Tangle - The 'no tax on tips' policy.

I’m Isaac Saul, and this is Tangle: an independent, nonpartisan, subscriber-supported politics newsletter that summarizes the best arguments from across the political spectrum on the news of the day — then “my take.”

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Today's read: 12 minutes.

Correction.

We have two small but notable corrections from yesterday's newsletter. First, in the introduction to yesterday’s issue, we referred to Walz’s position as command sergeant major in the National Guard as “the highest rank for enlisted soldiers in the military.” We used (and linked to) a source that was incorrect; while a command sergeant major is the most senior enlisted member of a color-bearing Army unit (battalion or higher), the sergeant major of the Army is the most senior enlisted soldier in the Army. We did not properly vet the source we used and apologize for the error. 

Second, in “my take,” I referred to "Walz's former battalion leader John Kolb." John Kolb was, indeed, the former battalion commander of Walz's National Guard unit, but he took over a few months after Walz's retirement. Somewhere in our editing process we restructured this sentence to make it sound cleaner, but made it inaccurate — since Kolb was never Walz's direct battalion leader. I missed this one after edits and apologize for the error. 

These are our 112th and 113th corrections in Tangle's 262-week history and our first corrections since July 22nd. We track corrections and place them at the top of the newsletter in an effort to maximize transparency with readers.

On Friday.

Every now and again, I write a personal essay for our Friday edition. This week, I’m going to be publishing one of the most difficult pieces I’ve ever written: a personal essay on Israel, the latest on the war, and how my feelings on what is happening in Gaza and the West Bank continue to evolve. Keep an eye out for the piece on Friday.

Quick hits.

1. Former President Donald Trump was interviewed by Elon Musk on the X platform last night for roughly two hours after the interview was delayed by technical issues. Trump, who has been endorsed by Musk, has also resumed posting on the platform. (The interview) Separately, Trump plans to sue the Justice Department for $100 million in damages for the raid on his Florida home in 2022. (The lawsuit)
2. Ukraine says it has seized hundreds of square miles of Russian territory after its incursion into the southwestern Kursk Oblast. (The incursion)
3. A New York judge ruled that Robert F. Kennedy Jr. cannot appear on the state's ballot because he falsely claimed New York residency. (The ruling)
4. Secretary of Defense Lloyd Austin ordered a guided missile submarine to the Middle East and accelerated the arrival of a strike group ahead of an anticipated Iranian attack on Israel. (The order) Separately, the FBI launched an investigation into efforts by Iran to infiltrate the Trump campaign. (The investigation)
5. The FDA rejected approval of MDMA (commonly known as ecstasy) for treatment of PTSD. The agency called for a new study to address significant limitations in data on the treatment’s effectiveness. (The rejection)

Today's topic.

“No tax on tips.” On Saturday, Vice President Kamala Harris told a crowd in Nevada that she would eliminate taxes on workers’ tips if she becomes president, just two months after former President Donald Trump made the same proposal. Trump said he embraced the idea of no tax on tips after a Nevada waitress who served his table explained that the government was taking too much of her money. The proposal was then added to the GOP’s 2024 platform.

The Nevada's Culinary Union endorsed Harris on Saturday, shortly before she addressed 12,000 people and promised to "raise the minimum wage and eliminate taxes on tips for service and hospitality workers."

Trump responded on Truth Social, writing, "This was a TRUMP idea - She has no ideas, she can only steal from me."

Harris's campaign answered by saying that their plan would be distinct from Trump's.

"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," an unnamed Harris campaign official told NPR. "Vice President Harris would push for the proposal alongside an increase in the minimum wage."

Senator Ted Cruz (R-TX) has already introduced a bill exempting tips from federal income tax, which was endorsed by House Speaker Mike Johnson (R-LA). Both of Nevada's Democratic senators also joined Cruz’s bill, which was also endorsed by several Democratic lawmakers.

