President Trump made a campaign promise that if elected, he would support legislation exempting tipped income from the federal income tax. On May 20, 2025, the Senate unanimously passed the “No Tax on Tips Act” with the House narrowly passing the “Big Beautiful Bill” on May 22 that also exempted tipped income from taxation. “No Tax on Tips” might make for a good political slogan, but it is lousy economic policy.
With the annual federal budget deficit approaching $2 trillion and the national debt topping $36 trillion, the federal government is in no position to lose tax revenue. If the Big Beautiful Bill becomes law, both the deficit and debt will only get larger, threatening higher interest rates, inflation and a financial crisis. It is irresponsible to exempt politically favored income from taxation when the government is facing this kind of financial hole.
Tipped workers such as servers and bartenders tend to be on the lower end of the income distribution, earning a median annual salary of about $30,000 or roughly $15 per hour. Exempting tips from the income tax appears to be a tax cut for lower income workers; however, many servers and bartenders come from middle- and upper-income families, such as students working part-time jobs. For instance, approximately 15%-30% of minimum wage earners are from middle class families. Thus, exempting tips from the income tax is a poorly targeted way to help lower-income Americans.
Additionally, servers and bartenders earn approximately the same hourly wage as those in occupations such as janitor and retail worker. Since janitors and many retail workers do not earn tips, exempting tipped income from the income tax privileges one type of job over other similar jobs. Why should a bartender, whose tips might be as high as 70% of his income, have such a substantial tax break while a janitor sees no such tax break?
Tips being tax-exempt makes tipped jobs more attractive for workers than jobs without tips. If I am considering working as a janitor or a server, “no tax on tips” makes being a waiter much more attractive since half, or more, of my income is not subject to the income tax while all of my income as a janitor is taxable. This increases the supply of servers and reduces the supply of janitors. Wages for servers will then fall, eliminating some, if not all, of the benefit of the tax exemption for these workers. In other words, the tax break may be captured by the restaurant owner through these wage savings.
Americans are getting tired of tipping – we are all annoyed when the iPad swings around and there is a button for a tip.
Expect this to explode if “no tax on tips” becomes law as workers outside of traditionally tipped industries try to take advantage of this tax break.
“No tax on tips” is fiscally reckless and economically unfair. Let’s hope this is one campaign promise that remains unfulfilled.
