Instead of promising to make income from gratuities tax-free, the former president should vow to abolish tips altogether.
Tipping is terrible. Almost no one likes it. And as it has become more ubiquitous, it has also become even more unpopular.
Undeterred by any of this, Donald Trump has an idea sure to make tip jars and in-app tip requests even more common: In a speech last week in Las Vegas, he said he would make tipped income tax-free. As a result, more pay would likely be defined as tipped income. Not only would that bring in less tax revenue at a time when it is sorely needed, it is also bad economics.
The normal justification to make certain types of compensation tax-advantaged or tax-free, such as 401(k) contributions or health insurance premiums, is to encourage their use. Society as a whole is better off when more people save for their retirement and get health care (although even then, the case for preferential tax treatment is weak and has proved distortionary). There is no economic justification to favor tipped income over regular income. If anything, it should be taxed more, because it is not a good way to pay people.
Continue reading the entire piece here at Bloomberg Opinion (paywall)
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.
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