Although no Americans are old enough to remember it, there was a time in the United States when there was no income tax. The income tax actually began as a modest 1 percent tax on taxable income above $3,000, followed by a series of surcharges of up to 6 percent applied to higher incomes. The maximum rate of 7 percent was applied to taxable income over $500,000. Thanks to generous exemptions and deductions, only a small percentage of the population paid taxes on their income.
The reason why people say that we just can’t eliminate the income tax is that it would deprive the government of revenue it needs to spend. But isn’t that the point? The case could be made that at least 90 percent of what the federal government spends money on is unconstitutional: foreign aid, business subsidies, welfare, education, health care, job training, the war on drugs, public broadcasting, student loans, food stamps, foreign wars, space exploration, and so much more.
During a campaign stop in Nevada early last month, Republican presidential candidate Donald Trump promised that if elected, there would be no more federal tax on tips.The constitutional functions of the U.S. government could be adequately funded without an income tax.
[Click to Tweet]
Said Trump: “For those hotel workers and people that get tips, you’re going to be very happy, because when I get to office, we are going to not charge taxes on tips. You do a great job of service. You take care of people, and I think it’s going to be something that really is deserved.”
According to the Internal Revenue Service (IRS), tips are taxable income and must be reported to employers. Four factors determine whether a payment qualifies as a tip:
- The customer makes the payment free from compulsion;
- The customer must have the unrestricted right to determine the amount;
- The payment should not be the subject of negotiations or dictated by employer policy; and
- Generally, the customer has the right to determine who receives the payment.
Tips reported to employers are included on employees’ W-2 forms for income-reporting purposes. Tips are simply added to one’s taxable income and are subject to not only income tax but also Social Security and Medicare payroll taxes.
Trump was not clear whether his proposal would exempt tips from payroll taxes, income taxes, or both.
A week after Trump met with congressional Republicans, Senator Ted Cruz (R-Tex.), with cosponsors Senator Steve Daines (R-Mont.), Senator Rick Scott (R-Fla.), and Senator Kevin Cramer (R-N.D.), introduced the No Tax on Tips Act. The relevant text of the bill simply reads: “There shall be allowed as a deduction an amount equal to the cash tips received during the taxable year that are included on statements furnished to the employer.” This would be an above-the-line deduction of tips received (via cash, credit cards, and checks) that reduces taxable income similar to the deductions for student loan interest paid, unreimbursed expenses of teachers, the deductible part of self-employment tax, and contributions to a traditional IRA.
Naturally, industry groups were ecstatic about the bill, including the National Restaurant Association and the Professional Beauty Association. Said Sean Kennedy, Executive Vice President of Public Affairs at the National Restaurant Association: “Tipped employees are a critical part of the restaurant industry, and anything that strengthens their economic condition is a positive for them. The ‘No Tax on Tips Act’ would provide immediate tax relief for more than 2.2 million restaurant employees and their families, putting more money in their pockets at a time when we’re all feeling the squeeze of higher prices.”
However, Elyanna Calle, an organizer with the Restaurant Workers United union, slammed the proposal, calling it a “misguided way of trying to fix a problem of uplifting the lower class.”
Other opponents of Trump’s proposal focused on how much revenue the federal government would be losing if tips were no longer taxed.
Be seeing you
MCViewPoint 