Trump’s Tax Swap: Rich Pay More, Tips Pay Nothing.

The way Donald Trump tells the story, a young waitress at his Las Vegas hotel restaurant last year mentioned that tax collectors were hounding her “viciously” for tip income. “ ‘You know, sir, you should have no tax on tips,’ she said. I said, ‘What did you just say? Say those words again,’ ” the president recalled earlier this year. “ ‘You just won the election for me.’ ”

“No tax on tips” entered Trump’s stump speech in June, later joined by no taxes on overtime and on Social Security and a host of other generous promises. Each raised questions that the candidate didn’t try to answer in any detail. Now that he’s back in the White House, Trump, along with congressional Republicans, faces the challenge of turning his slogans into sections of the Internal Revenue Code. It won’t be easy. Nothing can set off a chain of unintended consequences quite like revising tax rules.

Tax cuts are most likely to engender perverse results when they favor one kind of income over another. Lawyers and accountants have spent years dreaming up ways to steer their rich clients’ money into capital gains, which get preferential tax treatment over ordinary income. They often succeed, which is why your typical billionaire pays a lower rate than their secretary.

The first drafts of legislation implementing “no tax on tips,” quickly advanced by Texas Senator Ted Cruz and other Republican lawmakers last year, put up no restrictions at all. To take advantage of the exemption, anyone, including investment bankers, corporate lawyers, doctors and maybe even chief executive officers, might have started taking their compensation in the form of tips. More recent versions of “no tax on tips” impose some limits, based on occupation, income and amount of tips, which happen to bring Republicans closer to the proposal Democratic candidate Kamala Harris floated in response to Trump’s promise last year.

Polls suggest not taxing tips is particularly popular with the public, a generous gesture to the low-wage workers who bring our meals, cut our hair and make us coffee. Nonetheless, it’s hard to find a tax expert, from the left, right or center, who likes the idea. When you include overtime, not taxing two common forms of income could be messy and complicated, they worry, while having weird effects on the behavior of companies and workers. “If there aren’t any guardrails, people could do crazy things with this,” says Christina Lewellen, a professor of accounting at North Carolina State University.

First, there’s the issue of fairness. Why should a server at a fancy restaurant in Manhattan get a tax break on their tips, while a cook with the same income pays more?

Second, tax purists also cringe at the difficulty of drawing lines between different types of income, saying one is tax-free and another isn’t. What is a tip exactly? Existing rules suggest it’s not the mandatory service charges often imposed by restaurants on large parties. That is, a tip must be voluntary.

Then, of course, there’s the potential hit to government revenue. “There’s a lot of money on the line here,” says Garrett Watson, director of policy analysis at the conservative Tax Foundation. An overtime deduction on income taxes would cost $673 billion over a decade, according to Penn Wharton Budget Model estimates. “No tax on tips” should be cheaper, starting at $78 billion, but neither number takes into account behavioral shifts by workers or businesses, which are practically inevitable. For example, companies could work out deals to let workers maximize overtime hours in some weeks, in exchange for wage concessions and fewer hours in other weeks. “The tax benefits can be divided between the employer and employee,” says University of Michigan economics professor Joel Slemrod.

Wealthy people have been playing games like this to lower their tax bills for at least a century. Now working-class Americans would also get some loopholes to exploit. Yet unless they come up with clever ways to boost overtime and tips, or fool the Internal Revenue Service, only a thin slice of the workforce would be eligible to claim these exemptions. Only about 8% of hourly and 4% of salaried employees work federally qualified overtime on a regular basis, the Budget Lab at Yale estimates, and tipped occupations make up just 2.5% of the workforce.