Exempting Tips From Federal Income Tax Would Benefit Very Few Workers – TPC
“Around 3.3 percent of households would receive more take-home pay if tips were exempt from both income and payroll tax, and if there were no limit on eligibility.
“Of course, there would be a major trade-off. By avoiding payroll taxes, these workers would not contribute to Social Security and Medicare. As a result, when they reach old age, they’d receive lower, or even no, benefits from those programs.”
By crowding out wages, the EITC also reduces payroll taxes and later Social Security benefits:
Are Workers Paid the EITC Shortchanged on Social Security?
An alternative way to help low-income workers to exempting tips from taxes and expanding the EITC is raising the minimum wage – and significantly raising or eliminating the tipped minimum wage. Raising wages would also raise tax revenue and help reduced the federal budget deficit.
CCSE work on this topic: