If there is no tax on tips, what is to stop me as an independent contractor from charging $1.00 for all my services, and agreeing with a client that they'll just write in the "real" balance in the "gratuity" line that suddenly appeared on their invoice? Income is income. It should all be taxed the same. Which is to say, as little as possible.
I presume if you are caught, the IRS or the court will hold you in the wrong for fraud and tax evasion. Because they get to interpret the law, not you.
> presume if you are caught, the IRS or the court will hold you in the wrong for fraud and tax evasion
What is the difference between a discretionary bonus and a tip? What if I add a tip line to my business invoices?
The best solution is an income and deduction limit, e.g. you can't claim if you earn more then 2x median wage ($85,600 [1]) and/or the deduction is capped at the greater of $10,000 and 20% of your AGI.
Without an income deduction, I assure you, I will figure out how to get tipped.
> The best solution is an income and deduction limit
You don't have to help them try to make it make sense, it isn't intended to make sense.
A completely sensible proposal is to lower taxes on the middle class. But that's also entirely uncontroversial and furthermore they repeatedly say it and then don't do it so no one believes them and therefore no one pays attention to them if they say that.
"No tax on tips" gets people excited because a) there are a lot of service workers (which is the point; that's a lot of votes) and b) anybody can see that it's a tax loophole so large that even non-service workers can concoct a way to get in on it, but c) they haven't heard it before and it sounds like the kind of thing that could pass, because it won't cost the government too much revenue if the only people getting it would be a couple of waitresses and they themselves who will, unlike other people, come up with an ingenious plan to use this to avoid paying taxes anymore.
In other words, it's a silly proposal with extremely high memetic fitness. Don't try to fix it, just realize that what working people actually want you to do is lower their taxes.
The income tax burden on the middle class has been dropping for decades under tax policies across administrations of both parties, from an effective 19.1% in 1979 to 13% in the last pre-COVID year of 2019:
Not quite. That link is doing something weird and including the corporate tax rates to arrive at "total" tax rates. The median total of individual and payroll tax rates by those tables was 16% in 1979 and 11.4% in 2019. But even that isn't right because it apparently isn't counting the so-called "employer contribution" of FICA for people who aren't self-employed:
Using those numbers for the payroll tax rates, the median combined rate was 19.66% in 1979 and 17.7% in 2019. And this is slightly overestimating the rate in 1979 because the self-employed payroll tax was less than the combined employer+employee rate in 1979. So there hasn't been a significant reduction in 40 years, and the rate on small businesses has actually increased.
But that's not all. The start of that table was a high point. The median effective tax rate in 1950 was 5.5%:
That probably doesn't include FICA, but FICA in 1950 was only 1.5%/3% (and again less than the combined rate for self-employed back then), so the median federal effective tax rate would have been <8.5% in 1950 compared to 17.7% in 2019. And 1950 isn't even the low point, it's just the earliest number in that document.
The federal government dramatically raised taxes on the middle class in the early to mid 20th century and they've been stuck there since.
Presumably it’s including the average incidence of corporate rates because some small fraction of earners in the middle quintile pay those rates as business owners.
I happen to agree with you about who’s “really” paying for employer FICA, but there are many other taxes not directly assessed on the middle class that they’re likely paying for anyway. You can’t just tack on the full rate; not everyone in the middle class is paying FICA on every dollar of their income, there are many middle-class retirees.
Yes, the government is much, much larger than it was 75 years ago, and some of the burden for paying that has fallen on the middle class.
But the fact remains: Every major tax reform package from Reagan to Bush II to Obama to Trump has either lowered middle class rates, increased middle class deductions, or made significant new credits available to the middle class. Usually more than one of these.
You tip the person who pours you a drip coffee or a tap beer, but not the person who lugs an 80lb box to your doorstep. Would you advocate eliminating the $1 handing someone a cup tip, because it is expected service and not "above and beyond?"
The 20% performance fee in the 2 and 20 for hedge fund managers can easily become a tip on their tax returns, but I dont expect they will be back at the table asking what they did so wrong that would deserve such a paltry tip.
This is the same Justice System that recently ruled a gratitutiy for a Judge after a ruling isn't a form of bribery or corruption. So your mileage may vary.
They didn’t do that. They ruled that gratuities and bribes are two different kinds of corruption that require different proof and are made illegal under different laws.
