One of the tax policy ideas that Donald Trump proposed during his nomination acceptance speech was “no tax on tips.” At least one former restaurant CEO, Andy Puzder, who is also a senior fellow at The Heritage Foundation and American First Policy Institute, believes it is a good idea.

However, Puzder observes, “Critics from the Left and the Right claim it’s 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 explains:

Obviously, tipped employees would benefit if part of their income is untaxed — and that’s a good thing. According to the Budget Lab at Yale University, a nonpartisan policy-research center, roughly 4 million workers (2.5 percent of the labor force) hold jobs in tipped occupations. However, 5 percent of workers in the bottom 20 percent of wage earners — those making less than $17.66 per hour — hold jobs for which tipping is the rule. As a former restaurant-company CEO, I feel very confident predicting that this percentage would rise if Trump’s proposal became law, as would the benefits for low-wage workers. And those benefits would extend beyond a simple increase in those workers’ income.

He notes that a system that rewards workers for their individual work performance will incentivize better work and draw more workers to the industry.

This helps explain why tipped workers overwhelmingly support keeping in place what is known as the “tip credit” — receiving a much reduced minimum wage ($2.13 an hour at the federal level) in anticipation of tips. In this respect, tipped workers are already treated differently than non-tipped wage-based employees — and they prefer it.

“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 resulting 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 (which is what earns tips). Reduced or stable labor costs would leave employers with more capital available to keep a business open or to expand it and create more jobs.

He points to the $20 minimum wage increase debacle in California and how this has proven to be a disaster for restaurant workers and businesses.

Consider California. It has the second-highest minimum wage in the country, at $16 per hour, an unmatched $20 minimum wage for certain restaurant companies, and no tip credit. It’s no accident that California was the leading state for fast-food-restaurant closures in 2023 (at 379). Or that it has the highest unemployment rate of any state, at 5.9 percent, well above the national average of 4.1 percent.

But what would be the impact on government tax revenue?

“No tax on tips” would have direct and indirect tax effects. The direct effect of eliminating a category of taxable income obviously tends to be reduced tax revenue, as critics have noted. But the indirect effects of Trump’s proposal would preserve or create jobs, increasing tax revenue.

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