"No Tax on Tips" Is NOT Good, Actually
2024 08 17
Both ex-President Trump and VP Harris have proposed exempting tipped income from federal income tax. Jonathan Last writing in Bulwark
thinks that the change of tipped income from implicitly untaxed to actually taxed, (as tips changed from cash let on the table to amounts on a credit card) reduced tipped employees’ income in the same way that a new explicit tax on tipped income would AND that change reduced tipped employee income by the amount of the new “tax” AND that was undesirable, presumably because tipped income employees generally have low incomes.
I think this analysis ignores that all the participants in this process are aware of the change from untaxed to taxed tip income and (presumably) have adapted to it.
Employees decided to work for tipped wages or untipped wages on the basis of the after-tax income.
The willingness of workers to work for tipped wages influences how much employers have to offer in wages.
The total cost of restaurant meals including tips influences customers demand for restaurant services.
The fact that part of the cost is variable according to the service received on a particular occasion also influences customer demand.
And total demand for restaurant meals will affect owners’ profits.
And incomes of suppliers of inputs into the restaurant activity.
Removing the tax on tipped income in an attempt to re-establishe the pre-credit card status quo will, to some extent, benefit every participant in the tipped meal preparation-service-consumption market. But who will benefit the most depends on the elasticities of supply and demand across all of the margins discussed. In this sort of analysis, it is often found that the participant with the lowest elasticity of supply benefit the most. That is not necessarily employees currently working for tipped wages and could well be landlords if land use regulation and building codes do not make it easy to convert real estate from one use to another.
What is not in doubt is that this segment of restaurant activity will benefit in relation to other activities. Frankly, I can see no reason to favor this over other activities.
Even as a measure to favor employees working for tipped wages, supposing we thought they would be the main beneficiaries, why favor these employees over others? Why not just raise the zero-rate income tax bracket to favor all low-income wage earners equally?
Personally, I favor tax reform that collects more revenue, enough more that, together with expenditure reforms, deficits do not exceed the sum of expenditures with NPV > 0 but is also more progressive, collecting more than at present from high-income people than from those with low income. A higher zero bracket could be part of that reform.
[Standard bleg: Although my style is know-it-all-ism, I do sometime entertain the thought that, here and there, I might be mistaken on some minor detail. I would welcome comments on these views.]
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