Neither Trump nor Harris has said whether their proposals would eliminate just the income tax or both the income and payroll taxes that service workers pay on tips. Those details are critical. Payroll taxes help fund Social Security and Medicare, and roughly two-thirds of restaurant workers make under the annual amount required for them to pay federal income taxes — meaning most tip-earners already don’t pay income tax on any of their wages.

While the plan appears to be politically popular, many economists are more skeptical. Some argue that the plan would be difficult to regulate or administer, and would create unevenness across states (workers who earn reduced minimum wage and mostly tips would be taxed less than those earning higher minimum wage and fewer tips, despite doing similar services for similar pay). The plan could also cost the federal government several hundred billion dollars over ten years.

Today, we're going to break down some arguments from the right and left about the proposed plans. Then, my take.

What the right is saying.

• The right is mixed on the proposal, with supporters arguing it is both politically savvy and economically sound.
• Some criticize Harris for co-opting the idea months after Trump. 
• Others say extending the Trump tax cuts would be a smarter policy move. 

In National Review, Andy Puzder praised “Trump’s win-win tax proposal.”

“Critics from the Left and the Right claim [the proposal is] a political ploy that would benefit few workers and reduce tax revenue. Without question, tax policy should be designed to increase tax revenue, not to accomplish political goals. But some policies, such as this one, could achieve both,” Puzder said. “Earning a paycheck can improve a person’s, and particularly a young worker’s, sense of self-worth. Earning tips enhances that experience because the rewards of the job are directly tied to individual performance and received in real time — tangible proof that a worker has excelled at his job.”

“‘No tax on tips’ can have the income-enhancing benefits of a minimum-wage increase without the risks — such as reduced working hours, automation and job displacement, or business closures, which would result in fewer overall job opportunities. ‘No tax on tips’ would also benefit employers, reducing the pressure on them to increase wages — as workers can earn an increase with every shift — and incentivizing employee performance,” Puzder wrote. “‘No tax on tips’ is an innovative proposal that can increase benefits for low-wage workers while decreasing the costs of running and growing the businesses that employ them.”

In Hot Air, Jazz Shaw said “Kamala [is] copying Trump's platform now.”

“Harris broke form and actually did name a policy change that she would put in place if elected. To my great surprise, I found myself agreeing with her because it's a pretty good idea… But wait... that sounds kind of familiar. Where have we heard that before? Oh, that's right. Donald Trump has been saying the same thing all along and he was quick to point out that Harris is stealing his ideas,” Shaw wrote. “Of course… any such change to the government's revenue collection system would have to originate in the House and be passed by Congress before the President could approve it.

“Also, while it's a popular idea and should certainly be considered, it's difficult to estimate how much of a real-world impact it would actually have. Calculating and collecting taxes on tips is notoriously difficult because, unlike bills that are processed at the register and produce receipts, tips have traditionally been offered in a hand-to-hand fashion, with little or no documentation,” Shaw said. “Now, however, the ‘no tax on tips’ idea has been turned into a partisan political football. Back when it was just Trump talking about it, a number of media outlets were disparaging the idea… Now that Kamala Harris is saying it, everyone is in love with the idea.”

In The Hill, Vance Ginn called the proposal “a costly illusion.”

“Trump’s proposal to exempt tips from federal income and payroll taxes might sound like a windfall for service workers, but it’s a costly illusion that undermines fair tax policy and economic efficiency. This plan, proposed as legislation by Sen. Ted Cruz (R-Texas), designed to appeal to a crucial voter base, exacerbates inequities and distorts the tax system. There’s a better way,” Ginn wrote. “The core problem with exempting tips from taxes is that it narrows the tax base, leading to potential hikes in overall tax rates on tipped workers and everyone else to compensate for deficit spending. A broad tax base with low rates is essential for minimizing economic distortions and spreading the tax burden fairly.”

