Trump wants to kill tax on tips. That could save Americans over $100 billion over the next decade—but backfire for the working class

On paper, the policy change sounds like a slam dunk by reducing the tax burden on Americans working in service industries. According to a report from The Budget Lab at Yale University, families could have an average $1,700 cut from their annual tax bill with the elimination of tip taxes. However, that would only apply to a small subset of Americans.

“About 4% of families report tips to the IRS, and those who do are disproportionately young, unmarried, and lower-income,” the Yale report wrote. “This means that many tipped workers do not pay income tax to begin with and would not benefit from a new deduction.”

Eliminating taxes on tips might have more of an impact on non-tipped workers. Without guardrails, the reshaped tax landscape could enable more businesses to flip the tablet more often—worsening tipping fatigue and even making it easier for the wealthy to avoid paying taxes.

Waiters, valets, and baristas: Think you’ll be better off? Think again

The elimination of tax on tips could create a perception that being a tipped employee—and encouraging customers to tip—for services even like an oil change or teeth cleaning is beneficial. But that logic is all dependent on consumer behavior, and it’s unlikely they will comply.

Many Gen Zers in particular are already strapped for cash and in a cost-of-living crisis, resulting in them skimping out on tipping culture as is. A 2023 Bankrank survey found that just 35% of young people always tip their server at sit-down restaurants.

“It’s easy to imagine businesses automatically adding ‘recommended gratuity’ to invoices with the expectation that many consumers won’t be willing to speak up in protest,” wrote experts at the Economic Policy Institute

Disdain for tipping culture goes beyond young people or those on a budget. Nearly 9 in 10 Americans think tipping culture is out of hand, according to a recent survey from WalletHub. What’s more, about 60% think businesses are replacing employee salaries with customer tips. 

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And while just over 1 in 4 agree that tips should be taxed, experts warn that a tax removal could simply make tipping culture worse and lead to more workers living paycheck to paycheck with an abysmal hourly wage and inconsistent tips.

And let’s not forget, whether or not you’ll take home more from tips, you’ll be guaranteed less as a base pay: Under federal law, tipped workers’ guaranteed hourly wage is just $2.13 an hour—and employers can pay them that rate if they merely “customarily and regularly receive more than $30 a month in tips.” The federal minimum wage for nontipped workers is $7.25 an hour.

Elimination of taxes on tips could help the wealthy and even harm the poor

Highly paid professionals, like lawyers, financial advisors, and accountants, could use tipping tax changes as a new form of avoidance, the EPI added, by denoting their fees as tips to order paying tax.

A tip tax elimination would also reduce revenue from the federal government significantly. According to Yale, the losses could exceed $100 billion over the next decade, before even considering behavioral feedback. Because the government is already strapped for cash, that could lead to the further defunding of social programs that benefit lower-income, tipped employees. 

“The tax benefits could accrue primarily to high-income taxpayers, yet the revenue losses would harm the public overall, as governments would have less funding for high-quality public education, safe roads, public health, and anti-poverty programs for children and families,” EPI said.

Overall, tip tax elimination is a bipartisan subject, with Democrats, including Kamala Harris, endorsing the policy. However, restrictions on its scope and an increase in the minimum wage are often also part of the discussion.