Three Tax Ideas
Congress is back in Washington this week, and they'll soon be starting to put some actual numbers in their aspirational budget. This is going to involve a whole lot of intraparty struggles for Republicans, as different factions draw red lines on different issues. They've set an optimistic timeline for finishing, but it remains to be seen whether Republicans will be able to agree on all of the details in time to meet that schedule.
There are a lot of moving parts to their plans, and we'll doubtlessly have a chance to examine them all as we progress, but here at the start of the process I'd like to address three of their tax proposals in a rather ideological way. Two of them actually sound like good ideas, which is rather surprising (for me), seeing as how they're coming from the Republican Party. I'm not going to get into the much larger issue of the GOP's overall tax-cutting strategy here (again, we'll have plenty of time to talk about that in the coming days), choosing instead to focus today just on three campaign promises made by Donald Trump.
All three are new ideas, and all three are ideological in nature. They're all fairly radical in terms of how Congress usually changes the tax system, because they won't merely change tax rates in some marginal way -- they'll change how people do their taxes as well. While campaigning, Trump promised to completely eliminate income taxes in three big areas: tips, Social Security payments, and overtime pay. These would be much more fundamental changes than just lowering tax rates because these three ways of making money would essentially no longer qualify as income.
Tips
This was the first of the three promises Trump made while campaigning. Kamala Harris immediately seconded the idea, meaning it could wind up being one of those rare things that actually does have some truly bipartisan support.
Tips are a royal pain, when it comes to income taxes. Ask any barista or waitress, they'll tell you. People in certain service industries can even be paid a lower minimum wage, since it is expected that a large portion of the money they make will come from tips.
To be fully compliant with the law, if you earn tips at your job, you are supposed to keep a ledger or spreadsheet where you log in every single day's tips, and then add it up at the end of the year and include it on your income taxes. This, obviously, is a huge chore. Eliminating income taxes on tips wouldn't just give servers a break financially, it would also be a whole lot less hassle.
What is a tip, at heart? It is money given in appreciation for some service another person has provided. There are a lot of different professions where tipping is a big factor (restaurant servers, bartenders, valet parking, limo/taxi driver, maids, delivery service, yard workers, doormen, babysitters, masseuses, ecdysiasts, etc., etc.), so this would mean a whole lot less paperwork for millions of people. But is a tip income? If I tip a waiter, am I that person's employer? No, not really. What a tip is, essentially, is a gift. If I appreciate a service done for me, then I give the person a little money in appreciation for that service. This is over and above the actual cost of the service itself, it is merely my way of telling them: "Good job! Thanks!" in a monetary way.
But small gifts are not supposed to be taxable income. Up to a certain level each year (currently $19,000 for this tax year), gifts are excluded from taxes. If a relative of yours sends you a check for $19,000 (or less), you won't have to pay any income taxes on it, for example. So why should tips be considered taxable income? They are nothing more than a series of gifts a person working certain jobs gets from the people they interact with. So why should they be taxed at all?
Ideologically, it thus makes perfect sense to eliminate income taxes on tips. More to the point, it makes a whole lot of political sense as well. By eliminating tips, you will not only boost the income of some of the hardest working Americans there are, you will also be eliminating a paperwork headache for them as well. It would be an enormous change for people who regularly get tipped.
It also would be the cheapest of the three ideas, costing (by one estimate) between $100 billion and $550 billion over the next 10 years.
Social Security payments
There's also a strong ideological argument to be made for making Social Security payments tax-free as well. After all, you receive this money from the government, so why should they want to claw some of it back at the end of the year? That doesn't make much sense.
Social Security payments go to everyone who worked and survived long enough to retire. For some people, Social Security payments are a small part of their income in their retirement because they have done well enough for themselves that it is merely icing on the cake of their other investments and retirement funds. But for millions of people, Social Security is all they've got -- it is their entire retirement income. Living on such a fixed income is tough, so having taxes taken out of it is more than just an annoyance, it eats into the money they need to survive. Having all Social Security payments be tax-free would be a welcome change for millions of seniors.
Politically, this seems to be a big winner as well. Especially since older Americans vote at much higher rates than the rest of the public. More people get Social Security than get tips, so this one would be more costly: $550 billion to $1.5 trillion, over 10 years. But it certainly seems like a worthwhile thing to do.
Of course, you could make the same ideological case (why tax money that comes from the government?) for unemployment payments, but that would be a lot harder to champion politically. Social Security is a much more neutral subject, obviously.
Overtime pay
This third idea, however, does not seem to have any strong ideological basis to it. Considering tips to be gifts and making Social Security tax-free both have a certain built-in logic, whereas making overtime pay tax-free just doesn't.
Workers already get a bonus for working overtime. Most earn 150 percent of their base pay ("time-and-a-half") for any overtime they put in. Why should it also be free of income taxes as well? It doesn't make a whole lot of sense, really.
Of course, people who regularly work overtime would likely disagree, I do realize that. But considered in a macroeconomic way, the result would tend to be the opposite of what politicians usually stand for. Think about it... if a business (or even a whole industry) had a whole bunch of workers who gladly put in extra hours on a regular basis, then what it would mean is that it would take fewer people to produce the same amount of work. If 100 workers all work 40-hour weeks, then the same exact amount of work could be achieved by hiring only 80 workers who all work 50-hour weeks. This would mean a net loss of 20 jobs. And what politician wants fewer people employed?
