Trump’s Plan to End Taxes on Tips Could Cost $250 Billion

Trump’s Plan to End Taxes on Tips Could Cost $250 Billion

The Yomiuri Shimbun
By Yuval Rosenberg and Michael Rainey
Monday, June 17, 2024

Happy Monday! Let’s talk taxes for a bit…

Trump’s Proposal to End Taxes on Tips Could Cost $250 Billion: CRFB

Donald Trump’s proposal to exempt tips from being taxed as income would cost the federal government $150 billion to $250 billion over 10 years, according to an analysis released Sunday by the Committee for a Responsible Federal Budget.

At a campaign event in the key swing state of Nevada earlier this month, Trump told the crowd that if he’s reelected, he would stop taxing tips, claiming he would make the change "right away, first thing in office."

Trump reportedly told Republican senators last week that he got the idea from a waitress in Las Vegas who complained about the IRS. "He would like to tell you that it was incredible research and policy discussion, but the secret is, he got it from a waitress," Republican Sen. Kevin Cramer of North Dakota said, according to Roll Call.

Trump has since encouraged supporters to promote the idea — and his candidacy — by writing notes on restaurant receipts until the election.

Changing the taxation of tip income would require an act of Congress — and many Republicans have reportedly been receptive to the proposal, suggesting it should be under consideration as part of a 2025 tax overhaul. Some key Democrats have also expressed openness to the idea.

The new CRFB analysis notes that its cost estimate of up to $250 billion over a decade could be low once behavioral effects are incorporated. Those effects could be sizable, given the tax advantage the change would create for tips and the workers who rely on them. Employers and workers might respond by lowering wages and encouraging more tips. If tips increase by 10%, the 10-year cost could be as high as $275 billion, according to CRFB. A 50% increase in tips could bring lost federal revenue as high as $375 billion, while a 100% jump could result in a $500 billion hit to federal coffers.

"The big picture is clearly we have huge fiscal challenges for whoever the next president is, yet we seem 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 pander as their political strategy, which leaves the country so much weaker."

The CRFB estimate also assumes that the individual tax cuts passed in 2017 are allowed to expire as scheduled after 2025. The fiscal impact of exempting tip income would be 10% to 15% lower if the 2017 tax cuts are extended, according to the CRFB analysis.

A warning against Trump’s proposal: Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center, writes that exempting tips from federal taxation would actually hurt many workers.

"Tax-free tips might help a relatively small number of waiters at high-end restaurants. And they could reward hotel owners such as Trump by slowing efforts to raise the minimum wage for tipped workers. But many tipped workers make so little income that they already pay little or no income tax," Gleckman writes. "Trump’s idea also would create many new opportunities to game the tax system, which inevitably would result in new IRS regulations aimed at curbing tax avoidance. And a tax-exemption for tips violates every rule of tax equity. Why should a service worker avoid tax on tips while a warehouse employee earning exactly the same income must pay tax on wages?"

Gleckman says that eliminating taxes on tips could undercut the push to raise the minimum wage for tipped workers, hurting employees at lower-end restaurants. "Of course," Gleckman adds, "by reducing the pressure to raise the minimum wage for tipped workers, ending taxes on tips would benefit owners of restaurants and hotels" — owners like the one who floated this idea.

IRS Takes Aim at a $50 Billion Loophole for Wealthy Taxpayers

The IRS announced Monday that it plans to eliminate a loophole used by large, complex partnerships to avoid taxes — a move that could raise more than $50 billion over the next decade.

The tax agency is taking aim at "partnership basis shifting transactions," in which businesses that operate through multiple legal entities make income disappear by moving transactions through those entities while claiming tax breaks such as depreciation at each step in the process.

The IRS said that chronic underfunding has allowed the abusive practice to thrive as accountants and lawyers have developed more complex structures to reduce taxes — complexity the agency couldn’t keep up with as audit rates fell, at great cost in lost government revenues. "The combination of fewer resources to unpack ever more complicated business structures made it easier for wealthy taxpayers to avoid paying what they owe and are contributing to the estimated $160 billion per year tax gap attributed to the top 1 percent of filers," the agency said in a press release.

