Pandering, Tax Giveaways, and Threats to Democracy
Last week, I somewhat surprised myself by arguing here on Dorf on Law that the 2024 election -- and the impending coup that Donald Trump's Republican Party is already setting in motion -- makes almost all policy wonkiness irrelevant. When one of the two major parties is willing to seize power notwithstanding what happens at the ballot box, that is a problem. When that same party's vision of post-constitutional America is a full-on totalitarian, repressive state, that is when we might consider it a luxury to pretend that the old political rules are still relevant or that the stakes are somehow non-existential. I love policy talk, but come on.
I assume that a Harris-Walz administration, should it ever be allowed to come into existence, would be a center-left grab bag of policies that I would mostly support (at least mildly), with some disappointments mixed in. But at the very least, what we currently know of the Democrats and their nominees is all we truly need to know, from their commitments to voting rights to personal reproductive choice to opposing racism to supporting all people's rights to make decisions about their lives and loves. Everything else is third-order, at best.
The people who are scolding Harris for not yet having held a press conference or sitting for an interview with a "tough" reporter are therefore being self-indulgent in the extreme. And smaller-bore policy questions are not merely of lesser importance but are almost quaint. As I put it last Thursday: "I could have an honest discussion with someone about, say, whether servers' tips should be tax-exempt (short answer: they already mostly are), but holy guacamole does that miss the point." Having thought further about it, however, I can see a way in which discussion around certain narrow issues -- like that tax thing -- might at least help to illustrate the real stakes in 2024-25. We are not going to lose democracy because of one or two policy debates, but they are part of a larger picture.
Let me begin by pointing out that Trump began to talk about his idea not to tax tips by recounting one of his surely imagined tales about someone calling him "sir" and then saying something that just happens to fit with what Trump wants to do. That is hardly a surprise, but I did note one part of his story that seems to have been lost in the rush of the news cycle. The apocryphal waitress supposedly said to Trump: "[I]t's tough, the government's after me all the time on tips, tips, tips." Trump then adds this: "I said, 'Well, they give you cash, would they be able to find it?' She said, 'Actually' -- and I didn't know this -- she said, 'Actually, very little cash is given, it's all put right on the check.'"
Notably, Megyn Kelly's YouTube channel described that as the "Fascinating Origin Story" of Trump's proposal, and Kelly responded at the end of the clip by smiling and saying, "Pretty good!" I should point out, however, that by Trump's own telling, his immediate response to the waitress was to ask why she was not simply cheating on her taxes. "Well, they [customers] give you cash, would they [the government] be able to find it?" So Trump's lizard brain, as always, reveals itself without any trace of shame or even awareness. I cheat on my taxes whenever I can get away with it, so why aren't you smart like me?
As I noted when I brought up this issue last week, servers' tips are mostly already untaxed. Can that be right? After all, 37 percent of tipped workers currently pay zero taxes, which means that a clear majority pay some amount of income taxes. Even those who pay taxes, though, do so on amounts that are low-ball estimates that employers negotiate with the IRS and that are generally under-enforced in any case.
Moreover, even a person whose tip income is enough to have them paying some amount in tax is still receiving most of their income tax-free. How? If a single person with no unusual tax-relevant circumstances earns, say, an average of $14 per hour in income over a full year (not a normal situation, to be sure), the first $14,600 of that $28,000 in annual income would be untaxed, because of the standard deduction. The rest would be subject to 10 and then 12 percent marginal rates. So most of their tip income is currently untaxed, and the rest is taxed at a very low rate.
In any event, when I wrote that servers' tips are mostly untaxed, I was concerned with the policy question underlying the story: We all know that many tipped workers are struggling because they are underpaid (by law, because the sub-minimum wage explicitly permits it) and tips often do not add up to enough to support even a lower-middle-class standard of living. This, in turn, is where the story becomes more than merely a question of whether servers should pay taxes. It is a question of who should pay taxes at all.