Seems odd to attack my news sources, as if you know which ones I use instead of the argument itself. Under no circumstance should a Judge accept money from anyone even remotely involved in any case. It doesn't matter what they call it after.
Years ago (1991) in Canada, there was a massive change to the sales tax structure. It was quite convoluted, where things like 1 donut incurred tax, but a dozen had no tax. Potatoes had no sales tax, but of course, GST was levied on car sales.
Several large car dealerships immediately advertised that they were no longer selling cars, but expensive potatoes. If you bought a $12,000 potato from them (no tax), they'd throw in a free car.
You can imagine how long the government put up with that.
In the USA sales tax is charged on used cars in almost every state. Which is asinine when you figure the car could change hands an arbitrary amount of times.
Which means that almost all tips would be taxed. Most tipped workers make over 30% of their income in tips, and certainly the highest tipped workers that pay the most taxes do. That makes not taxing the first 25% of tipped income which would only be taxed at or less than 12% has a very marginal effect.
Plenty of bar tenders make >$100k/yr with <$30k in non-tip income. Taxing "only" $60k+ of their $70k in tip income looks pretty silly. You're going to save them at most $1200 when their taxes are already well over $12k.
I just don't get why one would want to promote tipping culture with financial incentives, when it's already fairly exploitative of the workers.
> A self-made entrepreneur, Kahre, 48, paid his workers in gold and silver coin, and said they could go by the coins' face value -- rather than the much higher market value of their precious metal content -- for federal tax purposes. He did not withhold taxes from their wages, and he provided the same payroll system to 35 outside clients, which were other local businesses.
I don't understand your last sentence, why as little as possible? is it better for the country to grow ever more deeper into debt or for politicians to get funding for their promises by appeasing billionaires and CEOs? it is just as important to pay taxes as it is to vote. I would even say the more taxes you pay, the more invested in politics and civic responsibilities you would become.
Excessive taxation is bad but I have never seen anywhere near excessive taxation in the US. The general ailments and downtrends in American society started right around the time when taxation (especially the corporate kind) started getting cut and we moved away from the gold standard for our money.
For once I'd like to see a politician promise to raise taxes and use that revenue to fix things and actually win. Perverse financial incentives are ruining everything.
> For once I'd like to see a politician promise to raise taxes and use that revenue to fix things and actually win. Perverse financial incentives are ruining everything.
The 2000 election was a debate over whether to use the budget surplus to reduce taxes or increased government spending. The "reduce taxes" side narrowly won, and then a year later the death of 3000 people provoked us into increasing spending by several hundred billion doallars per year. That doesn't completely explain the current unsustainable deficit ($1.5T or about 5% of GDP !!), but it's a good chunk of it.
Of course the Bush tax cuts were largely retained under Obama with a bipartisan bill that made them permanent with no corresponding cut to spending.
Taxes should be as high as necessary but as low as possible.
Debt should be reduced by reducing government spending, not by higher taxes.
I don‘t know where you get the idea that paying taxes somehow makes you more invested in politics. Switzerland has very low taxes and yet the whole political system is based on civic involvement with all but the top political offices being done by people as a sidegig rather than a career. Meanwhile Germany is a high tax country where most people are just fed up with politics and government because politicians are so far removed from civic society.
The GP said that income should be taxed as little as possible. That doesn't necessarily mean taxes, period, should be as little as possible. One could just tax things other than income.
From an economic standpoint, it makes sense not to tax income because income is production, and taxing production reduces the incentive to produce, which is the last thing we need. If we have to tax something, it makes more economic sense to tax consumption, for example with a national sales tax.
> The general ailments and downtrends in American society started right around the time when taxation (especially the corporate kind) started getting cut and we moved away from the gold standard for our money.
I don't think this historical narrative is correct. First, the two things you mention did not happen at the same time; tax cuts, at least if we are talking about income taxes, more or less started with Reagan in the 1980s, but the US went off the gold standard in 1933 under FDR. (Technically the US still claimed to support converting dollars to gold internationally until 1971, but that's a relatively minor change compared to what happened in 1933.)
Second, "general ailments and downtrends" is very broad and I don't think one can pin down a particular time when they started.
Third, as I believe pg pointed out in one of his essays, US government tax revenue as a percentage of GDP has varied very little over decades even while tax rates have varied a lot.