According to IRS Commissioner Danny Werfel, recent audits have revealed how pervasive the problem has become. "In the audits we’re doing today, we are seeing systemic use of basis shifting where there is no economic substance to the transaction," he told reporters. "That allows them to inappropriately avoid taxes they owe, and this guidance today is intended to end that practice."

Treasury Secretary Janet Yellen linked the crackdown to the Biden administration’s broader effort to reduce tax cheating by corporations and the rich. "Treasury and the IRS are focused on addressing high-end tax abuse from all angles, and the proposed rules released today will increase tax fairness and reduce the deficit," she said. "Thanks to resources from President Biden’s Inflation Reduction Act, Treasury and the IRS have the tools to stop longstanding abuses."

Still, the IRS’s effort to end the practice will likely meet resistance. Attorney Robert Kovacev, who has represented firms that have been audited for basis shifting, told The Washinton Post he doesn’t think basis shifting is tax evasion. "That has a fraudulent tinge to it that I don’t think exists here," he said. "It’s a tax planning tool that follows what Congress said you can do." Kovacev added that he doesn’t think the IRS has the authority to change the rules, which would require an act of Congress, and that the effort to eliminate the practice will be challenged in court.

Number of the Day: 17.5%

Federal revenue will equal 17.5% of gross domestic product this year, according to an estimate by the Congressional Budget Office. That’s close to the average level of 17.2% recorded between 1984 and 2023 — and proof for some critics that spending levels are too high. If revenues are roughly where they have been for 40 years relative to the size of the economy, the argument goes, then the fact that there is a huge budget deficit means that spending should be cut until it more or less balances with typical levels of revenue.

Analysts at the liberal-leaning Center on Budget and Policy Priorities offer a different perspective on spending levels in a report published Monday. They point out that before World War II, federal revenues typically equaled about 4% of GDP, but that was before the demands of global war and social insurance became permanent features of the fiscal landscape in the 1940s. The required revenue level rose as conditions changed, and now conditions are changing again, with rising demands for spending on the retiring baby boomers, child welfare, education and healthcare – none of which are adequately funded at current revenue levels, as the growing debt and deficit attest.

"To support sound budget policies, the level of federal revenue ... needs to increase over previous and currently projected levels," the researchers wrote. "Our current approach is one of low investment and support for people and communities relative to other wealthy nations, coupled with even lower revenue. This has led not only to a fiscal deficit, with federal debt growing more quickly than GDP, but also an investment deficit."

"To meet our commitments to seniors, make high-value investments that will improve well-being and broaden prosperity, and improve our fiscal outlook, we must raise more revenue," the researchers continued. "Simply put, we cannot meet 21st-century needs with past levels of revenue."

Quote of the Day: Hitting NATO’s Defense Spending Targets

"The United States’ military presence in Europe remains essential for the security and stability of the European continent. But Europeans are doing far more for their collective security than just a few years ago. … Europeans are ramping up their defense spending to record high levels. When we made the pledge to invest 2% of GDP in defense back at the Wales Summit of NATO in 2014, only three allies met that mark – and that was the United States, Greece and United Kingdom. Just five years ago, there were still less than 10 allies that spent 2% of GDP on defense. But later today when I see President Biden, I will announce new defense spending figures for all allies. And I can already now reveal that this year more than 20 allies will spend at least 2% of GDP on defense. This is good for Europe and good for America. Especially since much of this extra money is spent here in the United States."

− NATO Secretary General Jens Stoltenberg, in a speech Monday at the Wilson Center, a nonpartisan D.C. think tank. Stoltenberg later said that 23 out of the 32 member countries in the transatlantic alliance are now meeting their pledge to spend at least 2% of their gross domestic product on defense. That represents a record high, up from a reported total of six as of 2021, before Russia invaded Ukraine.

"NATO allies are this year increasing defense spending by 18%. That's the biggest increase in decades," Stoltenberg said today.

NATO leaders are scheduled to hold a summit in Washington, D.C., next month celebrating the 75th anniversary of the alliance.

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