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IPFS News Link • Tax Reform

Stop Taxing Tips

•, by Ron Paul

Tips often comprise a substantial portion of the earnings of waiters and waitresses, as well as of other service-sector employees. However, unlike regular wages, a service-sector employee usually has no guarantee of, or legal right to, a tip. Instead, the amount of a tip usually depends on how well an employee satisfies his customers. Since the amount of taxes one pays increases along with the size of tips, taxing tips punishes workers for doing a superior job!

Many service-sector employees are young people trying to make money to pay for their education, or single parents struggling to provide for their children. Making tips tax free gives these hard-working Americans an immediate pay raise. A person may use this pay raise to devote more resources to his children's or his own education, to save for a home or retirement, or to start a business.

Eliminating taxes on tips will provide some (limited) relief from the Federal Reserve's inflation tax. This tax results from the decline in the dollar's purchasing power caused by the Federal Reserve's monetization of federal debt. The inflation tax is the worst form of tax because it is hidden. Thus, most people will not blame the Fed for higher prices. The inflation tax is also regressive, as price inflation is more of a burden to those at the lower end of the income scale than to billionaires. The Fed-created price inflation has forced many Americans to work two jobs.

This is not to suggest that reducing taxes on tips will fully compensate working people for the income they lose to the inflation tax. The best way Congress can help relieve the people of the inflation tax is to cut federal spending that leads to the Federal Reserve monetizing debt. Congress should also pass a law forbidding the Fed from monetizing debt by purchasing federal debt instruments.