So, how's this No Tax On Tips thing gonna go?

0:01NPR

0:11We've heard a lot over the last several weeks about getting rid of taxes on tips, notably from Donald Trump. It's called no tax on tips. No tax on tips. And then Kamala Harris in her Nevada speech about a week and a half ago. And eliminate taxes on tips for service and hospitality workers. But you know who doesn't agree with this policy? Economists. Yes, economists and tax experts like Howard Gleckman. It's a terrible idea. Howard is a senior fellow at the Urban Brookings Tax Policy Center. And Waylon, shall we just go through some of the reasons why most economists hate this idea? Yes, let us count the ways.

0:52All right. Unfairness, for one thing. Like, why should a waiter get part of their income tax-free, but the dishwasher in the back doesn't? Nor does, say, a cashier at Target. Also, more than one in three tipped workers already don't pay federal income taxes. They don't earn enough. People could also game the system. What's stopping a corporate lawyer from taking their fees as a gratuity? Yeah, maybe a tip jar when you go in for your merger or acquisition. It might be a pretty big jar. It's not like a take a penny, leave a penny situation. You know, that is a big one. So given the concern of people redefining their income as tips, how could this policy be written in a way that minimizes the fallout?

1:37This is The Indicator from Planet Money. I'm Darian Woods. And I'm Waylon Wong. Today on the show, how to put in place guardrails for a policy that many economists believe is likely to go off the rails.

2:11it yourself. Just go to linkedin.com slash NPR pod. That's linkedin.com slash NPR pod. Terms and conditions apply only on LinkedIn ads. Support for NPR and the following message come from Edward Jones. What does it mean to live a rich life? It means brave first leaps, tearful goodbyes, and everything in between. With over a hundred years of experience navigating the ups and downs of the market and of life, your Edward Jones financial advisor will be there to help you move ahead with confidence. Because with all you've done to find your rich, they'll do all they can to help you keep enjoying it.

2:51Edward Jones, member SIPC. This message comes from NPR sponsor Veeam. AI promised intelligence, but it also exposed everything people couldn't see, like scattered data and hidden risks. Now there's a new way forward where protection, governance, and AI trust move together. With Veeam plus Security AI, you can see your entire data estate in real time because when resilience, security, governance, and AI trust come together, innovation moves safely and faster. Learn more about accelerating safe AI at scale at Veeam.com. Shannon Lee is an esthetician you know, skincare, beauty treatments and she says she got into it because of her own acne and she says when her customers come in with it it is quite satisfying to treat I think acne is like my favourite thing ever You love acne?

3:47I love acne I bet Shannon and I both enjoy watching pimple popping content on social media Sorry, Darius No comment Look, I'm not going to yuck your yum, as they say. It's very compelling. It's incredibly disgusting. I can't look at it. Now, Shannon has her own business in New York, and we spoke there with a treatment table between us. Shannon says the mid-range for estheticians in New York is about$22 an hour, plus commissions and tips. Her employees earn about a third of their income through tips. We're talking$30 an hour or even more. Shannon gets tips too, so this proposal to make those tips tax-free sounds almost too good to be true.

4:33If you were to not have to pay taxes on those tips, would that be a good thing for you? Am I allowed to say yes? You're allowed to. Absolutely, this would help out. Shannon thinks other workers and business owners might be tempted to change their fee schedules so that more income comes in as tips. I think it will change the people's perspective on how they structure everything. That is one of the big concerns from the tax experts, like Howard Gleckman from the Urban Brookings Tax Policy Center. When you tax income in different ways, people are going to work very hard to characterize their income in the lower tax form.

5:10Howard points to plenty of historical examples where a regulation or lower taxes for some types of income have meant that people changed how they get compensated. We all now take employer-sponsored health insurance for granted. Everybody, you have a job, you expect to get health insurance through your job. That didn't exist before World War II. Yeah, the Stabilization Act of 1942 froze wages and benefits. It was part of a wartime effort to control inflation. But it had a big exception. Pension plans and insurance could grow. So they did. It led to these big, all-encompassing health insurance plans being a very normal part of American compensation in a job.

