“No tax on tips” is actually good
Bill Kristol represented Sarah at the Secret Show and we talked about how smart the Harris campaign has been so far: “It’s really impressive that they’re building this plane while they’re flying it.”
We also had a subtle political science discussion about how the compressed time frame of the campaign might be the most important principle and that this factor benefits the candidate of “change,” Kamala Harris.
It’s a pretty lighthearted episode, to be honest. catch it here.
Josh Barro has committed for Kamala Harris to pander to voters. His basic argument is that voters mostly like a bunch of stupid populist ideas and Harris is trying to win an election, so she should give the people what they want.
Harris has heeded that request and put forward some populist economic proposals. Some of them will be bad ideas. Some will be good. Others will be a mixed bag. But I want to defend one in particular: Harris is right to steal Trump’s “no tax on tips” plan.
Eliminating the federal tax on tips is pandering, especially to Nevada’s service sector workers. But it’s also a good idea because it restores a basic economic reality that has been distorted by technology over the past 20 years.
This is going to be pretty weird. But I hope you’ll stick with me.
Tax policy treats tips and wages as the same thing. They are not. A wage is a guaranteed, agreed-upon source of income. The wage flows directly from the employer to the employee. In this sense, it can be viewed as a contract that creates two important economic dynamics:
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The employer becomes part of the broader labor market and must respond to supply and demand (for labor) by increasing or decreasing the wages he pays.
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The employee can negotiate her wages directly with the person who pays her.
The effect of these two dynamics is to create a relatively transparent and fair labour market in which employees and employers each have clearly defined incentives.
Unlike wages, tips are not guaranteed and can fluctuate widely. More importantly, tipped wages create a huge distortion in the labor market that puts the worker at a disadvantage.
Imagine I’m a waiter at Big Sally’s Diner and you come in to eat.
Who is my employer? Is it Big Sally who pays me a nominal wage? to keep your business running? Or is it you, the customer, whose tips make up the lion’s share of my income for that hour?
Tipping distorts the labor market by breaking the link between by right employer (Big Sally) and the employee (me) and to create a phantom relationship in his place, in which you (the customer) are also my de facto Employer.
This distortion has a number of knock-on effects. One of them is that tipped workers are excluded from the regular labor market because their “real” employers do not pay them and the “customers” who pay them are shielded from market forces.
Combining this distortion with the temporary and voluntary nature of tip wages, there is absolutely no reason why the tax system should treat tip income and regular wages as interchangeable.
So why does Does the tax system treat them equally?
For a long time, the tax system was not Strictly speaking Treat tips and wages equally. It is simply faked For decades – generations – tips were not taxed in the real world. Tips were paid in cash and the general reality was that service sector workers did not report them.
This reality is exactly Why The economics of the service sector developed as follows: employers in the service sector were able to outsource the payment of their employees to their customers precisely because this meant that tipped wages were not taxed.
Over the past 20 years, America has become an increasingly cashless society. In particular, tips have moved from being paid in cash to being paid by credit card—and tips paid by credit card are reported and therefore subject to federal income tax.
People whose economic lives depended on non-taxable tip income were hit with a huge new tax.
But the service industries themselves not Adjustments must also occur because tipping taxes create distortions in the labor market. In a normal labor market, if workers were hit with a new tax, they would respond by seeking higher-paying jobs, and employers would have to respond over time.
But when tipped workers face a new tax reality, their “real” employers are immune. Your waiter could negotiate with Big Sally to get a higher base wage from the restaurant – but those wages are already taxed. Your waiter can’t negotiate with Big Sally to get a higher base wage from the restaurant – but those wages are already taxed. Youthe person sitting at the table eating the food he served you. And you end up paying your waiter a lot more than you pay Big Sally.
All of this explains how the move away from cash resulted in a de facto tax increase on tipped workers without any countervailing pressure on service sector employers. The service sector as a whole remained unchanged, even though tipped workers had to earn less.
The conservative argument against “no tax on tips” is that there is no reason why a waiter’s income should be exempt from taxation while a food vendor’s income should not.
But this purely legal view ignores the old systems and the long-standing reality: For generations, the waiter’s income not are subject to the same taxes as the grocer, and the economies in their respective industries have evolved according to this reality, regardless of what the tax law says.
Properly understood, civil law should correspond to reality and not try to distort reality to satisfy arbitrary ideas.
A quick note before things get even more complicated:
We’ve gained a lot of new readers in the last few months, and if you’re one of them, you’ll notice that there are no ads on this site. You’ll also notice that very few of our products are behind a paywall. And that we try to have factual conversations here every day.
We can only work like this because Bulwark+ members. So thank you family for all your support. And if you support a project like The Bulwark exist in the world and can afford it, I hope you will consider joining us.
As always: If you want to participate Bulwark+ but can’t manage it, just email me and we’ll find a solution. (This is another thing we can do thanks to your support – and it means the world to me. Thank you.)
Consider the landmark Supreme Court decision of 1984 Sony v. Universal.
This case concerned the invention of the VCR. Until 1984, it was technically illegal for someone with a VCR to record a television show – it was a violation of copyright.
But the courts recognized that in a world of personal video recording devices, old notions of intellectual property law no longer hold water. Faced with the prospect of making every American a criminal or adapting the law to new technological realities, the Supreme Court wisely chose the latter.
This is the principle behind the abolition of tip taxation.
While the taxation of tips has been a long-standing feature of fictitious Tax law, it did not exist in the real world until recently. It was brought into being by an unrelated technological change, and this change has only This resulted in an additional tax burden on employees without corresponding changes in the services sector that could have ensured wage equality.
Tax law should be brought into line with the long-standing reality of this particular industry and formally recognize that the labor market for tipped wages functions differently than the labor market in general due to centuries-old decisions and traditions.
Yes, abolishing the tip tax is pandering. But it is also good – and fair – policy.
From the New Atlantis:
“The moon exploded without warning and for no apparent reason.” We were doomed. All we could do was pour resources into space programs and put a few thousand of our best and brightest minds into orbit before a massive hail of meteorites wiped out all life on the Earth’s surface.
The International Space Station’s astronauts and engineers were able to logistically keep people alive in their hastily constructed capsules, but they were not able to keep them happy politically. A mob on social media condemned the sparse leadership and instigated a rebellion.
Due to mutinies, asteroids, and cannibalism out of desperation, the population was reduced to just a few women. All was not lost: they had a fully equipped genetics laboratory and the know-how to use it for asexual reproduction. Today, five thousand years later, humanity thrives in a world that is both technologically astonishing and sociologically plausible.
Some readers may recognize this as the plot of Neal Stephenson’s 2015 novel Seveneves. The book was rightly praised at the time, and it contains an element that deserves special attention today: the idea of ”Amistics.” Coined by Stephenson and named after the Amish, “Amistics” is the term used by the people of the repopulated Earth to describe “the decisions made by different cultures about which technologies they wanted to incorporate into their lives and which they did not.”
For the real Amish, Amistics means deciding which technologies to use Orderor rule of life, and which would undermine it. Every option, from roller skates to internal combustion engines to compressed air to power tools, is weighed and judged rather than accepted by default, and to some extent different communities interpret the rules differently. Yet the Amish, Stephenson says, are unique not so much in the concrete choices they make, but in the fact that they are aware that they are making a choice at all: “All cultures have done this, often without realising that they have made a collective choice.” The enlightened, space-faring people of the far future know that “any improvement is an amputation”, a surrender of one possibility in favour of another. They want choice.
In America today, we are bad at making conscious choices about technology.
Read the whole thing.
