The unintended consequences of Trump’s ‘No Tax on Tips’ plan 

No matter what you thought about President Biden’s fitness to serve another term, we’re past that. Now we can focus on what the frontrunner candidates for 2024 actually want to do. 

This is, sadly, not always easy.  

Policy questions are complicated. It’s hard for regular voters — people with, you know, jobs, bills and maybe kids — to figure out what will be best. And because the candidates want to win, they don’t want to tell people about tradeoffs of their policy pitches. They don’t want you to know that if the government does more of one thing, by necessity it must do less of something else. 

So, let me suggest that you consider one small change in the tax code that may be up for grabs.

It’s nothing big and complex like abolishing the income tax in favor of a consumption tax (a terrific idea that will never happen). But it is something Donald Trump floated in detail in his RNC convention acceptance speech last month — and something Vice President Kamala Harris will have to address: “No Tax on Tips.”  

The plan is exactly what it sounds like. Well, sort of; former President Trump wasn’t clear on whether he meant that tips would be exempt only from income tax or whether he meant to include Social Security taxes, too.  

If it’s just income tax, it's not worth thinking about, since most service workers pay little or no income taxes (people making less than $50,000 per year pay less than 2.5 percent of all income taxes paid). Social security taxes, however, are a very big deal. Even the lowest paid workers fork over 12.4 percent of every dollar earned (and, yes, you need to count the employer contribution). 

But even if No Tax on Tips doesn’t add up to real money, it’s a good way for voters to think through what they want tax policy to accomplish.  

You don’t need an economist or a politician to tell you that if you cut taxes on something, you’ll get more of whatever that something might be. If, for example, you cut taxes on corporate investment, you get more corporate investment. That’s just common sense. 

You don't need an economist to answer the next question either: how much? If you cut corporate taxes, just exactly how much investment could you expect — and how much tax revenue will you lose? What government services will disappear down the line? 

You really do need a politician to answer the hardest question of all: is it worth it?  

Is there ever such a thing as a “free” tax cut — a cut that gets you more of that something you want without sacrificing revenue? Maybe there are unicorns. But every tax cut proposed in the real world involves tradeoffs. Irresponsible politicians may try to tell you otherwise (and a few irresponsible economists will produce bogus studies claiming they’re right) but good politicians are needed to negotiate those tradeoffs. 

So, to state the obvious, if we cut taxes on tips, we will get more tips. Both service workers and their employers will try and do everything possible to move compensation away from taxable wages and into untaxable tips. That could mean more aggressive soliciting of tips — the tip options on the card reader at the coffee shop might start at 30 percent. It could mean more people will ask for tips — if you tip the person who pours your coffee at Starbucks, why not tip the person who fills up your oil at the Quick Change place? It could mean the dreaded “service charge” will show up on every restaurant tab. 

Are you good with that? Most people are not. Surveys indicate that tipping creates anxiety. People don’t know how much to tip and don’t know where it goes. You’ve been at the counter when getting ready to pay with your card and the employee asks: “Answer a question?” Which, translated, means “are you going to tip me for handing over your order?” 

Service workers aren’t big fans, either. Sure, they’d like to make more money, but they’d also like a predictable income. The tips some days are bigger than other days. Tips also create a nasty tension between the workers like waitstaff and bartenders who receive the tip and workers like food runners and hostesses who aren’t in front of the customer at the moment of tipping truth. They deserve a share, too. 

It's been a very long time since either presidential candidate lived the kind of life you and I live. They fly in big private jets surrounded by an entourage. They have staff to leave the tip. That’s fine, we shouldn’t expect otherwise. But we should expect our leaders to understand the life most of us live and how their policies will matter to us. No Tax on Tips gives us a clue. 

Michael Davis is an economics professor at the Cox School of Business, SMU Dallas.