5:51This very American healthcare system is a historical accident fueled in part by people seeing loopholes and using them. Another example that really highlights what happens when you tax two different forms of compensation differently is something big-shot financial people know really well. Hedge fund managers, private equity partners, they have learned that getting paid a salary doesn't work out the best for them tax-wise. If you're somebody, particularly somebody who's making a lot of money, and you can turn your income into capital gains, you're going to be paying a maximum rate of 20%. If it's ordinary income or wage income, you're going to be paying a 37%.

6:27So there's a big incentive to change the way your income is categorized. Some call this the carried interest loophole. It's when in lieu of some salary, these finance people get a share of the profits from the deals the company's worked on. That's then taxed at that lower capital gains rate, as it's considered a profit on selling an asset. The end result of all these loopholes and carve-outs means that the tax code can be gamed. Laws intended to benefit one group might actually benefit another. And the government finds it harder to raise revenue. So he posed the challenge to Howard. If the elimination of taxes on tips had to be made, how could the unintended consequences be minimized?

7:10What kind of guardrails could be put in place to reduce gaming of the system? Like that hypothetical corporate lawyer with a tip jar. So this starts getting really complicated. I mean, you certainly could put in income limits. Capping the income at which you can get tax-free tips is something that Kamala Harris said she would do. So that would stop those wealthy white-collar workers from claiming their income as tips. Donald Trump's proposal doesn't have that detail. You certainly could try to define those occupations that are eligible for the tax-exempt tips and those that aren't. Again, this is something that Harris has included in her proposal, to only allow this for hospitality and service workers.

7:51Trump, again, hasn't specified this. That said, Howard is skeptical that this would solve the problem. He says that people like freelancers can redefine what industry they're in. They will gain the system. They'll change the nature of their work just enough so it fits a definition and allows them to get the income. Howard says this behavior could even boil over into outright fraud. And the root of this, he says, comes down to a broader problem with the IRS. You can put down anything. The IRS doesn't have the resources to audit you to determine what your occupation really is. So it sounds like boosting IRS resources might be part of your big policy proposal.

8:31Oh, I'm a fan. I think it's a great idea. Ultimately, though, Howard was just kind of playing along with us. The bottom line really is, you know, it's unworkable. You can't. I mean, I'm not going to sit here and try to fix something that shouldn't happen and shouldn't actually be fixed. Well, I appreciate you being game at least enough to think about the hypothetical. Yeah, I try, but I'm not going to help them out on this. They're making this mess. They've got to get out of it themselves. world. What Howard thinks would really support tipped workers would be an increase in the federal tipped minimum wage, which is currently at$2.13 an hour.

9:06Yeah, that surprises a lot of people. I mean, this varies state by state, of course, but for some states, that is the minimum wage for tipped workers. Yeah, I mean,$2.13, that's like barely going to buy you a fountain drink at the restaurant you're working at, you know? Yeah, and so Howard hopes that maybe bringing up that tipped minimum wage could push back against this entire system of compensating people through the whims of their customers. When you go to Europe and there's less pressure to tip, how do you feel? I feel great. I actually, I'm one of those people who really does resist the whole tipping culture.

9:41Yeah, I bet Howard hates those pop-up screens that are everywhere asking for tips left and right. Yes. And Kamala Harris's proposal is paired with an increase in the minimum wage, but it's unclear yet whether that's an increase in the tipped minimum wage. Trump hasn't advocated for an increase in the minimum wage. And so just stepping back, do we think that removing taxes on tips is actually likely to happen? You know, it's a bipartisan issue. Politicians on both sides of the aisle support it. You've got Republican Senator Ted Cruz who introduced a bill, the No Tax on Tips Act, earlier this summer.

10:16Democratic Representative Stephen Horsford said last week he's going to introduce another bill. This one's going to be called the Tipped Income Protection and Support Act. So there's a real possibility it might happen. This might also have something to do with Nevada being a battleground state. It's a big state for tipped workers. You've got one in five workers there working in leisure and hospitality. Oh, wow. Yeah. So no doubt. It may not please the Howard Gleckmans of this world, but it's good politics. This episode was produced by Angel Carreras with engineering by James Willits. It was fact-checked by Sierra Juarez.

10:50Kate McCannan edits the show and The Indicator is a production of NPR.

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