“This proposal picks tipped workers as winners over everyone else, incentivizing more tipped jobs and payments. Today, nearly every payment app prompts users for tips, a practice that could proliferate further under such a tax exemption. This disrupts consumer behavior and distorts the labor market by artificially boosting the attractiveness of tipped positions over other roles, regardless of the actual economic value they generate,” Ginn said. “A more effective approach would be to make the individual income tax cuts from the 2017 Tax Cuts and Jobs Act permanent, as they expire next year. Coupled with broadening the tax base and lowering rates, this would create a more efficient and equitable tax system.”

What the left is saying.

• The left is skeptical of the idea, suggesting tipping should be eliminated, not further institutionalized. 
• Some question the strategy behind Harris adopting Trump’s proposal. 
• Others say it’s smart politics from Trump, even if the policy itself is flawed.

In Bloomberg, Allison Schrager wrote “Trump is totally wrong about tipping.”

“Tipping is terrible. Almost no one likes it. And as it has become more ubiquitous, it has also become even more unpopular. Undeterred by any of this, Donald Trump has an idea sure to make tip jars and in-app tip requests even more common… he said he would make tipped income tax-free,” Schrager said. “As a result, more pay would likely be defined as tipped income. Not only would that bring in less tax revenue at a time when it is sorely needed, it is also bad economics… There is no economic justification to favor tipped income over regular income. If anything, it should be taxed more, because it is not a good way to pay people.”

“Tipping is now internalized as a cost of doing business. That means a quarter to a fifth of restaurant revenues go directly to the server rather than to the business itself. Owners thus have less money to allocate among staff based on the value of their skills or their scarcity in the labor market — the way it works in every other business. This creates a distortion in the service industry,” Schrager wrote. “The only way to end tipping is through policy change. And the policy is definitely not to encourage more tipping by giving it tax advantages. It’s to make tip pooling the norm or, better yet, to phase out tipping entirely.”

In The American Prospect, David Dayen called Harris’s proposal “a policy gimmick.”

“No taxes on tips is generally a poor idea where there are other good ones available. It would somewhat unfairly segregate people who make the same income by virtue of how that income is technically collected. It invites gaming of the system, where real estate and stock brokers, lawyers, or even hedge fund managers can recharacterize their income as tips and get a huge tax break,” Dayen said. “It would nullify efforts to improve reporting compliance on tips. And if this affected payroll as well as income taxes—which businesses would certainly push for on the employer side as well—it could catastrophically reduce what tipped workers pay into and get out of Social Security.”

“Of course, endorsing an end to the subminimum wage wouldn’t have offered much to the Culinary Union in Nevada, because they’ve already secured that. So Harris’s team made a move to co-opt an idea from Trump, who responded with his usual fury. That’s a reasonable political maneuver, but as a policy idea it kind of stinks,” Dayen wrote. “This demonstrates an instinct for gimmickry over what might actually work well. Harris said earlier Saturday that she would roll out a policy platform focused on the economy and lowering costs this coming week. We do need to understand what she would do in office. But I’d hope it gets better than faux populism endorsed by restaurant trade groups.”

In The Atlantic, David A. Graham said “Trump has somehow stumbled into a very likable policy idea.”

“‘No taxes on tips’ has not inspired a great deal of elite attention, but maybe it should. Some 4 million people work for tips, and the idea could make a big difference in their lives. It is also a notable electoral ploy in Nevada, a key swing state that Republicans keep losing; a pithy slogan in a campaign otherwise lacking any; and the sort of signature Trump gambit that tends to fracture existing political coalitions,” Graham wrote. “In other words, it’s a typically Trumpian move: completely detached from expert opinion on the left or right but with an intuitive appeal and political edge.”

“Customers tend to hate tipping, or at least to feel uncomfortable about it… But Trump would take things in the opposite direction, shoring up tipping’s role in the economy. In doing so, he could unite tipped workers in the service industry with wealthy small-business owners and small-government conservatives,” Graham said. “Even if it seems questionable, who wants to be on the record voting against cutting taxes for waiters and cabbies? This makes ‘No taxes on tips’ a little like the ‘Build the wall’ of 2024: It might not actually be smart policy, but it sure sounds good on the trail.”

