Trump’s proposal to exempt tips from taxes could cost $250 billion – Former President Donald Trump’s pledge to stop taxing tips would cost the federal government up to $250 billion over 10 years, according to a nonpartisan watchdog group.
The proposal – first made by Trump in Nevada just over a week ago – would increase the country’s red ink to between $150 billion and $250 billion and possibly much more if it resulted in a shift in overall compensation from wages according to tips. This is reported by the Committee for a Responsible Federal Budget (CRFB). analysis released on Sunday.
“The big picture is clearly that we have enormous budget problems for whoever the next president becomes, yet we appear to be seeing a number of proposals that would make the situation worse rather than better,” CRFB President Maya MacGuineas told CBS MoneyWatch. “Our politicians are using their political strategy, which is making the country so much weaker.”
Trump’s proposal, which does not address how it would be paid, is bad tax policy because it would create an incentive to push more revenue into tipping, MacGuineas added. “Turning our economy into a tipped economy is not desirable in the first place,” she said.
By making a pitch to win over voters in a state largely dependent on the hospitality industry, Trump told a rally on the Las Vegas Strip on June 9 that he would immediately eliminate tip taxes, “immediately the first in office, because it has been a point of contention for years and years and years.”
Changing the law would require approval from Congress, which has not previously taken action on it. But lawmakers will have a chance to rewrite the country’s tax laws in 2025, when Trump’s 2017 tax laws expire. Tips were not included in the original legislation.
The Internal Revenue Service legally requires employees who earn wages based on tips to report their income on their taxes, which are then taxed at the same rate as regular income.
“In practice, exempting tip income from tax would result in employees and employers reclassifying ordinary income as tip income wherever possible and could lead to a greater shift towards lower base wages and higher tip income, in broader sense,” the CRFB said.
Assuming a 10% shift in tipping revenue would increase costs to $275 billion, a doubling of tips, offset by lower wages, could push the price tag to $500 billion, the group predicted.
A Trump spokesperson did not respond to a request for comment.
Asked about the former president’s proposal as he briefed reporters on President Biden’s tax proposals last week, National Economic Adviser Lael Brainard declined to address the idea of specifically exempting tips from taxes.
“Our view is that the meaningful set of policy changes that would really improve the living standards of Nevada workers would be to raise the minimum wage” and eliminate the tipped minimum wage in Nevada, which would save workers there $6,000 a year , Brainard said.
The Biden administration is proposing that tax cuts for those earning $400,000 or more a year should expire as scheduled in 2025 but continue for households earning less.
The Trump campaign has also proposed extending personal and estate tax cuts passed in 2017, and the presumptive Republican presidential nominee recently floated the idea of cutting corporate taxes from 21% to 20%.
“The campaign season is still a silly season,” noted MacGuineas, who called on candidates to “make a pledge that they will not take out loans other than real emergencies” and focus instead on balancing the country’s budget deficit.
“Interest payments are the second largest item in the budget and the fastest growing,” she said.
