Trump plans to exempt tips from taxation

Ambitious plan: Trump gestures after speaking at his birthday celebration in West Palm Beach, Florida. The Republican presidential candidate says he would like to offset revenue losses from tax cuts by raising tariffs on imported goods. — AP

NEW YORK: Donald Trump’s new proposal to exempt tips from taxation would add between US$150bil to US$250bil to the federal budget deficit over 10 years, a budget watchdog group forecasts.

The cost estimate from the nonpartisan Committee for a Responsible Federal Budget (CRFB) suggests that the plan’s deficit impact would be comparable and potentially much larger than the US$172bil projected revenue loss from extending the 2017 tax cuts for small businesses and other so-called pass-through companies due to expire next year.

The tax exemption for tips is Trump’s latest effort to court younger voters.

He announced it at a campaign rally in Nevada, a crucial presidential battleground which has the highest proportion of food service and accommodation workers in the country, industries where employees have historically relied on tips.

“We need to spread the word so that every time you leave a tip for the next five months, you put on the receipt, ‘vote for Trump because there’s no tax on tips’,” the former president said at an event in Florida last Friday that celebrated his 78th birthday.

The CRFB warned the cost could be much higher if employers and employees responded to the tax exemption by shifting more overall compensation from wages to tips.

The group estimated that with a 10% shift towards tips the cost could rise to US$275bil and with a doubling of tips offset by lower wages, the lost revenue to the federal government could soar to US$500bil.

The price tag creates a financial obstacle to enactment of Trump’s proposal.

The presumptive Republican presidential nominee is already proposing extending individual and estate tax cuts enacted in 2017, which the Congressional Budget Office (CBO) projects would cost US$4.6 trillion over 10 years.

Brian Hughes, a spokesman for the Trump campaign, defended the proposal in a written statement and said: “Tip earners work for every dollar and shouldn’t be expected to fund Washington’s bloated spending for illegal migrant social programmes or out of control bureaucracy.”

Trump last Thursday floated to top business executives the idea of lowering the 21% corporate tax rate to 20%.

He told House Republicans the same day he would like to offset revenue losses from tax cuts by raising tariffs on imported goods.

Republicans are divided on whether such tax cuts should be offset by spending cuts or other sources of revenue.

The 2017 tax cuts were not paid fully paid for and the CBO estimates they added US$1.5 trillion to budget deficits.

House Speaker Mike Johnson and other key Republicans are advocating making large cuts to federal spending early on in a new Trump administration to put a priority of slowing the growth of the US national debt.

“There is going to be a rigorous debate next year,” said House Budget Committee chairman Jodey Arrington, a Texas Republican.

“With the size of the debt and the level of interest rates, we are in a much different environment than 2017.” — Bloomberg

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