Are We There Yet? vol. 233
My general rule is to stay away from politics when I write this blog each week. But there is a proposed policy upon which both candidates agree, so I think I can address it. The issue is “no tax on tips.” The idea seems very appealing emotionally. Tip earners are likely near the bottom quartile of wage earners and may struggle financially. But does such a policy make sense?
As my friend and partner, Len Wolf, said to me the other day, such a policy doesn’t pass the fairness test. What about lower-paid earners who don’t work in businesses where tips are paid? Sanitation workers in Arlington, Virginia make $15.36 per hour. That is all taxable and subject to social security withholding. Where is their tax break?
Second, while the policy seems like a winner for those getting tips, that expectation assumes that all other variables remain the same. I offer the example of municipal bonds. In an effort to get investors to invest in municipalities, Federal tax law exempts municipal bond interest from taxation. Again, sounds great, but the municipalities, knowing that the investor would not have to pay tax on the interest, lowered the coupon rate on the bonds to somewhere near the after-tax interest yield for a taxable bond. So, taxpayers don’t really get a tax break because they earn lower interest.
Finally, I’m a believer that if consumers know that a waiter will not be taxed on their tips, they likely will leave a lower tip. The rationale is that they are giving the waiter the same amount after taxes are considered. Employers, thinking that wait staff are now making more money because their tips are not taxed may decrease their hourly wages. In the end, it’s possible that those receiving tips will actually make less if tips are exempt from taxation. Plus, they won’t receive social security participation with respect to the tip income, which might impact them in retirement.
The lesson is that when you make a change, you can’t assume that all other variables will remain static. The result you may have anticipated may not be the result you actually get.
Take care and stay safe.
BOOK:
Beautiful Days by Zach Williams
A couple awakens in a home in the woods to find themselves rapidly aging as their toddler remains unchanged. A work-worn employee navigates conspiracy theories and the threat of violence in an abandoned office. A tour guide leads a troublesome group to an ancient structure, apparently nonhuman in origin, discovering along the way that the most mysterious creatures of all are right beside him. These ten stories show the fallibility of time and how reality reveals itself behind the gauze of a dream—or a nightmare. Throughout, Williams illustrates how quickly we come to the edges of our patience and endurance, the hidden damages lurking in the shadows of the everyday, the distances we must travel to protect our families, and the tenuousness of even our deepest relationships. Williams sees the perversity in the mundane and dares readers to confront the power—and beauty—of time’s relentless movement.
Learn more about Bob Len here.
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