Former President Donald Trump has unveiled various public policy proposals to lower individuals’ tax rates, the big three being no taxes on tips, Social Security benefits, and overtime pay. The anti-tax agenda elicits the famous quote from legendary economist Milton Friedman: “I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.” He contended that starving the beast would initiate a retrenchment in the size of the Leviathan.
Whether tax cuts were instituted under Democrats or Republicans, federal outlays maintained the same upward direction. At a time when the budget deficit, national debt, and interest payments are spiraling out of control, can across-the-board tax reductions resuscitate the spirit of fiscal management? Let’s crunch the numbers, courtesy of the Tax Foundation, a research think tank.
No Taxes on Tips
In June, the Republican presidential candidate unveiled his plan to exempt workers’ tips from taxes. The proposal appeals to the roughly 48 million individuals employed in tipped occupations in the food, leisure, and hospitality industries. In a tight 2024 election race, the number of impacted people could explain why Vice President Kamala Harris borrowed this idea and inserted the policy into her campaign.
Sen. Ted Cruz (R-TX) recently introduced the “No Tax on Tips Act,” a legislation that would create a 100% deduction for income on cash tips. Some caveats included non-cash tips remaining taxable and keeping cash and non-cash tips under the payroll tax. In the lower chamber, there is a separate “Tax-Free Tips Act of 2024,” submitted by Reps. Matt Gaetz (R-FL) and Thomas Massie (R-KY), that would abolish income and payroll taxes on tips.
The Tax Foundation estimated that eliminating tips from the personal income tax would reduce federal revenues by approximately $118 billion over the next ten years.
No Taxes on Social Security Benefits
Since 1984, based on the recommendation of the 1983 Greenspan Commission, a portion of Social Security benefits have been subjected to federal income taxes. Now, forty years later, the former president has vowed to eradicate taxes on Social Security benefits, much to the delight of retirees. Indeed, according to the Senior Citizens League, Social Security benefits have lost about 20% of their buying power since 2010. Additionally, the cost-of-living adjustment is projected to be just 2.5% in 2025, when many other goods and services are rising at a higher clip.
While this might seem fair to retirees, the policy fails to address the fractured fundamentals of the retirement scheme. The main hurdle for officials to overcome is the program running out of money. According to the Congressional Budget Office, a key Social Security Trust Fund is poised to be exhausted by 2034. Additionally, the program faces $63 trillion in long-term unfunded obligations – $23 trillion if observers only comb through the 75-year horizon.
Analysts at the Tax Foundation estimate that eliminating taxes on Social Security benefits will reduce federal revenues by approximately $1.2 trillion over the next decade.
No Taxes on Overtime Pay
The former president’s plan to eviscerate taxes on overtime pay has been short on details. The Bureau of Labor Statistics estimates that roughly 34 million Americans worked an average of 41 or more hours per week last year. However, there is also the number of employees associated with working overtime – the federal government classifies these workers as executive, administrative, or professional workers and Highly Compensated Employees.
(Photo by John Moore/Getty Images)
Experts note that the distinction matters immensely because exempting overtime pay from income taxes could have varying revenue implications.
The Tax Foundation projects that exempting all overtime pay from the individual income tax would reduce federal receipts by nearly $227 billion over ten years. However, if exemptions are implemented for “all pay associated with working more than 40 hours per workweek as opposed to overtime pay as defined by FLSA [Fair Labor Standards Act] rules,” revenues could plunge by around $1.1 trillion over the next decade.
Fiscal Implications
Economists warned at the onset of the Tax Cuts and Jobs Act that federal revenues would crater, exacerbating debt and deficit challenges. Years later, these prognostications missed the mark, and revenues are near all-time highs. Will their doom-and-gloom expectations become realized if Trump enacts these policies if he is elected in November? Well, there are a few things to consider.
First, Trump’s proposed tax cuts equal about $6.1 trillion over ten years. Second, annual federal deficits are poised to be around $2 trillion until 2034, the national debt is anticipated to exceed $50 trillion in the next decade, and cumulative interest payments will total nearly $13 trillion in this span. Third, outlays have increased under GOP administrations even as they imposed tax cuts. Finally, neither candidate has proposed serious spending cuts.
Indeed, the economic growth prospects from these tax policy endeavors are high. Allowing millions of people to keep more money can further support an economy dependent on two-thirds of consumption, effectively boosting revenues. The issue is whether the stimulated activity will be enough to fill the canyon-sized crater nestled cozily in the streets of the nation’s capital.