> Perverse financial incentives are ruining everything
I don't disagree with this as a general statement, but I think the tax code is a fairly minor contributor to the perverse financial incentives as compared with the government (via the Fed) printing money. Historically, monetary debasement has always led to civilizational decline.
_Earned_ income should correspond to productivity.
But unearned income enjoys a dramatically lower tax rate (the capital gains rate is lower than income rate, and capital gains are not subject to FICA/self-employment taxes)
The capital gains rate is lower because the way capital gains are calculated causes nominal price increases due to inflation to be counted as an increase in the value of the asset. This is a pretty dumb way to do this -- just calculate the capital gain in inflation-adjusted dollars instead -- but the current system isn't inherently to the advantage of capital gains. For long-held low-risk assets it typically goes the other way because so much of the "gain" is only on paper but gets taxed anyway. And short-term capital gains are taxed at a higher rate.
What you are calling "unearned income" can still represent production indirectly, since it is income from passive investments, which are supposed to give returns based on creating wealth. It is true that that isn't always the case, however, particularly when such investments can include various sorts of derivatives and other zero-sum transactions.
That said, if no income were taxed at all, any disparity between how the various kinds of income were taxed would go away.
That seems a very elegant solution to the problem of fair income taxes. Just don't tax income, that way you can't have a disparity in income tax.
What should we tax instead? Capital seems to me a viable choice. It would be a lot more work for everyone, though.
My proposal (in the GP of the post you responded to) was to tax consumption, i.e., a national sales tax or something like it.
> Capital seems to me a viable choice.
What would count as "capital"?
Whatever the answer is, this would seem to me to have the same issue as income taxes have: you would be taxing production instead of consumption, hence lowering the incentive to produce.
you aren't wrong but i do think an organization that large with that many customers and attention from many more should be able to make and sell useful products to the world. Simply forcing people to pay is a rather crude and unsophisticated approach. It takes a lot of men to cash in the proverbial protection money.
A simple example, we have periodic checks for bicycle lights. If yours doesn't work you get a fine. If you have plastic or cash it would be a good idea if the government employee would fix your light and/or sell you a new one. You are supposed to walk while holding your bike. Everyone does that until they are around the corner. They can fix car lights too, deliver food and drive for uber. etc
> I don't understand your last sentence, why as little as possible?
It should come with a corresponding reduction in government waste. The existing government budget contains a level of inefficiency which is difficult to comprehend. The scale of it is so large it's hard to wrap your head around it.
> I would even say the more taxes you pay, the more invested in politics and civic responsibilities you would become.
This doesn't seem to be the case. In fact, it tends to go the other way. The people who have lives and just want to go about their business (i.e. the middle class) are taxed heavily specifically because they don't have time to get involved in politics and then are poorly represented when politicians are slicing up the pie. The super-rich, meanwhile, are highly involved and then avoid paying.
> The general ailments and downtrends in American society started right around the time when taxation (especially the corporate kind) started getting cut and we moved away from the gold standard for our money.
US government revenue has been stable as a percent of GDP since the end of WWII and growing over time in real dollars per capita. Taxation per capita, even adjusted for inflation, is now higher than it was during WWII. That level of taxation is... high.
As to your point, multinational corporations avoid paying those taxes: Since real government revenue has been going up rather than down, guess who pays?
> For once I'd like to see a politician promise to raise taxes and use that revenue to fix things and actually win.
Doing this is not really possible. Between state and federal income, payroll, sales, property and other taxes, the average person in many states is already paying more than 50% of their compensation in tax.
Even if all you care about is tax revenue, there comes a point at which increasing taxes lowers government revenue. If you raise total taxes from 5% to 10% and that causes the economy to contract by 10%, that's maybe not great for wage earners, but government revenue has increased by 80%. If you raise total taxes from 55% to 60% and it causes the economy to contract by 10%, even government revenue goes down because 55% of 100 is more than 60% of 90.
The problem isn't that the government doesn't have enough revenue, it's that most of that money might as well be set on fire because it spends it so inefficiently. And whether you think it should instead be returned to the taxpayer or spent in some other way, the status quo is absurd and unsustainable.
3. California put hundreds of millions of homelessness dollars at risk because of its “disorganized” and “chaotic” anti-fraud policies, according to a critical federal audit released today. https://calmatters.org/housing/homelessness/2024/08/hud-hcd-...