My take.

Reminder: "My take" is a section where I give myself space to share my own personal opinion. If you have feedback, criticism or compliments, don't unsubscribe. Write in by replying to this email, or leave a comment.

• I appreciate that Republicans and Democrats are really trying to reach working-class voters.
• This proposal, however, leaves me with more concern than optimism.
• I credit Republicans for a great attempt, but I think the unintended consequences are likely to outweigh the benefits.

I really want to love this policy proposal.

First of all, kudos to Donald Trump and the Republican Party for making it a part of their platform. “No tax on tips” isn't a "new policy" in the sense that Republicans were the first ones to think of it, but it is novel in the sense that it hasn't been debated seriously in a long time. Trump brought it back into the national conversation; it was broadly popular (especially in the swing state of Nevada), so Harris co-opted it. Now we have a popular policy proposal and a bill in the Senate that both have bipartisan support. That's great.

It's also nice because this policy position is genuinely aimed at the working class. Broadly speaking, the Democratic Party used to make the working class a major priority in their policymaking, but in recent years has prioritized highly educated, well-off suburbanites and urbanites. Broadly speaking, the Republican Party used to focus on friendly tax policies for business owners and corporations while putting the working class second, but in recent years has done a lot more talking about the working class (while still having very friendly policies for corporations and business owners). Democrats getting back to their roots and Republicans backing up that talk are both things I’m genuinely happy about.

The upside is obvious: If you are a service industry worker who makes a lot of money on tips, you'll pay less in taxes. This will increase your take-home pay, which will put more money in your pocket, which will help you. That’s pretty straightforward. However, this plan has a lot of downsides that are overshadowed by the draw of a bigger paycheck:

• Perhaps most notably, it will discourage employers and federal or state governments from raising the base wage for tipped employees. Right now, the federal minimum wage for tipped employees is $2.13 per hour — and has been since 1991. A policy that works against raising this rate could very easily harm workers in the long term.
• Tax exemptions differ across states, so service workers  in one state could pay more in taxes than workers doing the same job for the same pay in another state if they make a smaller proportion of their money through tips. 
• This policy is likely to cost the federal government hundreds of billions of dollars in lost revenue. It also narrows the tax base. That always means other people are going to pay higher taxes to make up for the shortfall.
• Have you noticed how you are asked to tip on everything these days? Do you find it slightly annoying to be asked to tip even after buying something that requires little to no service? Well, this proposal would make that a lot more common, because more jobs would magically become tip-wage jobs. Is that really a trade off we all want to accept to (potentially) benefit workers in tipped occupations, who make up just 2.5% of all workers? 
• There is a reason so many labor leaders do not want this proposal enacted: They know it could be used against them.

Does this mean “no tax on tips” is a policy idea doomed to fail? Actually, no. I think there is a world where this policy gets implemented, employers lower wages thinking workers will make it up on tips, then workers do make it up on tips — and end up with a slightly higher take-home pay. That outcome is completely plausible.

But when I look at this policy critically, it’s easy to see that there is something gimmicky about it that could blow it up, and I think the unintended outcomes are more likely. Trump Republicans get an A+ for considering a policy that is centered on broadly helping service workers. Harris gets a B for copying the right person's homework. But this policy, on the merits, is a hard C — with a lot of risk, a lot of unanswered questions, and a lot of reasons for workers to be skeptical.

Take the survey: What do you think about “no tax on tips”? Let us know!

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Your questions, answered.

Q: In yesterday’s poll results [from the Aug. 8 edition], you said that 64% of readers called the Khelif decision “fair,” which is misleading because most of those people also said that the IOC should review its rules. In the past you said that Tangle doesn’t pool results, but today you did. Why the change? This seems incredibly biased to me.

