In the early stages of the 2024 Presidential race, two prominent figures have put forth an intriguing proposal - exempting tips from federal taxes. Donald Trump first floated the idea in June during a Las Vegas appearance, while Kamala Harris recently presented her own version at a rally in the same city. This has sparked a debate on whether this tax exemption would truly benefit low-income workers who rely heavily on tips.

Ernie Tedeschi, an economist from the Yale Budget Lab, points out that a significant number of tipped workers already pay zero federal income tax. However, he argues that a tax exemption alone would not significantly improve the financial situation for many low-income workers who heavily depend on tips as a substantial part of their income.

The concept of tax exemption for tips has been circulating in political circles since the 1980s. California even implemented a state tax exemption for tips in 2015, albeit with certain conditions.

While Trump's proposal lacks specific details, a bill introduced by Sen. Ted Cruz (R-Texas) and Rep. Byron Donalds (R-Fla.) provides a framework for understanding the GOP's approach. According to this bill, tips would be exempted from federal income tax but not from the payroll tax that funds Social Security and part of Medicare. The exemption would apply only to households that pay federal income taxes, and would not provide any benefit to households whose income is so low they don't owe federal taxes.

Economist Ernie Tedeschi estimates that the number of workers in traditional tipped occupations, such as wait staff and barbers, stands at around 4 million, constituting just 2.5% of all workers. He highlights that a meaningful share of tipped workers already pay zero federal income tax.

Data from the U.S. Census further supports Tedeschi's argument. In 2022, more than a third of tipped workers earned so little that they owed no federal income tax, meaning they would receive no benefit from the Republican act.

One concern with the bill is its lack of safeguards to ensure that only low-income tipped workers receive its benefits. The bill does not define tips or establish a phase-out based on income, potentially allowing higher-income households to manipulate the system and claim deductions for their earnings disguised as tips.

Brendan Duke, an economist at the liberal Center for American Progress, highlights this issue by mentioning the possibility of high-income professionals such as hedge fund managers exploiting the system for their own financial gain.

Critics argue that the Republican approach operates in isolation, as if tax exemption on tips alone would suffice to establish pro-family credentials for the GOP. They emphasize that far greater gains could be achieved by extending enhancements to the Earned Income Tax Credit and the Child Tax Credit, measures initially implemented as part of the American Rescue Plan of 2021.

It's worth noting that some Republicans who have criticized Biden's student debt relief plan have themselves benefited from pandemic relief loans without repaying them. However, they argue that their situation is different.

As the 2024 Presidential race progresses, the debate surrounding tip tax exemptions continues to unfold, with concerns about its effectiveness and potential for exploitation by higher-income earners.