tips” will harm more workers than it helps – EPI’s report

The “No Tax on Tips Act”: Background on Tipped Workers – Yale Budget Lab