In the three weeks (yes, it has only been that long) since she became a candidate for the White House, Kamala Harris’ campaign has proven remarkably skilled and successful. Which is why it was strange to see Harris make what might have been the first major mistake of her campaign: Adopting one of Donald Trump’s new policy positions, ending federal taxation of income from tips.
Like many tax proposals, ending taxation on tips has an intuitive appeal — until you consider its true implications. So the Harris campaign made a misstep in two ways: Appearing to parrot Trump, and doing so in the service of a bad idea.
Like many tax proposals, ending taxation on tips has an intuitive appeal — until you consider its true implications.
The proposal has all the earmarks of something Trump heard somewhere, tested out before a crowd, and when it got a round of applause, decided it would become an official position of his candidacy. It’s unlikely he put more than a few moments of thought into it, let alone considered all the pros and cons. But there is a version of it in Congress, proposed by Sen. Ted Cruz of Texas. One of its biggest problems is that it doesn’t contain safeguards preventing the wealthy from shifting their income into something they’ll call “tips,” thereby enabling them to avoid paying taxes.
The Harris campaign says her proposal — which, like Trump’s, hasn’t yet been laid out in detail — “comes with an income limit and with strict requirements to prevent hedge fund managers and lawyers from structuring their compensation in ways to try to take advantage of the policy.” It would apply only to service workers in industries such as retail and hotels. Which is why both candidates have promoted the idea in Nevada, a swing state where a large number of workers are employed in the hospitality industry.
Nevertheless, Trump’s promise didn’t exactly transform the race; the powerful Culinary Workers Union in Nevada, which along with its parent union UNITE HERE has endorsed Harris, wasn’t impressed by his proposal. “Nevada workers are smart enough to know the difference between real solutions and wild campaign promises from a convicted felon,” one top official said.
As tax proposals go, this one is limited in its effects: An analysis by the Budget Lab at Yale shows that of the approximately 4 million Americans who rely on tips, more than a third already make too little to owe any federal income taxes.
But if Harris really wants to start a salutary discussion about tipping, she could propose eliminating the practice entirely, or at least scaling it back.
We’ve all noticed how tipping has spread like wildfire; it seems like almost every purchase you make is now accompanied by a request for a tip, even when you received nothing resembling “service” at all. More importantly, tipping is a practice that has deeply racist roots; as an Economic Policy Institute report notes, “Following the Civil War and the abolition of slavery, formerly enslaved Black workers were often relegated to service jobs (e.g., food service workers and railroad porters). However, instead of paying Black workers any wage at all, employers suggested that guests offer Black workers a small tip for their services.”
Today, while the minimum wage hasn’t been raised from $7.25 an hour in 15 years, employers are allowed to pay tipped workers a minimum of just $2.13 — and that latter figure has remained the same for 33 years. The law says that if their tips don’t bring their total income up to $7.25, then employers are supposed to pay them the difference, but they don’t always do so, one of many forms wage theft takes.
That’s just one kind of exploitation tipped workers are subjected to; millions of female servers have to grin and bear constant sexual harassment from customers, because their income is dependent on not angering the guy who just made an offensive remark or put his hands on their body. One survey found 70% of female servers saying they had experienced sexual harassment.
Employers are allowed to pay tipped workers a minimum of just $2.13 — and that latter figure has remained the same for 33 years.
But if tipping is going to be with us at least for now, wouldn’t exempting tips from taxes still give a hand to low-wage workers? Perhaps some, but it would come with unintended consequences. For instance, lower income subjected to taxes today would mean lower benefits for those workers when they retire. As Berkeley economist Sylvia Allegretto notes, “Tips that are not taxed will not be credited towards the time and amount that workers are putting towards their Social Security.” So they would end up gaining very little if anything out of the deal. Lowering taxed income would also reduce the amount some workers would receive through the Earned Income Tax Credit.
There’s also a fundamental principle guiding proposals like this one that progressives should push against at every opportunity: that some kinds of income deserve to be treated better by the tax system than other kinds. Why should a person earning $25,000 a year in tips waiting tables at a diner not pay taxes, while a person earning the same $25,000 at a fast-food restaurant next door should?
“As a general rule, you want to treat all income the same,” says Dean Baker of the Center for Economic and Policy Research. “You don’t want to give people an incentive to game the tax code. This is one reason (in addition to giving a lot of money to rich people) that most on the left hate the carried interest deduction. We allow some of the richest people in the country to have much or most of their wage income to be taxed at the capital gains rate.” Just as we shouldn’t tax investment income at a lower rate than the income people get from working, it violates progressives’ belief in equality to say certain kinds of work should be exempt from taxes while other kinds shouldn’t.
Vice President Harris will be releasing her economic plan soon, and we should hope that it contains proposals that will make a difference to more Americans. Those could include increasing both the minimum wage and the tipped minimum wage (or better yet, eliminating the distinction entirely), restoring the increased Child Tax Credit that was in place during the pandemic, and strengthening the ability of workers to form unions. All that would be much more meaningful than a proposal that amounts to little more than a gimmick. After all, if Trump thinks it’s a good idea, we should all be suspicious.