Abolishing Taxes on Tips Would Be a Costly Mistake

Making tips taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. -free would not only lower revenues but distort the tax code

The individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. has plenty of problems, but in some respects the tax has improved in recent decades. Unfortunately, several Trump administration proposals would move us in the wrong direction, including the president’s call to drop taxes on tips.

Back in the 1950s, the tax code featured sky-high marginal tax rates and ample opportunities to avoid them. The top marginal tax rates was higher than 90 percent for part of the 1950s (even though only a narrow sliver of taxpayers were subject to it). But the marginal tax rates on ordinary taxpayers were high, too. In 1953, the bottom marginal tax bracket was 22.2 percent; today, it’s 10 percent.

Despite these much higher taxes on paper, tax revenue as a share of GDP throughout the 1950s was roughly the same as it is today. How do we still collect the same level of revenue with much lower rates? Because of reforms that brought rates down and expanded the base.