Trump's tax plan may cost poor Americans $1,500 a year—while tipping the rich $104,000

Time of India

02-06-2025

U.S. President Donald Trump's proposed tax break on tips might sound like a win for working-class Americans, but analysts say it offers limited benefits for low-income earners—and could, in fact, leave them worse off overall.
The "no
tax on tips
" idea is one of several elements in a sweeping tax and spending bill currently before Congress. While it targets service workers like bartenders and hairdressers, experts say most won't benefit much. In fact, broader cuts to healthcare and food assistance programs could erase any gains.
'If you're thinking about things that could help low-income workers, 'no taxes on tips' would not be high up on my list,' said Martha Gimbel, director of the Budget Lab at Yale University.
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A Shift in Wealth
According to multiple independent analyses, the bill would effectively redistribute wealth—from the poor to the rich.
The Penn Wharton Budget Model estimates that families earning less than $22,000 per year would lose $1,500 in after-tax income. Meanwhile, those making more than $5.2 million could see an annual windfall of $104,000.
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The Congressional Budget Office (CBO) supports these findings, also highlighting large gains for the wealthiest Americans.
Limited Reach for Tipped Workers
Despite the popularity of the 'tax-free tips' idea—especially in hospitality-heavy swing states like Nevada—it would benefit only a small portion of workers. Tipped employees make up just 2.5% of the U.S. workforce, and 37% of them earn too little to owe any
income tax
at all, meaning the deduction wouldn't apply to them.
The bill passed in the House would allow workers earning up to $160,000 a year to deduct their tips from gross income until 2029. However, the income would still be subject to Social Security and Medicare taxes.
House Republicans claim the bill would provide an average $1,300 tax cut per family, and that business tax breaks will lead to better wages. Jason Smith, Chairman of the House Ways and Means Committee, said the plan helps workers afford housing, food, and save for the future.
Benefits for the Wealthy, Barriers for the Poor
But critics argue the benefits are tilted toward higher earners. Tax breaks on tips, overtime, and auto loan interest only help people who already owe income tax—excluding many low-wage earners.
'All of those will only benefit someone if they have enough income that they are paying a positive tax liability,' said Brandon DeBot, policy director at NYU's Tax Law Center.
Worse, other changes in the bill would restrict access to key support programs:
Up to 8.7 million lower-income Americans could lose health coverage due to Medicaid and ACA cuts, according to the CBO.
New restrictions on the Child Tax Credit would exclude 4.5 million eligible children by requiring a Social Security number for qualification.
The Earned Income Tax Credit, which reached 23 million tax filers in 2022, would impose stricter eligibility standards.
Reduced IRS funding could make it harder for low-income families to navigate the new tax code.
Long-Term Costs for the Poor
The bill is also projected to add $3.8 trillion to the national debt by 2035, pushing the total to over $36 trillion. That burden, economists say, will fall disproportionately on the poor.
Penn Wharton found that low-income households could see a lifetime loss of $8,500 due to a weaker safety net and higher debt service costs. Wealthier households, on the other hand, could gain $17,800 over their lifetime.
'You're inheriting this higher debt, this higher burden. Somebody has to pay for it,' said Kent Smetters, director of the Penn Wharton Budget Model.
With agency inputs