Podcast Summary: Future of Freedom - "Andy Puzder & Allison Schrager: Should Tips Be Taxed?"

Episode Information:

• Title: Future of Freedom
• Host: Scott Bertram
• Guests: Andy Puzder & Allison Schrager
• Release Date: September 16, 2024
• Description: This episode delves into the contentious debate over whether tips should be exempt from federal income tax. Representing opposing viewpoints, Andy Puzder, former CEO of CKE Restaurants, advocates for the policy, while Allison Schrager, Senior Fellow at the Manhattan Institute, critiques it.

Introduction to the Debate

Scott Bertram opens the episode by introducing the central topic: former President Donald Trump's proposal to eliminate federal income tax on tips, a policy later echoed by Vice President Kamala Harris in Nevada. The discussion aims to dissect the proposal's implications from both conservative and libertarian perspectives.

Andy Puzder's Advocacy for Tax-Free Tips

1. Seriousness of the Proposal

Andy Puzder asserts that Trump's proposal is a serious and comprehensive plan aimed at providing tax relief to working-class Americans. He emphasizes that the initiative extends beyond tips, including tax eliminations on overtime pay and Social Security retirement benefits.

Andy Puzder [01:22]: "This is really an attempt by the president to give tax breaks to working class Americans. And it's comprehensive. [...] Harris is just copying President Trump."

2. Economic Incentives and Business Benefits

Puzder argues that removing taxes on tips incentivizes better service, as tips directly reward employees for their performance. He highlights that this approach allows workers to increase their take-home pay without imposing additional costs on business owners.

Andy Puzder [02:24]: "It gives people an incentive to provide better service. [...] it's a way to increase workers take home pay without increasing the cost for the business owners."

He further contends that maintaining lower labor costs helps prevent restaurant closures, especially in states with high minimum wages like California.

3. Potential Economic Growth

Addressing concerns about reduced federal revenue, Puzder challenges the Congressional Budget Office’s (CBO) projections, suggesting that lower taxes can spur economic growth by enabling businesses to expand and create jobs. He references President Kennedy’s advocacy for tax cuts to illustrate the potential for increased prosperity and tax revenue through economic expansion.

Andy Puzder [06:38]: "The CBO has been a disaster when it comes to analyzing the impact on economic growth... President Kennedy was a big advocate of these kinds of tax cuts because they did generate economic growth."

4. Impact on Employment and Business Operations

Puzder envisions the policy making server roles more attractive, addressing staffing shortages in the restaurant industry. He believes that tax-free tips can lead to higher income for servers, making the profession more desirable without burdening businesses financially.

Andy Puzder [09:17]: "Working in a restaurant generally, if the tips are shared, are going to make those restaurant jobs more desirable, more attractive, higher income."

Allison Schrager's Critique of Tax-Free Tips

1. Distortions in the Tipping System

Allison Schrager critiques the existing tipping system, labeling it as a "pretty standard obligation" rather than a true market-driven incentive. She points out that tips create artificial constraints, requiring a significant portion of a restaurant’s revenue to be allocated to servers, which can distort business operations and wage structures.

Allison Schrager [13:21]: "Tipping is actually just a pretty standard obligation. [...] there's this weird constraint in the, in tipped industries where 20% of revenues have to go to servers."

2. Inequitable Compensation Structures

Schrager highlights the imbalance in compensation between servers and other restaurant staff, such as chefs, who often receive less despite the high skill and training required. She argues that making tips tax-free further entrenches these inequities.

Allison Schrager [13:21]: "Chefs end up getting a fraction of what the servers do anyway. [...] it's just a bad way to pay people."

3. Inefficiency and Lack of Business Control

She contends that allowing tips to flow freely creates inefficiencies, as business owners cannot effectively control compensation or allocate resources based on talent and performance. Schrager warns that tax-free tips amplify these issues, leading to greater distortions in the industry.

Allison Schrager [16:37]: "Just as soon as you move to a world where everyone's tipped [...] it's so distortionary."

