Making Tips Tax Free Would Be A Solid First Step In Stopping The Feds From Robbing Us Blind

Former President Donald Trump’s announcement that he wants to end taxes on tip income for workers in most service industries has been met with thunderous applause by groups of workers who are desperate for tax relief in this economy.

The last three and a half years have devastated the American middle class and low-wage workers. To finance trillion-dollar-plus deficits year after year, the federal government has used the hidden tax of inflation to destroy American’s purchasing power and transfer that lost wealth to the Treasury.

We seldom think of inflation as a tax, but that is precisely what it is. There is no better definition of a tax than something that transfers wealth from the people to the government — a perfect description of how inflation operates.

Instead of Congress raising everyone’s income taxes, they relied on the Federal Reserve to do the dirty work for them: secretly, silently, subtly robbing everyone blind via inflation.

For a perspective on how bad this hidden tax has become, consider that the average American worker’s hourly pay has increased by $4.98 since January 2021, but that larger hourly pay buys 67 cents less. The difference between the nominal and inflation-adjusted change is $5.65, or the hourly loss from inflation, and it exceeds the average worker’s hourly loss to federal income taxes.

Low-and-middle-income workers have been hit the hardest by inflation. Their incomes tend to adjust slower to changes in other prices throughout the economy, and they tend to have less savings than their high-income counterparts. That means little to no cushion in their monthly budgets to absorb any increase in the cost of living.

The result has been a depletion of savings, concentrated among those with less income, and an accumulation of debt, including over $1.1 trillion in outstanding credit card balances.

Making tip income tax-free would provide much needed relief to low- and middle-income folks, from those working at restaurants and hotels, to those who work as housekeepers or provide driving services.

Aside from ameliorating family finances amid a cost-of-living crisis, eliminating taxes on tips would also encourage industriousness and merit.

Generally, tips depend highly on the quality of service a worker provides. Customers tend to respond to better service with larger tips. By allowing a worker to keep all the tips that he or she earned, there is a greater incentive to be productive and attend to customers’ needs.

That’s a win-win for everyone involved.

Currently, the taxation of tips relies on a hodgepodge of employees reporting their own tips and the Internal Revenue Service monitoring employers’ point-of-sale systems. It is not particularly efficient.

Ending income taxes on tips would be as simple as canceling these reporting standards and protocols.

To prevent high-income service jobs from abusing this category of tax-exempt tip income, the exemption can simply be applied to incomes below some specified cap — perhaps the average hourly wage. In other words, anyone with income below that dollar amount would owe no taxes on tips.

That precludes a very high-income earner in a service role (perhaps a Wall Street broker) from charging customers relatively little with an “understanding” that the customers will “tip” quite heavily. Trump has made it clear that he wants to provide targeted relief and not a loophole for the wealthy.

Theoretically, his proposal could get support from both the political left and the right because while it is a tax reduction, it’s targeted at low- and middle-income folks and would make the tax code more progressive.

Regardless of who supports this new idea, it is an example of original thinking — something desperately needed at a time when the status quo has horribly failed the American middle class.

E.J. Antoni, Ph.D., is an economist. His views expressed here are personal and do not reflect the institutional positions of his employers.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.