The Trump administration is contemplating the possibility of allowing the top tax rate for the wealthiest Americans to increase, as a means to finance tax cuts on income earned from tips, according to information provided to Axios by a senior White House official. This consideration arises as the tax cuts introduced during President Donald Trump’s first term are nearing expiration at the end of the year, with Congress actively working on legislation to extend them.
One of Trump’s key campaign promises was the elimination of taxes on tips, a commitment he has reiterated upon returning to the White House. Additionally, making his previous tax cuts permanent was another significant campaign commitment. The Tax Cuts and Jobs Act of 2017, characterized by a reduction of the top income tax rate to 37%, marks the hallmark of Trump’s economic policy from his first term. This legislation is set to expire, and if not renewed, the top rate would revert to 39.6%.
Republican lawmakers are in the process of drafting legislation aimed at renewing Trump’s tax cuts while simultaneously identifying federal spending cuts to counterbalance some fiscal implications. The prospect of increasing the top tax rate emerges amid Republican recognition of the political ramifications associated with the tax-cut agenda, which Democrats argue favors the wealthy and may lead to Medicaid cuts.
An official from the White House acknowledged the potential political fallout of renewing tax cuts for affluent individuals if it results in Medicaid reductions, highlighting ongoing discussions without any final decisions being made. In parallel, former Trump advisor Steve Bannon has cautioned against Medicaid cuts, drawing attention to a brewing dissent among Republicans representing areas with significant working-class and low-income populations.
The Trump administration did not provide a comment to Fortune when requested. Trump has also proposed using tariffs as a method to increase federal revenue, thus allowing for further income tax reductions. Recent reports indicate that he is urging his advisors to adopt more aggressive tariff strategies, possibly implementing a single levy of up to 20% on nearly all U.S. trading partners.
In contrast, the proposal to eliminate taxes on tips might not be as advantageous as perceived, as the benefits would be limited and could exacerbate issues like tipping fatigue. Wealthier individuals might be incentivized to report more of their earnings as tips.
According to a recent report from the Budget Lab at Yale University, the removal of tip taxes could reduce the annual tax burden for families by an average of $1,700. However, the report also notes that only about 4% of families report tips to the IRS, primarily comprising young, unmarried, and lower-income individuals. Consequently, many tipped workers do not currently pay income tax and thus would not benefit from this proposed deduction.
Conversely, a report from the Economic Policy Institute highlights that high-income professionals, such as lawyers, financial advisors, and accountants, might start classifying their fees as tips to avoid taxation. Furthermore, some low-income tipped workers may lose eligibility for credits such as the Earned Income Tax Credit and Child Tax Credit, while employers may have reduced motivation to increase base wages.
The Economic Policy Institute emphasizes that this tax strategy could be detrimental to the workers who truly require assistance, benefiting unscrupulous employers and tax evaders instead. This article was originally published on Fortune.com.