4. Limited Impact on Tax Revenue and Social Programs

Addressing the potential for increased tip reporting, Schrager remains skeptical. She notes that most servers earning lower incomes may not be significantly impacted by federal income tax changes, and the overall increase in reported tips may not substantially benefit Social Security or Medicare funding.

Allison Schrager [19:35]: "If you're at the low end of the income spectrum, you're probably not paying federal income tax anyway."

5. Alternative Solutions for Supporting Low-Income Workers

Instead of tax exemptions, Schrager advocates for more progressive tax policies or tax credits that do not single out specific income types. She believes these alternatives can better address income inequalities without introducing further distortions into the compensation structures.

Allison Schrager [20:37]: "We could have a tax credit or something like that. [...] that's a better alternative than just all of a sudden declaring a type of income tax free."

6. Challenges in Eliminating Tipping Culture

Schrager acknowledges attempts to move away from tipping, such as those by restaurateur Danny Meyer, but notes the challenges faced when eliminating tips, including decreased server income and operational difficulties.

Allison Schrager [21:28]: "Servers end up getting a lot less money than servers at other high end restaurants. [...] it seems like you're asked for tips constantly for everything though."

Rebuttals and Counterarguments

Impact on Reporting and Tax Compliance

When discussing whether tax-free tips would lead to better reporting of tip income, Schrager remains unconvinced, especially for lower-income servers who may not benefit significantly from increased tax compliance.

Allison Schrager [19:48]: "If you're at the low end of the income spectrum, you're probably not paying federal income tax anyway and you're just paying Social Security tax."

Puzder counters the effectiveness of CBO projections by emphasizing the missed potential for economic growth and increased business incentives.

Andy Puzder [06:38]: "When a business's costs go down, what you want to do is you want to expand your business... create prosperity and abundance."

Conclusion and Final Thoughts

The episode presents a clear dichotomy in perspectives on the taxation of tips. Andy Puzder champions the policy as a means to enhance worker income, incentivize better service, and foster economic growth without imposing additional financial burdens on businesses. In contrast, Allison Schrager criticizes the existing tipping system for its inherent distortions and argues that making tips tax-free would exacerbate these issues without delivering meaningful benefits to low-income workers or significantly improving tax revenues.

The dialogue underscores the complexity of balancing economic incentives, business sustainability, and fair compensation within the service industry. While Puzder sees tax-free tips as a pathway to economic vitality and improved worker satisfaction, Schrager warns of deepening inequities and systemic inefficiencies that could arise from such a policy shift.

Notable Quotes:

• Andy Puzder [01:22]: "This is really an attempt by the president to give tax breaks to working class Americans. And it's comprehensive."

• Andy Puzder [02:24]: "It gives people an incentive to provide better service. [...] it's a way to increase workers take home pay without increasing the cost for the business owners."

• Andy Puzder [06:38]: "The CBO has been a disaster when it comes to analyzing the impact on economic growth... President Kennedy was a big advocate of these kinds of tax cuts because they did generate economic growth."

• Allison Schrager [13:21]: "Tipping is actually just a pretty standard obligation. [...] there's this weird constraint in the, in tipped industries where 20% of revenues have to go to servers."

• Allison Schrager [16:37]: "Just as soon as you move to a world where everyone's tipped [...] it's so distortionary."

• Allison Schrager [20:37]: "We could have a tax credit or something like that. [...] that's a better alternative than just all of a sudden declaring a type of income tax free."

About the Guests:

• Andy Puzder: Former CEO of CKE Restaurants (16 years), Distinguished Visiting Fellow at the Heritage Foundation, Senior Fellow at the America First Policy Institute. Twitter: @AndyPuzder

• Allison Schrager: Senior Fellow at the Manhattan Institute, Bloomberg columnist. Twitter: @AlisonSchrager

For more insights and discussions, visit americastalking.com to explore additional episodes of the Future of Freedom podcast and other offerings from America's Talking Network.