Stop Using Tax Exclusions for Workers’ Tips and Overtime – Here’s Why It’s a Terrible Idea!

As the election season unfolds, candidates are proposing significant changes to the tax system that can impact various income sources. Donald Trump and Kamala Harris are advocating for exemptions on specific income types, but there are underlying concerns about the effectiveness and fairness of these proposals. Let’s delve into the details behind these tax subsidies and explore alternative solutions that could benefit a broader spectrum of earners.

1. Flaws in Tax Exclusions:
   • The current tax code provides numerous exclusions, but these subsidies have their drawbacks.
   • Exemptions can be costly, regressive, and susceptible to exploitation.
2. High vs. Low-Income Disparities:
   • Tax benefits from exclusions favor higher income individuals due to progressive tax rates.
   • For instance, a taxi driver earning $5,000 in tips might not receive significant tax savings depending on their tax bracket.
3. Complexities of Exclusion Proposals:
   • The specifics of tax exclusion or deduction plans by candidates are vague and raise concerns.
   • Various scenarios like exclusion from payroll taxes and impacts on Social Security benefits add to the complexity.
4. Challenges with Regressive Tax Subsidies:
   • Although deductions from taxable income could benefit low-income earners, they still pose regressive issues.
   • Implementing income limits or phasing out deductions at higher AGI levels may introduce new complexities.
5. Potential Costs of Exemptions:
   • Estimates suggest that exempting tip income could incur substantial annual costs, but this projection does not account for potential tax avoidance behavior.
   • The temptation for taxpayers to convert income forms to tax-exempt sources creates further challenges.
6. Alternative Subsidy Models:
   • Policymakers should consider implementing flat-rate refundable tax credits as an alternative to exclusions or deductions.
   • A capped credit system could prevent abuse while ensuring broader benefits for workers across income levels.

In conclusion, while tax exclusions may seem appealing on the surface, they come with a range of issues that could exacerbate existing disparities and complicate the tax system. As policymakers navigate these proposals, it is crucial to prioritize equitable solutions that benefit a wider demographic of earners without adding undue complexities to the tax code. Let’s aim for tax reforms that are efficient, fair, and sustainable in the long term.