Our income tax is one of the only parts of the US fiscal system that is explicitly progressive, in that it by design (that is, because of the standard deduction) exempts the lowest-income workers from paying any income tax. Whether you are a server at a lunch counter or a minimum-wage laborer, you will pay zero income tax to the US government if your income is too low, full stop. And that is good -- although it is somewhat infuriating that Republicans constantly complain that people who pay no taxes have no "skin in the game" and maybe should not even be allowed to vote. Trump's proposal would add more people to the "pays no taxes" group -- that is, to Mitt Romney's infamous "47 percent of Americans" who supposedly pay nothing and are looking for a government handout.
So as a basic matter of US tax policy, there is no reason to exempt people from taxes based on their job description. If your income is low enough to put you in what tax geeks call the "zero bracket," you pay zero tax. This would be true even of a hedge fund manager, if his income were that low. And that is good. (Trump's ridiculous proposal to end taxes on Social Security benefits is misplaced for the same reason, but even more so: Only about 40 percent of beneficiaries currently pay those taxes, and that is because they are high-income, even in retirement.)
To the surprise of many, the Harris campaign has also come out in favor of eliminating taxes on tips. This should have been expected, however, because Joe Biden's press secretary had said that the President would sign a no-tax-on-tips law, if one were passed by Congress. It should also have been no surprise because it is possible to enact even misguided tax policies in a way that minimizes damage, and that would be the difference between a Trump version and a Harris version of such a tax giveaway.
One of the truisms of tax policy is that any provision that provides different tax treatment will be open to abuse. For example, we currently (and quite unwisely, but I digress) impose a significantly lower tax rate on capital gains income than we do on earned income, which has inevitably caused people to try to receive their incomes in the lower-taxed form. "Oh, I'm not receiving a salary, I'm receiving a capital gain, so my top tax rate should be 20 percent instead of 37 percent." This further leads some people to try to cheat and say that their income derives from capital gains, even when it does not.
If Trump's "no taxes on tips" policy were to become law, everyone would have an incentive to say that their income was tipped income, not salary. A professor could ask his department to write "tip" on his annual income reporting form. A corporate manager could receive one dollar in salary per year and have the company "tip" her $17 million.
All of this is so predictable that even a Trumpist administration would need to put some anti-abuse mechanisms into the law. A Harris government would almost certainly put more and better boundaries on the giveaway, but even that would end up being imperfect. Consider a similar example of bipartisan pandering. During the 2012 Olympics, a then-obscure US Senator named Marco Rubio found out that bonuses for medal winners were taxable, and he was outraged that we were taxing our "heroes" for their success. President Obama agreed. I harshly criticized that idea at the time and assumed that it was a news blip that would not result in actual legislation.
But I was wrong. A few years later, Congress and the President added Section 74(d) to the tax code, which provided in paragraph (1) that "[g]ross income shall not include the value of any medal awarded in, or any prize money received from the United States Olympic Committee on account of, competition in the Olympic Games or Paralympic Games." But because many people rightly wondered why, say, NBA multimillionaire Kevin Durant should not pay taxes on his $25,000 Gold Medal bonus, the law added sub-paragraph (2)(A): "Paragraph (1) shall not apply to any taxpayer for any taxable year if the adjusted gross income (determined without regard to this subsection) of such taxpayer for such taxable year exceeds $1,000,000 (half of such amount in the case of a married individual filing a separate return)."
The net result of this is that most Olympic medal winners were unaffected, because they were already too low-income (especially after taking into account training expenses) to pay taxes, whereas winners who were making as much as $999,999 incomes were given a tax holiday. If this goes forward under a Harris Administration, expect any anti-abuse rules to be arbitrary and too generous. Under Trump, it would be closer to yet another full-on grift.
Does that mean anything in the larger picture, where we should be worried about whether the rule of law will survive beyond January 20, 2025? If pundits want the candidates to "discuss the issues," the resulting conversation can be this boring and this low-stakes. But even when the candidates agree on the top-line pander, what will ultimately matter is how the inevitable spillover effects are managed and minimized. Long before Trump, Republicans had decided that they could reduce taxes by under-enforcing the tax laws. Giving people carte blanche to ignore guardrails is not quite the same as Trump's instinctive "Why not just lie?" response, but it is a close approximation.
Not everything that would happen under Trump would be visibly catastrophic, but there would be a zillion things like this that would give Republicans the opportunity to undermine our system of laws. And they have shown that they will exploit every last one of them.