- For all the rancor of the 2024 presidential election, there was one issue on which both the candidates agreed.

- "And eliminate taxes on tips for service and hospitality workers."

- "No tax on tips, no tax on tips."

- [Philip] No taxes on tips is one of the few economic issues that has gone bipartisan.

A 2024 "Wall Street Journal" poll found that almost 80% of registered voters supported the idea, and in July of 2025, it was included in Trump's Big Beautiful Bill.

- I guess it's nice to know that in our bitterly divided country, at least some ideas are so obviously good that everyone gets on board.

- Well, not everyone.

The same "Wall Street Journal" poll asked another group what they thought of eliminating taxes on tips and got a very different response.

And unfortunately, it was economists.

(upbeat music) - I gotta admit, this isn't a great look for economists.

Everyone knows that tipped workers bust their butts for low pay.

Who would begrudge them a little slack from Uncle Sam?

- As with many issues at the intersection of politics and economics, pithy slogans and emotional appeals often outweigh careful analysis.

So let's take a dispassionate look at the actual details of the policy.

- The provision that was included in the Big Beautiful Bill allows workers to deduct any tips they've earned over the year when calculating their federal income tax.

This is great news for someone like Ifrah, who is a server at a mid-level restaurant making $50,000 a year, a little over half of that in tips.

She can now claim those tips as a deduction, reducing her federal income tax burden from $3,961 to $900.

The legislation only applies to federal income tax.

FICA and state taxes are still calculated from her total income, but that's still a yearly savings of $3,061.

- However, this is no help to someone like Emmanuel, who is a teacher for the local school district.

He makes about the same as Ifrah and works just as hard, but because none of his income is in tips, he sees no benefit from the change.

- And that's the main problem economists have with this policy.

It applies to a very small number of people.

Only around 2% of American workers earn tips, and over a third of them make so little money that they wouldn't owe any federal income taxes anyway.

The main beneficiaries will be above average tipped earners like high roller casino dealers, posh hairstylists, and fine dining servers.

- There are some limitations like an income cap of $160,000, which could put some workers in an odd situation.

If a customer's tip pushes you just $1 over the limit, that would completely disqualify you from the deduction, potentially adding over $10,000 to your tax burden.

- It also only applies to voluntary non-negotiated bonus payments from customers.

But in reality, this would be kinda hard to enforce, and workers would be strongly incentivized to categorize as much of their income as tips as possible.

Imagine your hairstylist offering to give you a 50% discount on the price of a cut as long as you agree to a 100% tip.

- Employers would also be incentivized to reclassify staff as tipped employees since it would make the position more attractive and ease pressure to raise wages.

Currently, the bill stipulates that only workers that "traditionally" receive tips may qualify, but there are already hosts of lobbyists from various industries petitioning Congress to expand the definition.

Some fear that the exemption could evolve to include high paid professionals like lawyers and financial advisors who could restructure their invoices to include tips, thereby skirting tens of thousands of dollars in taxes.

- All this means that once this takes effect, tipping may become an even more entrenched and pervasive part of the American economy than it already is, and that's not good.

Not only do most people find it annoying, labor activists warn that tipped workers are especially vulnerable to wage theft by their employers.

In our state of Texas, for example, restaurants are allowed to pay their servers only $2.13 an hour as long as their tips bring them up to minimum wage.

But no one's really checking the boss's math.

And many servers report that rocking the boat can get you blacklisted from the most lucrative shifts.

- It should be a bit of a red flag that big companies that rely on tipped workers like Uber and DoorDash strongly support this measure.

It will raise the proportion of the paycheck their employees take home, meaning they won't have to offer as much in wages to attract workers.

The American taxpayer will be effectively subsidizing these billion dollar firms' labor costs.

- Tax policy experts are likewise aghast at this provision because if there's one thing the US tax code doesn't need, it's more loopholes and complexity, and it violates one of the most fundamental precepts of democratic taxation, equity.

Historically, we tax people based on their income, not what type of work they do.

Why should a teacher pay a higher tax rate than a blackjack dealer?

Why should a bartender pay a lower rate than an electrician?

- If the goal is really to help low income workers, there are much more effective and less convoluted ways of doing it, like raising the standard deduction, increasing the earned income tax credit and the child tax credit, or even raising the minimum wage.

- It's totally understandable to wanna help people who work for tips because frankly, working for tips sucks.

You're at the mercy of your boss's honesty and your customer's generosity, and your weekly earnings can be wildly unpredictable.

- That's why economists on the right and the left don't want to incentivize businesses to put more American workers in that position.

- [Both] And that's our two cents.