This summer, former President Donald Trump said he supports getting rid of taxes on the tips that workers earn. Trump made his announcement in June in Nevada, which has the highest concentration of tipped workers in the country.
Shortly after that, Vice President Kamala Harris said she, too, wants to eliminate taxes on tips.
While neither candidate has put forward detailed plans on provisions like how they would do that and who exactly would be eligible, having both major party candidates support the idea has led to a lot of conversation about it.
Adam Chodorow is not in favor of the plan. Chodorow is a professor of law at Arizona State University's Sandra Day O’Connor College of Law.
Conversations highlights
Why don't you think this is a good idea?
ADAM CHODOROW: Yeah, it's ... bad both from a theory perspective and from a policy perspective. So let me start with the theory, right. The income tax should be imposed on all income, which includes wages. And salary and tips are a form of wages and salary. So it doesn't make sort of theoretical sense to say, OK, we're gonna tax you on, on the part you get from your employer, but the part that your employer essentially doesn't pay, but it comes from the customers — that's income, but we're not gonna tax that. So that's the theoretical problem with the idea.
The policy problem is that it creates huge inefficiency and distorts the economy and will lead to sort of dynamic changes in game playing that you can try to stop, but then that's going to significantly complicate the code.
So you're incentivizing people to not take jobs that don't involve tips because your entire income would be taxed, as opposed to a job where part of your income would be taxed, but another part would not be
CHODOROW: Right. So, so the example you might use is, is somebody's trying to think about, should I become a bartender or should I become a public school teacher? And let's just pretend for, for theory's sake that, that they both make $40,000 a year. But the bartender gets $10,000 in tips and the teacher doesn't. So if you're thinking about it from an economic perspective, you would much rather be a bartender than a teacher. We've created an incentive for people to pick bartending over teaching. And that's not to say that bartending isn't a noble thing and we don't need — we need bartenders and, and there's nothing like a well made cocktail. let me tell you. But, but we don't want the tax system to, to force people one direction or the other. Right? The whole idea — and it's actually a Republican idea — is that the market should determine what people do and, and let them follow their preferences. But if you tip the scale one way or the other through the tax system, you're gonna get people going one way or the other, even if they'd rather go the other way.
That seems like a very theoretical argument. But like in the real world, we know, for example, a college professor and a bartender probably don't make the same amount of money. So, are you really disincentivizing somebody, let's say, from going to get an MBA to be an executive at a company versus somebody who's going to work in a more service-oriented job? Or are you just concerned about the types of jobs where the salaries are closer to what a tipped worker might earn?
CHODOROW: Right, I mean, it depends on what you're motivated by. But if you're motivated by, you know, what's my after tax return, right? How much do I get to keep when the day is done? Somebody who's gonna go into business or ... earn $100,000 a year probably isn't gonna say: "Yes, but some portion of my much lower bartender income is tax free." We're not gonna lose people to bartending from high-income jobs. But anybody who's earning about the same amount, if, if they're acting rationally and economically rationally, is going to pick the, the job where, where less of the income is taxed.
Is there a way to let that happen? Because I would think that would be a good outcome from a societal standpoint, to some degree, as long as you can make up for the lost revenue in the government. But if workers are able to keep more of their money, they're probably going to spend more of it. That creates more sales tax, more jobs for people, that kind of thing.
CHODOROW: Right, so if your question is, should we help people who are low-income folks, right? Who need help, who are struggling in the economy? The answer to that is almost certainly yes, because there are all kinds of follow-on economic effects, like you just mentioned. The question really is: What's the best way to do that? And the best way to do that is an across-the-board, neutrally applicable rule. Like for instance, lowering taxes on everyone. It isn't picking winners and losers. And that's the problem with this proposal is that we are essentially saying to the world, tipped workers are more worthy in some way than other people who make the same amount, who have the same economic struggles they do. But we're going to give a tax break to these people and not to those.
