If implemented nationwide in the United States, would a policy of tax-free tipping result in a net increase in the average inflation-adjusted annual income of service workers by at least 10% within five years of implementation?

• During the 2024 United States Presidential election, both the Republican campaign

  of the former president Trump, and the Democrat campaign of Vice President Harris have signalled support for the idea of eliminating income taxes from tips for service and hospitality workers. The current legislation treats tips the same as regular wages.

• Those in favour of tax-free tipping argue that tax-free tips benefit service and hospitality workers significantly by increasing their take-home pay. Service and hospitality workers are already some of the lowest-earning segments of the workforce, and improving their financial stability and quality of life overshadows the potential loss of governmental tax revenue. In addition, advocates argue that tax-free tips would also incentivize workers to offer a higher service quality.

• Those against tax-free tips argue that the expected loss of tax revenue for the government is oversized compared to the benefit of helping a relatively small segment of low-wage workers (only 5% of bottom quarter of wage earners earn tips). Tax-free tips might also lead to lower base wages, as tax-free tips could incentivize employers to shift more of the compensation burden to customers, leading to a much higher loss of tax revenue for the government, greater income instability, and potentially even offsetting or negating the expected benefits to the worker.

If tax-free tipping is implemented, I will resolve this question based on FRED data and the U.S. Bureau of Labor Statistics Occupational Employment and Wage Statistics report.