Photograph Source: The White House – Public Domain
No one ever accused Donald Trump of knowing much about the economy. That fact comes through loud and clear in his tax cut proposals. In addition to his big tax cuts for corporations and rich people, Trump also pushed his “populist” tax cuts. These were exempting tips, Social Security, and overtime pay from taxes, and also making the interest on auto loans tax deductible.
It’s fair to say that these proposals make zero economic sense and in fact go against the one positive contribution of Trump’s 2017 tax cut: simplifying the tax code. That tax cut eliminated or limited many deductions. It also increased the size of the standard deduction.
As a result, 90 percent of taxpayers now take the standard deduction. This makes their taxes easier to calculate and reduces the opportunity to game the tax code. This means people will make decisions based on whether they make sense for them rather than whether they save them money on their taxes.
Trump’s populist proposals all go 180 degrees in the opposite direction. What possible rationale can there be for having someone who makes $50,000 a year — $20,000 from straight pay and $30,000 from tips — pay less in taxes than someone earning $50,000 in straight pay?
The idea of helping lower-paid workers is great. Let’s raise the minimum wage and eliminate the tip wage credit that allows workers receiving tips to be paid less than the minimum wage. But why would we want to give special treatment to the pay they get from their tips?
Okay, we don’t have to play naïve here. Nevada was a key swing state in the election last fall and workers in the casinos actually do often get substantial pay in tips. So, exempting this income from taxation was an effective way to win some important votes.
But this exemption may actually hurt many, if not, most tipped workers. Most tipped workers pay little or no income tax. Average weekly earnings in the restaurant industry is $490, which translates into $24,500 for a person working 50 weeks a year.
The standard deduction for a head of household (a worker with at least one dependent) is $21,900. This means that a restaurant worker getting the average wage would pay taxes equal to 10 percent of their income above this amount, or $2,600. Their tax bill then be $260.
Let’s say that $10k of this worker’s pay was in tips. That means for tax purposes they would be reporting $14,900 on their taxes, well below the point where they would owe any taxes. That would mean Donald Trump saved them $260 in taxes. That’s not exactly a game-changer, but surely a nice break for someone getting by on less than $500 a week.
But wait it gets worse. If this worker has two children, they would be getting the Earned Income Tax Credit. The amount of this credit hits a peak of $6,960 for a parent with two children in 2024. The size of the credit is lower as income rises, but at the original $24,500, this worker would get $6,590, almost the maximum amount.
But the credit also phases in at lower incomes. If this worker only puts down $14,500 as their income, since they don’t have to declare their tips as income, then their credit would only be $5,970. This would make them a net loser from Trump’s tax break. They would have saved $260 on their income taxes, but they would have lost $620 as a result of getting a smaller Earned Income Tax Credit. That one doesn’t score very high on the populist front.
Exempting Social Security benefits from taxation does even worse. The vast majority of Social Security beneficiaries pay little or no taxes on their Social Security already — their income is too low. On the other hand, a high earning couple, who may have $60,000 in benefits, would be paying $22,200 in taxes on their Social Security benefits. If we ended taxation of benefits completely, they would be getting a very generous tax break.
Fortunately, it seems the Republicans in the House approached this one with a bit more sanity than Trump and just raised the standard deduction for people over age 65 by $4,000, with the higher deduction phasing out at high income levels. This means more people will pay no tax on their benefits. It would save $400 in taxes for many middle-income retirees. That may not be the best use of revenue given the needs of the country at this point, but certainly less pernicious than Trump’s original proposal.
Making interest on car loans tax deductible is another obvious election pitch. Michigan was a swing state and Trump presumably hoped to convince people that this tax break would increase car sales. The problem with that story is that 90 percent of people take the standard deduction and would not benefit from making interest on a car loan tax deductible. As a result, this tax break is likely to have very little impact on people’s taxes or the car market.
Finally, we get to making overtime pay tax exempt. Again, this one fails the logic test. Why do we think people should pay no taxes on their overtime pay? One of the reasons for passing the Fair Labor Standards Act in 1937, which set the 40-hour workweek, is that we wanted to penalize employers for working people long hours. We wanted them to instead hire more workers. This is yet one more New Deal measure that Trump is looking to reverse.
It’s also worth noting that Trump could have focused on ensuring that workers who work overtime get paid for their work. Overtime is straightforward for workers who are paid hourly. You get time and a half pay for working beyond 40 hours a week. However, this does not apply for management and supervisory personnel, who typically get paid a fixed weekly salary.
Since employers are clever people, they realized that they could get around paying workers overtime, or even anything at all for extra hours, by classifying them as management. The classic example is an assistant manager at a fast-food restaurant who may get very low pay, and have no real authority, but still gets classified as management.
While this worker can contest that they are not really management, and therefore should get overtime, there is a provision to protect against abuses like this. If a worker gets paid less than $844 a week ($43,900 a year) they are automatically eligible for overtime pay. Biden had proposed raising this threshold further to $56,660 a year, but a court ruling (a damn activist judge ignoring his presidential mandate) struck this down. If Trump wants to help workers get more overtime money, he might try pushing through Biden’s higher threshold.
But instead, we get tax-free overtime pay. Thankfully House Republicans are proposing to limit the income of workers who benefit, so we won’t see investment bankers reporting millions of dollars in tax-free overtime pay.
Still there is an interesting pattern here. There are big differences in the length of the average workweek across industries. The figure below shows average weekly hours for production and non-supervisory workers for April of this year. Mining tops the charts with an average of 46.4 hours, with both construction and manufacturing near 40 hours.
By contrast, the average workweek in private education and health services is 31.9 hours. In retail trade it is 30.6 hours and in leisure and hospitality (hotels and restaurants), it is just 24.1 hours.
Here’s another graph, this one showing the percent of workers in each industry that are men. Mining tops the charts at 86.1 percent. Construction and manufacturing follow with 85.6 percent and 71.2 percent, respectively.
By contrast, in leisure and hospitality 46.0 percent of the workers are men. In private education and health services, men are 23.4 percent of all workers, and in the other services category 41.5 percent.
The simple story is that it looks like men, guys named Joe, are hugely more likely to benefit from making overtime pay tax-free than women. To be clear, there’s nothing wrong with guys named Joe. I have many friends named Joe (seriously). But there is no obvious reason to design the tax code to give them special favors. At least Trump isn’t being DEI.
This first appeared on Dean Baker’s Beat the Press blog.