


By tradition, most tips were in cash, and most people who received tips didn’t report them all to the taxman.
For those of us who think in terms of the basic free-market/supply-side school of tax policy, the Trump push to eliminate taxes on tips not only looks a lot like pandering, but runs counter to the idea that the tax code should be simple and uniform, and should seek to treat people alike. Quin Hillyer makes that case. “There is no logical reason — none whatsoever — to treat half their income as being more sacrosanct than half the income of dental hygienists or police officers,” he argues. And “unlike broad-based tax relief that can noticeably boost economic growth systemwide, this policy would not encourage the creation of new jobs or encourage more productivity.”
As a matter of theory, he’s right, and I argued during the campaign that while it might be a popular policy that’s useful in helping win elections, it’s not the kind of conservative priority that you run for office to accomplish: “It treats some income and some workers unequally, it adds further exploitable loopholes to the tax code, it could incentivize employers to cut wages in favor of tips, and it’s less economically beneficial than other forms of tax relief that could be crowded out by the ‘cost’ to the government in foregone tax revenue from ending the tip-tax.”
There is, however, a conservative case for exempting tips from taxation. That case has nothing to do with economic theory and everything to do with existing economic practices. As conservatives, we take account of the “hidden law” — the ways in which business, society, and government actually function, not just what the law says. When Edmund Burke and other British conservatives wrote about the “constitution” of Britain, they didn’t mean a written charter of binding rules (Britain didn’t have one and still doesn’t), but the habits of British society, only some of which were written down in its laws. In America, where the rule of written law is king, we still have hidden law — and when possible, we ought to conform our written laws to our actual laws.
So it is with tips. By tradition, most tips were in cash, and most people who received tips didn’t report them all to the taxman. If they were prudent, they’d report some of the tips, because it wasn’t plausible that a full-time waitress or bartender got zero tip income. But there was no practical way for the IRS to call out the accuracy of reporting of tipped income. That changed, however, as the shift to credit cards, debit cards, and other forms of electronic payments led to a much more robust paper trail of tip income. Moreover, the Biden administration sought to increase enforcement — a plan for which Kamala Harris cast the deciding vote in the Senate, making her later about-face on the issue especially hilarious.
It’s bad to have laws that are widely flouted. Given settled expectations in the past that tip income was hard if not impossible to tax, it’s hardly unreasonable for Republicans to decide that the written law should acknowledge what the hidden law already provided, and exempt tips from taxation. It’s not as if the law never before treated tips as a distinct type of income, given that the Fair Labor Standards Act and other state-level minimum-wage laws have long treated categories of workers who earn a lot of tip income as exempt from the minimum wage that applies to other jobs.
“No tax on tips” is not great tax policy. But it’s small-c conservative in ways that we should at least appreciate.