— Rick from Albany, NY

Tangle: Yes, we said that 64% of readers called the IOC’s decision to allow Algerian boxer Imane Khelif and Taiwanese Lin Yu-ting to compete in the women’s division “fair.” Yes, 24% of respondents called the decision “totally fair” while 40% said the decision was fair but that the IOC “should review [its] rules.” Yes, ever since we started to accompany our survey results with visualizations, we’ve made the choice not to pool results when we summarize them (that is, we had been summarizing the most common response only). Yes, you (and other readers) have pushed back against this policy. 

And we think you had a good point. We review and revise our policies all the time, and we changed our minds on this one. We actually made the change when we summarized our survey about Vice President Kamala Harris choosing Minnesota Governor Tim Walz as her running mate. In that poll, 32.3% of readers said they “support” the decision, compared to 30.3% who said they “strongly support” it. Under our existing policy, we would have said that “32% said they support the decision,” even though 65% answered in support. That’s when we realized that our critical readers were right — the policy as it existed was producing some misleading descriptions.

So, moving forward, you will notice that we’ll be “pooling” survey results in our reader surveys when it makes sense to do so. Thank you all for writing in with your feedback; we might not always take your suggestions, but sometimes we just need a little bit more time and thought before we do.

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Under the radar.

The Biden administration has frozen a controversial program that allowed tens of thousands of migrants from Cuba, Haiti, Nicaragua, and Venezuela to fly or travel directly to the U.S. The  Department of Homeland Security said it is pausing the program after an internal report showed significant amounts of fraud. Previously, the program had allowed 30,000 migrants who meet certain conditions to come to the U.S. legally from those countries under parole. The migrants had to provide identifying information for a sponsor, but the internal report showed a handful of Social Security numbers, addresses, and phone numbers were used hundreds of times. Fox News has the story. 

Numbers.

• 4 million. The approximate number of U.S. workers in tipped occupations in 2023, roughly 2.5% of all employment, according to an analysis from The Budget Lab.
• 2%. The approximate percentage of workers earning between $17.66 and $25.00 an hour who were in tipped occupations in 2023.
• $538. The median weekly wage for tipped occupations in 2023, compared to $1,000 for non-tipped workers.
• 37%. The percentage of tipped workers who paid no federal income tax in 2022. 
• 67%. The percentage of U.S. voters who do not believe tips given to service workers should be taxed, according to an August 2024 poll from Newsweek/Redfield & Wilton. 
• 74%, 70%, and 59%. The percentage of Gen Xers, Millennials, and Gen Zers, respectively, who do not believe tips given to service workers should be taxed.
• -8%. The decrease in the percentage of Americans who say they tip their servers at sit-down restaurants between 2021 and 2024, according to a Bloomberg analysis.  
• $673 and $402. The median weekly wages for front-of-house employees and back-of-house employees, respectively, at casual fine-dining restaurants, according to a 2014 study from Cornell University and Ohio State.

The extras.

• One year ago today we had just published a conversation with UFO skeptic Mick West.
• The most clicked link in yesterday’s newsletter was the ad in our free version for Nice News.
• Nothing to do with politics: To all our southpaw readers, happy left-handers day!
• Thursday’s survey: 2,179 readers responded to our survey asking about how Tim Walz has characterized his service record with 69% calling it fair. “Being a veteran myself, I do have some problem with his overstated retirement rank. But, the questions regarding deployment and his misstatement on carrying guns in war are not worth the time to argue about,” one respondent said.

Have a nice day.

Sofie Furio, a military veteran who struggles with PTSD, has found a useful tool in her healing journey: LEGO sets. Furio has described working on the sets as an activity that grounds her and enables her to work through difficulties, while also providing a way to work with others. She is not alone in this discovery; a number of individuals battling difficulties ranging from PTSD to childhood trauma have benefitted from working with Legos. Dr. Jay Watts, a clinical psychologist and psychotherapist, said that while LEGO sets won’t entirely heal trauma, working with them “allows us both to let our imaginations run riot and to engage in a precision that demands qualities akin to mindfulness.” The Canary has the story.

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