'No Tax on Tips' and Free-Lunch Populism

From tax-free tips to student loan forgiveness, giving benefits to specific groups eats up fiscal capacity that could be used for more egalitarian forms of support

In this week’s newsletter:

• The Main Event: What ‘No Tax on Tips’ and student loan forgiveness have in common

• Homework Assignment: New American Compass report on child care policy

• Et Cetera

The Main Event

It’s difficult to find any serious policy analyst or economist who will say anything good about not taxing tips. Erica York of the Tax Foundation is concerned the proposal will “worsen[] the structure of the tax code.” Ernie Tedeschi, writing for Yale's Budget Lab, estimates 37 percent of tipped workers already pay no federal income tax. Brendan Duke of the Center for American Progress worries it will open the door to white-collar workers reallocating their work as “tips” and getting a tax advantage for it. And, as Howard Gleckman of the Tax Policy Center pointed out, “No Tax on Tips” raises a basic question of fairness - “Why should a service worker avoid tax on tips while a warehouse employee earning exactly the same income must pay tax on wages?”

Half of waiters and waitresses made less than $31,940 in 2022, so those workers, especially with children, already owe very little in federal taxes and will benefit little from the policy. Incentivizing income from tips helps customer-facing staff but hurts those in the back of the house, like dish washers or line cooks. If you enjoy how nearly every retail interaction now features soul-searching over how much you’re expected to tip at a grocery store or self-checkout machine, get ready for that on steroids.

Image source: Pixabay

But the idea has caught fire first with former President Donald Trump, then MAGA-aligned Republicans, then Vice-President Kamala Harris and finally the White House, and we all know why. It’s a catchy, seemingly “cost-free” way of appealing to a geographically-concentrated subset of voters without asking anything of other groups.

Of course, it isn’t free at all; the Committee for a Responsible Federal Budget estimates the proposal would reduce federal tax revenues by at least $125 billion over ten years, and possibly twice as much if people adjust their behavior (the Harris approach, with slightly more safeguards, gets an estimated budget score of at least $100 billion.) If included in next year’s tax negotiations, this election year gimmick would soak up fiscal capacity that could otherwise go towards tax credits for research and innovation, the Child Tax Credit, or decelerating the increase in the federal deficit.

To put that into context: If the number of births stayed at 2023 levels, we could take that $125 billion and write a $4,000 check to every married couple, and $2,000 for single parents, who are welcoming a new child for the next ten years and still have $8 billion left over. Those pushing “No Tax on Tips” are limiting the ability of Congress to go big on families.

If politicians want to help servers, a more straightforward way would be to phase out the sub-minimum tipped wage, as seven states have already done (one of the loudest champions of this idea is Saru Jayaraman, author of One Fair Wage: Ending Subminimum Pay in America.) Restauranteurs and franchisers hate this idea, naturally, and pass the additional labor costs through to consumers, who appear to compensate for the higher prices by tipping less (interestingly, this dynamic led some servers in Maine to advocate for restoring the sub-minimum wage.)

These are inherent trade-offs to raising the minimum or sub-minimum wage that are part of politics; they ask one group to give up something to make another group better off, or ask why one industry should benefit from an effective subsidy for low-wage work. It can be messy and unsatisfying. It’s no wonder politicians prefer to conceal a transfer from the rest of society to a politically favored group in the form of deficit spending.

But seen in this light, “no tax on tips” has more in common with student loan forgiveness than, say, measures to increase the Earned Income Tax Credit or boost the standard deduction to allow all low-income workers to keep more of their take-home pay. The analogy isn’t perfect (for one thing, the Biden administration’s steps on forgiveness have had the same fiscal impact in one year that "No Tax on Tips" would rack up in ten.) But the thinking - that a politically-advantageous handout is desirable because it isn’t directly gore any specific person’s ox - has some commonalities.

For the same 10-year cost as “No Tax on Tips,” Congress could write a $4,000 check to every married couple (and $2,000 for single parents) welcoming a new child for the next ten years — and still have money left over.

Or course, there may be times we might legitimately wish to spread costs for a discrete group over the whole of society. Take the Biden administration’s new “Time is Money” effort, which seeks to (in their words) “crack down on all the ways that corporations...add unnecessary headaches and hassles to people's days.” Policies that require health insurers to accepted claims submitted online, or bar airplanes from charging extra fees in order for parents to sit together with their children, may end up pushing costs up a little across the board. Not every family flies, and not every patient or family member gets stuck on hold for hours on end.¹ But on a case-by-case basis, we can agree that maybe some benefits — be it fewer people stuck in insurance-company limbo or more families able to stick together during their travels — are worth the hit to “overall efficiency.”

Likewise in family policy. Progressives have floated covering all childbirth costs in a Medicare-like program. Centrists get excited about expanding the tax credit for child care to reach more families (for more, see below). Some conservatives want to see Hungary’s pro-natalist approach of eliminating income tax for moms with four kids replicated here in the U.S.

Maybe these ideas are valuable on the merits. But in an era in which deficits matter, benefits for specific groups eat up fiscal capacity that could go towards broad, egalitarian support. Hanging a giant price tag on making birth free would reduce the economic and political capital available to expand the Child Tax Credit; so, too, would Build Back Better-type social programs or tax breaks for only big families. If those ideas are worth pursuing, they will require us to be more creative by reallocating and rethinking existing spending or improving cross-subsidies.

At its best, a populist impulse can tether politicians to the needs and values of Americans who don’t think about public policy in the language of D.C. think tanks. At its worst, it can be an excuse for sloppy thinking, an inclination that because economic costs are diffuse they don’t matter, or that good intentions mean policymakers don’t have to grapple with trade-offs. Economic free lunches were a zero-interest rate phenomenon. Now, Congress has to learn to eat its vegetables.

Homework Assignment

This week at American Compass, I have a decently-lengthly exploration of the two main federal child care approaches: the tax code’s Child and Dependent Care Tax Credit (CDCTC) and the Child Care and Development Block Grant (CCDBG). If you don’t feel like reading the whole thing, I won’t tell on you (but you should anyway). Here’s the Cliff Notes version:

• The CDCTC is a clunky, distributionally-skewed tax credit of limited effectiveness. As the below graph suggests, it’s predominantly claimed by higher-income households with more paid child care expenses and higher tax liability. Congress should shy away from bipartisan efforts to expand it, and instead transform it into a young child supplement to the Child Tax Credit.

• The CCDBG is a targeted program aimed at supporting low-income families, predominantly single parents, to enable them to afford child care. As a legacy welfare reform’s emphasis on conditioning public benefits on work, it makes sense for conservative to strengthen the program by stressing the importance of boosting supply and expanding parental choice, without letting it creep towards a middle-class benefit for a lucky few households.

Et Cetera

Reports: Among women ages 18 to 49, 12% of Republicans and 14% of Democrats report having had an abortion; two-third of Republican women have ever been pregnant, while only half of Democratic women have (KFF).

Articles: The Limits of Parents' Rights (Naomi Schaefer Riley, National Affairs)…Pregnant women face poor treatment in states both with and without abortion bans (Associated Press)…Is private equity making child care less affordable? (Simon Willis, Fortune)…The FDA has recently approved a biomarker test that could make it easier to identify patients at risk for pre-eclampsia (Governing)…Since 2017, Polish spending on family benefits has increased from 40 billion to 90 billion zł‎, but their fertility rates continue to fall (300Gospodarka; in Polish)… “Welfare or sticking it to cat ladies? The coming fight over the child tax credit” (Zach Halaschak, Washington Examiner)…The Housing Theory of Childless Cat Ladies (Christian Britschgi, Reason)…How Christian Conservatives Are Planning for the Next Battle on I.V.F. (Elizabeth Dias, New York Times)….Bipartisan push for family-friendly policies gains momentum (Eleanor Mueller, Politico)…Harris set to propose increased Child Tax Credit among other economic agenda items (Emily Peck, Axios)

Takes: A polarized family policy is the last thing America needs (Elliot Haspel and Joe Waters, The Hill)…Silicon Valley’s version of pro-natalism has real downsides (Emma Waters, Public Discourse)…We need to save pronatalism from the pronatalists (Ramesh Ponnuru, Washington Post)…“I'm a Conservative Mom of 6. Why Are the Democrats So Much Better on Family Policy?” (Bethany Mandel, Newsweek)…Either no tax on tips or Child Tax Credit (Emma Fuentes, Washington Examiner)…Senator J.D. Vance tells Face the Nation he “would love to see a child tax credit that's $5,000 per child.”

Roundup: Missouri will have three ballot amendments this November: scrubbing restrictions on abortion up to 24 weeks gestation, raising the minimum wage, and permitting sports gambling…Arizona: Amendment to legalize abortion up to 24 weeks (up from 15) makes it onto November ballot…Maryland: Baltimore judge rules ‘baby bonus’ proposal unconstitutional…Minnesota: Massive overhaul of child care regulations is being postponed after concerns of “administrative overload”…Oklahoma: Private school tuition surges after tax credit introduced…New York: Republican state Senator introduces $1,000 baby bonus legislation.

Elsewhere: J.D. Long Garcia highlights my recent thoughts on the GOP platform re-write in his look at abortion politics for America magazine…Nathanael Blake cites my NYT guest essay while assessing the promise and peril facing the pro-life movement for Public Discourse…

Do you have any tips for me? Namely, on how to make Family Matters more useful or informative? Send me a postcard, drop me a line, and then sign up for more content and analysis from EPPC scholars.

1. Then again, citation needed.