No. of Recommendations: 13
Or the "no tax on tips." Which is also a proposal that economists have slagged as being a poor choice based on policy. It "buys" you the voters you're trying to land, concentrating a benefit on them that has to be made up from other taxpayers, so it has economic benefits - but it makes little sense as an economic policy.
Agreed. It not only makes zero sense from an economic sense, it is very corrosive to the larger ecosystem around taxation. The whole point of taxes is that there are certain activities (police, courts, schools...) required for EVERYONE'S benefit that require funding to which all those benefiting have some conceptual obligation to contribute. Alternatively, there are some functions required in a civil society that will NOT be produced with sufficient quantity or quality via private enterprise and market incentives which also require funding to which all those benefiting have a conceptual obligation to contribute.
The idea of declaring that tip income should not be taxed seems both offensive and stupid. Offensive because such proposals are really saying "We know making $3.50/hour PLUS tips isn't enough for even one to eat off of, much less raise a family but instead of devising a way so that you earn an ACTUAL living wage, we're going to toss a fake benefit and let you not pay taxes on tips. You're still gonna starve and eat dog food three days a week but we'll all feel better about ourselves by saying you aren't paying any taxes on tips."
Here's what this scheme really means to the individual.
a) Make $3.50/hour in "wages" and collect $16/hour in taxable tips and net $ 19.50/hour or $39,000/year gross. At tax time, get a $14,600 deduction, leaving $24,400 in taxable income and pay 10% on the first $11,600 ($1160) and 12% on the rest ($12,800 x 0.12 = $1536) or a total of $2696 in taxes, leaving you with $36,304 to live on.
b) Make $3.50/hour in "wages", still collect $16/hour in tips and net $ 19.50/hour or $39,000/year gross. But at tax time, only $3.50 x 50 weeks x 40 hours or $7000 is taxable, that amount doesn't even exhaust the standard deductible and you wind up with zero taxable income.
In reality, in either of these scenarios, total income is WAY below the max threshold of eligibility of $63,698 for the Earned Income Tax Credit so no income taxes are being paid anyway and the EITC is likely putting an additional $2100-$2400 in the worker's pocket each year. Why not adjust the formula for that program to yield the desired incremental benefit rather than ELIMINATING taxes on an entire category of income and risk unanticipated after-effects?
The real picture here is that from an order of magnitude standpoint, the dollar value of the benefit being provided is quite small (though still material to those at this income level). On the other hand, implementing a new rule that EXCLUDES "tips" from any federal income tax seems to be waving a stadium sized red flag in front of the bull that is corporate America to trigger a mad dash to devise ways for CORPORATIONS to exploit such a rule. Maybe companies will figure out a way to claim bonuses paid to executives are "tips". Maybe companies will try to figure out a way to reclassify divident payments as tips so rich investors already only paying 15% income tax on dividends won't pay any tax. And certainly, a waiter working a restaurant serving $120 steaks to execs traveling on "bidness" is making enough that paying $0 on tips when they might be clearing $600 per shift isn't the best use of a tax break.
More importantly, any plan to eliminate taxes on tips further increases the perception of inequality in the tax system, seeminly pitting one category of worker against another based on how their income reaches their wallet. Is a waiter more deserving of a lower tax rate than a roofer? We don't need MORE discrimination in the tax system, we need LESS, ESPECIALLY at TOP tax brackets.
WTH