Plus, it would be an accounting nightmare. If any work you do above 40 hours a week isn't taxed at all, then it would make payroll a lot harder to figure, and it would likewise mean a headache at the end of the year, since your income would have to be reported in two chunks (taxable and nontaxable).
It would also cost more than the other two ideas -- $250 billion to $3 trillion dollars, over 10 years. And Congress is already going to have problems paying for all these tax changes (or adding them to the national debt), so this one seems the likeliest one for them to skip.
Conclusion
It is rather surprising that Republicans are even having these debates. These are all essentially populist ideas, which Republican politicians usually talk a lot about but never actually do. It wouldn't be hard to picture Bernie Sanders proposing these things, to put it another way.
Of course, these aren't the only Republican proposals on taxes, and the budget will contain more than just changing the tax code. So it's doubtful whether many Democrats will wind up supporting the whole package (which will assumably have plenty in it for Democrats to hate). But I have to say, two out of the three rather radical changes that Donald Trump has proposed for income taxes seem like ideas that any progressive could support. Again, on the campaign trail, Kamala Harris even expressed her support for some of these ideas, showing that this doesn't have to be a partisan issue.
Giving tipped workers and Social Security recipients a big break on their taxes both seem like good ideas. It'd mean less paperwork, less hassle, and a financial boost to people who could really use one. It'd probably be wildly popular with those directly affected. Making overtime pay tax-free, however, is a bridge too far for me personally -- especially since it is the most expensive of the three options.
-- Chris Weigant
Follow Chris on Twitter: @ChrisWeigant
I wonder what percentage of tipped workers actually owe any income tax. Not keeping track seems like the real upside to me, but if they really want to help those people, they should make it illegal to pay people $2 an hour. It's an outrage.
What is a tip, at heart? It is money given in appreciation for some service another person has provided.
Not to me. I give the tip unless the server does something egregious. I consider it a subsidy for people who should not have to work for $2 an hour.
It's money the employer should be paying. That's what a tip is.
Excellent post, and thanks for it. It got me thinking in ways I hadn't, about these proposals.
But for all the logic of your argument that tips are gifts not income, I tend to agree with John from Cens in [2] above.
No one is unaware that tipping is expected - almost compulsory - in the restaurant business. You HAVE to tip, or be yelled at (as I have witnessed, in NYC a number of years ago). Heck, in Europe the 'tip' is on your tab, already included as a 'service' surcharge on the cost of your meal.
For reasons of tradition and custom, as John from C. says, the customer is paying the server directly rather than through the employer/restauranteur. But it is most definitely 'income' from the server's point of view. It is the reason the server's wages are lower than standard - because the tip income is assumed to make the difference.
And so, yes, it's income, and it should be taxed.
Unless. Unless. Congress is willing to raise the minimum wage to a true living wage, even in metropolitan areas. And if, as well, Congress is willing to pass a law making a restaurant tip a completely optional charge that the customer is informed is entirely dependent on having received well-beyond-average superior service.
Not gonna happen. And until then, keep taxing tips - and make the restaurant owner responsible for tracking and recording the servers' tips for tax purposes. After all, the tips most often come as part of the credit card charge, which the owners have access to for informational purposes.
If a relative of yours sends you a check for $19,000 (or less), you won't have to pay any income taxes on it, for example.
If a relative (or not a relative) of yours sends you a check or gives you a large handful of Benjamins or transfers (who writes checks anymore?) cash to you for less or more than $19,000, it's still a gift that you don't have to pay income taxes on no matter how much it is. The $19,000 figure is how much a person may gift annually to another person (relative or not) without the necessity of the giver having to report it to the IRS on a Form 709 gift tax return. An individual may currently gift $13.99 million dollars in their lifetime without need of paying tax on those gifts; however, if Congress doesn't do something to keep that in place, it is going to sunset on December 31, 2025, wherein the annual gift tax exclusion for givers is going to drastically reduce.
By show of hands, who here believes Congress will allow the gift tax exclusion to shrink drastically? Rhetorical question. :)
They are nothing more than a series of gifts a person working certain jobs gets from the people they interact with. So why should they be taxed at all?
Why shouldn't an employee define themselves as a charity and have all "series of gifts" deemed tax deductible to the giver and receiver?
Thoughts to ponder. :)
There's also a strong ideological argument to be made for making Social Security payments tax-free as well.
Of course, it's not a new idea at all because Social Security payments were already tax-free until Ronald Reagan signed into law legislation in 1983 that drastically reduced the taxes of the very rich by shifting the tax burden onto the backs of middle class and retired taxpayers beginning in 1984.
middle class and retiredpoor and middle class After all, you receive this money from the government, so why should they want to claw some of it back at the end of the year? That doesn't make much sense.
Posted prematurely! How the heck did that happen!?
Last paragraph should read:
After all, you receive this money from the government, so why should they want to claw some of it back at the end of the year? That doesn't make much sense.
It makes sense when you consider why Social Security became taxable in 1984: In order to shift the tax burden away from wealthy taxpayers, somebody had to make up the difference. Whenever taxes are reduced from the rich, they are generally at the expense of the poor and middle class.
For instance, Donald Trump wants to replace income taxes altogether via tariffs that are a regressive tax on taxpayers... the largest tax hike on Americans in history.
Last paragraph should r