Do you know those people who refuse to tip with anything but cash? They’ll do anything to keep money from government, to the point of being annoying. Count yours truly as one of those truly annoying people.
Even if it means paying exorbitant ATM fees in order to get cash, that’s much better than tipping waiters and waitresses on credit cards. No thanks. It’s rude to the wait staff. Taxes are awful, and because they are tips will be paid in cash as at least a small way of limiting the flow of dollars to the tax man.
Which is why it’s in some ways easy to like Donald Trump’s pledge to zero out taxes on tips. If we ignore that presidents don’t have the power to make tax policy, or to spend in general, good for Trump that he’d like to reduce taxes on restaurant workers. Which means if he’s president, and if Congress enacts the legislation Trump claims to desire, it will be easy to cheer it.
At the same time, let’s be clear that the tax cuts on tipped income will do nothing to stimulate growth. Basic economics. Trump, like his former top adviser in Steve Bannon, has made policy all about reducing the tax burden on relatively lower earners. Waiters and waitresses obviously fit into that category. Trump, like Bannon, like so many close to the former president has made his politics about throwing bouquets to the so-called “working classes.”
Maybe it’s good politics. Maybe it’s not. The view here is that the politics are lousy. Republicans are supposed to be the party of aspiration. They’re supposed to be all about reducing the tax burden on the rich precisely because the rich get that way by founding and building all manner of innovative companies, not to mention all the companies they create through the wealth attained by founding and building companies. Republicans are supposed to cheer this, and they’re supposed to be about penalizing this less. Instead, Trump’s pursuing small economic ball with calls for zeroing out taxes on tips. Once again, maybe it’s good politics. But it’s lousy economics. And it is because waiters and waitresses don’t earn enough money.
Since they don’t, tax cuts for them will solely stimulate more consumption. Yes, Keynesian tax cuts. Economists are mostly Keynesian, so they’ll at least privately agree with Trump that reduced taxes on millions of workers will power growth. Except that they won’t.
Tax cuts for those who aren’t impressively well-to-do don’t in any serious way power economic growth that is always and everywhere driven by investment. This is basic supply side economics. While Keynesians believe consumption is the source of growth, supply siders have long pointed out that consumption is an effect of growth, that our production is what enables our consumption. Crucially, production can only increase insofar as producers are matched with capital, capital that waiters and waitresses lack the means to provide.
What’s been written should in no way be construed as a call for Trump to reverse course. Waiters and waitresses should be taxed less, but entrepreneurs and CEOs should be taxed much less. They should because we shouldn’t penalize success in the United States, but also because economic growth only emerges from reduced penalization of immense wealth.
Trump doesn’t know this, but some of his supply side advisors like Larry Kudlow do know this. They owe it to Trump, and their ideology to explain what will enhance growth, and what won’t.
Republished from RealClear Markets