> For once I'd like to see a politician promise to raise taxes and use that revenue to fix things and actually win. Perverse financial incentives are ruining everything.
No. We should vote for no more new taxes (not a single cent more) till we audit at all levels of government and find out how much fraud and waste is there and have a plan to fix it.
> GAO estimated total direct annual financial losses to the government from fraud to be between $233 billion and $521 billion, based on data from fiscal years 2018 through 2022. The range reflects the different risk environments during this period
That is just fraud. Wastage will be probably be higher lol.
It is morally wrong to pour more water into a container with holes in the middle of water shortage.
So in a fantasy world where we could eliminate all fraud without spending a single dollar on enforcement[1], we could cut the deficit by somewhere between 1/7 and 1/3, and would still have to find over $1T more money somehow.
The deficit is so absurdly high at this point that we need to both cut spending (and yes, any obviously wasteful spending is a good place to start) and increase revenue.
> It is morally wrong to pour more water into a container with holes in the middle of water shortage.
I have no clue what you are trying to say with this analogy, so I'll just take it at face value and point out that a human being is a container with holes.
Not only that, you can separate the waste into several different categories.
The first is purposeful waste. That is, a corrupt program that diverts tax dollars into the coffers of some corporation with lobbyists. This is extremely common in the DoD, for example, and identifying these has extremely high gains because the program can be deleted wholesale.
Then there is simple inefficiency. The government's website is incapable of doing something it should be capable of doing and then the government has to employ an army of clerks to do it by hand. These can be pretty big gains too. If you can reduce the number of clerks by 80%, that's a lot of money.
Then there is unnecessary complexity. Most of this comes directly from Congress. Somebody needs to go through all the existing laws and do a cost/benefit analysis to see which ones are still relevant and have a net positive effect, and get rid of the ones that don't. More than that, look at the laws as a whole and see if they make sense. We have a slew of programs that all have the same ostensible purpose, e.g. to provide assistance to the poor, but then they all have different applications and qualification conditions and phase outs and benefits. Combine them all into a single system that provides a cash benefit and you can eliminate a lot of bureaucracy. And for both of these, the savings isn't just to the government -- it's also to the citizens who have to interact with the government. So even though the savings in terms of tax dollars might be smaller than the other categories, the value here gets doubled because it's also a savings to the public in time and paperwork.
Yeah, there's a lot of inefficiency with handling stuff for the poor. But I suspect a lot of it is deliberate, the more friction in the system the more people get improperly denied or are unable to jump through the hoops. And look at what has been happening in some red states--they're in a rush to kick people off welfare and the system can't handle the load. And since they fail to prove eligibility they're kicked off.
While I think the system is in a major need of a cleanup I don't expect it to free up money.
I also agree our legal system needs a rewrite. Unfortunately, it's an impossible task because things change. To *some* extent it could be handled by having judges actually change the law (provisional while appeals are pending) but sometimes one judicial ruling will invalidate many laws. (The one that I think probably changed the most laws was the 10th Circuit Court's ruling on top equality. Six states became topfree with the stroke of a pen and there's an awful lot of local laws involved. Roe affected more people but since those were generally state laws there probably were fewer jurisdictions involved.)
I would like to see a system in which unclear law is automatically unconstitutional. The defendant should get to choose the most favorable interpretation of what the law says. And if it's not clear to the average person to whom it applies (thus, for example, a law regulating doctors needs to be clear to doctors, but need not be clear to the average person) it's also unconstitutional.
And, in addition to the purposeful waste you refer to there is purposeful exploitation. A nice chunk of change could be freed up from the Medicaid system this way. The problem is the federal government pays a *percentage* of the Medicaid costs. Thus you see drug companies colluding with states. Cover our expensive drug X but don't cover the generic, we will rebate you more than the state share of the price difference.
> While I think the system is in a major need of a cleanup I don't expect it to free up money.
The scenario you're laying out is one in which, for example, a program is currently dispensing $100B in benefits but if everyone who qualified for it actually received the benefits it would be dispensing $200B. A platonic ideal would then have the program costing $200B (i.e. more), but we don't have to beat the platonic ideal, we only have to beat the status quo.
