Since Trump hasn’t given any details, we have to use the Cruz/Donalds No Tax on Tips Act as a signpost for the GOP approach. The measure exempts tips from federal income tax, but not from the payroll tax that funds Social Security and part of Medicare. It applies only to households that pay federal income taxes — it’s not refundable, meaning that it doesn’t provide any benefit to households whose income is so low they don’t owe federal taxes.
That leaves out all but “a small sliver” of American workers, according to economist Ernie Tedeschi of the Yale Budget Lab. He counts the number of workers in traditional tipped occupations, including wait staff, barbers and hairdressers, at about 4 million, or just 2.5% of all workers.
“A meaningful share of tipped workers already pay zero federal income tax,” Tedeschi notes.
U.S. census data drive home his point: More than a third of tipped workers earned so little in 2022 that they owed no federal income tax. In other words, they’d receive zero benefit from the Republican act.
Another flaw of the bill is its lack of guardrails to ensure that only low-income tipped workers receive its benefits. Nowhere in the three-page measure are tips defined, nor is there a phase-out of the tax break based on income. This raises the possibility that higher-income households could game the system by defining some of their earnings as tips and pocketing the deduction.