And that program dispensing $100B is spending another e.g. $10B just doing the eligibility determinations. Moreover, the program is then dispensing vouchers that can only be used for specific things, which are less valuable than money.
So if we take the $100B and distribute it as unconditional cash (i.e. a tax credit) instead, the intended recipients get the same $100B as they get now. But the government saves $10B in administrative costs, the recipients save all the time and effort of applying for the program, and $100B in cash is worth more than $100B in vouchers because it e.g. gives you the option to live with your parents while using the money to eventually save up a down payment on your own home rather than being required to use the subsidy to pay rent to a landlord forever.
> I also agree our legal system needs a rewrite. Unfortunately, it's an impossible task because things change.
That doesn't make it an impossible task, it makes it a continuous task. The problem is we haven't been doing it at all, so laws keep accumulating rather than anyone going through and removing the bad ones after things change or we realize that the law was ill-conceived to begin with.
It would probably help quite a bit to make laws expire and have to be renewed every e.g. 10 years. Not only would it invite reconsideration of dusty rules, it would get Congress to spend some time arguing over whether those rules should stay instead of spending all of their time accumulating new ones.
> I would like to see a system in which unclear law is automatically unconstitutional. The defendant should get to choose the most favorable interpretation of what the law says.
This is nominally already the case. There is a rule of interpretation that ambiguous laws are to be construed in favor of a criminal defendant. The problem is judges are human and prosecutors are not, so the prosecutor will purposely bring the precedent-setting case against the most vile scum in the dungeon and force the judge to choose between resolving the ambiguity in favor of the prosecution or letting the child-murderering cartel hitman go free. Then the same precedent gets used against everybody whenever the prosecution couldn't otherwise prove a case against them.
> And, in addition to the purposeful waste you refer to there is purposeful exploitation.
The best solution to this would be to stop forcing the states to fund half of federal programs and let each program be funded entirely by one or the other. The existing system is the federal government screwing the states out of billions of dollars because the states either have to fund a federal program they may not even like or they don't get the federal program but their people still have to pay the taxes that fund it. A ruling that the existing arrangement is unconstitutional wouldn't do a lick of harm.
The interesting thing about law is that all they have to do is make a jury think you were “not paying your fair share”. It’s amazing how well that argument works!
Maybe in in person transactions. It usually tips are processed specifically as tips by platforms and processors and there are fraud rules against tips being more than a certain percentage of the sale. Even the card networks might reject or mark your transactions as suspicious and increase your processing fees. The same I think happens in person.
If you have a compelling reason to believe that "income should all be taxed the same", I'd like to hear it. An easily solvable loophole is not compelling.
The notion of having graduated rates is also from an era when the government operated very differently.
Once upon a time, quite a long time ago, most government spending was public services, e.g. roads and constables and teachers. Government assistance was not a major expenditure. Maybe they would have operated a homeless shelter but there were no food stamps, no social security, no EITC. Then you were faced with the government needing to pay the constable but if you took the money from someone who was already close to starvation, they would starve, so the proposal comes to take more of the money from doctors and lawyers. Okay, sure, so make the marginal rates lower on the poor then. Progressive rate structure.
Then we added food stamps and all the rest of it. Now, most of these programs would be better as cash, but either way they have phase outs so you're not giving food stamps to Jeff Bezos. Except that phase outs and marginal tax rates are really the same thing. So we built a whole complicated system to impose lower marginal tax rates on lower income people, and then a separate whole complicated system to impose means testing and phase outs for government benefits, and these systems cancel out because one of them lowers the marginal tax rate of lower income people and the other one raises it.
This is dumb. Get rid of both complicated systems, make the benefits simple unconditional cash and then use a uniform tax rate.
I don't see how this is easily solvable. Whatever tipping cap you introduce will get maxed out, even in situations where tipping didn't use to be the norm. Zero tax is a lot less than any finite tax.
Also, even if you close the loophole in the law, enforcing it is a nightmare, since the tax office needs to process every single tip now, otherwise someone could slip a few thousand dollar tips through the gaps in enforcement.
"As president, she would work with Congress to craft a proposal that comes with an income limit and with strict requirements to prevent hedge fund managers and lawyers from structuring their compensation in ways to try to take advantage of the policy," the official, who isn't authorized by the campaign to speak publicly, said. "Vice President Harris would push for the proposal alongside an increase in the minimum wage."
