A Lesson for the Big Beautiful Bill

 

President Donald Trump and the Republican Congress have an incredible opportunity to redirect our national trajectory towards more sustainable financial waters, while providing tremendous relief to the American public. Unfortunately, it appears that the Congress will prioritize targeted policy gimmicks over broad-based relief for families.

In fairness to the Republican majority, much of the playbook was set by President Donald Trump during his 2024 reelection campaign. The President floated popular slogans like “No Tax on Tips” and “No Tax on Overtime” to the applause of many voters. While these proposals may have been good politicking, they are not good policy.

The beauty of President Donald Trump’s key legislative victory during his first term, the Tax Cuts and Jobs Act, is that it greatly simplified the tax filing process for the American people by shifting more households towards the standard deduction in lieu of itemized claims.

Furthermore, it emphasized broad reductions for entire taxpayer demographics, rather than providing narrow relief to target groups. For example, the core and popular provisions that the TCJA enshrined include the expansion of the standard deduction (increased from $12,700 in 2017 to $24,000 for MFJ), the doubling of the child tax credit, and the establishment of the QBI deduction for pass-through entities. Each provision impacted large, not narrow, taxpayer demographics.

The policy gimmicks being floated today do quite the opposite. The Economic Policy Institute (EPI) estimates that only about 5% of the American workforce are in traditionally tipped occupations, while the Yale Budget Lab estimates it to be an even smaller 2.5%. Furthermore, the Budget Lab found that the median weekly wage for tipped employees was only $538, or $27,976 per year. If the median tipped employee is single with no children, he or she already faces a minimal federal income tax liability (about $1,297.60). If they are either married or have one child, they would have a zero net income tax liability. Indeed, more than a third of all tipped employees (37%) don’t pay any net federal income taxes.

The “No Tax on Overtime” is likewise, and unfortunately, a narrowly targeted provision. In a separate study, the Yale Budget Lab estimated that only 8% of hourly workers and 4% of salaried workers receive FSLA-qualified overtime pay on a regular basis. The Senate further narrows the “benefit” of this provision by capping the deduction at $12,500 for single filers and $25,000 for married filers earning less than $160,000. This is not a provision that is going to yield tremendous benefit to a broad segment of the American population.

This point hammers home when you realize how limited this provision will actually benefit so many of these workers. Approximately 42% of all workers are compensated via salaries in the United States. For nearly all these workers, they are ineligible for overtime pay if they earn more than $58,656 year and have “duties” that pertain to executive, administrative, or professional occupations. These individuals already have low averaged adjusted federal income tax liability and thus will not yield much return from this "relief". 

This deduction will provide only a marginal benefit to these employees, with a strongly diminishing effect for those that are married or have dependent children. The individuals who will benefit most from this provision are those without spouses or children, and who are usually younger and have fewer financial responsibilities.

These two provisions, beyond their limited demographic scope of relief, also create unnecessary disparities for income earners. Why is tipped income more valuable than alternative sources of income, like hourly wages, salary, or performance pay? Why is the waitress earning $20 per hour, with $15 coming from tips, more valuable than a cook who earns $20 per hour entirely in pre-defined wages? We can assume that the hourly wage is a pre-determined figure regardless of productivity, while tips are more commonly associated with high performance. However, under that assumption, why shouldn’t commissions or bonuses be equally tax free?

Similarly, why is the ten hours of overtime committed by an hourly, or rare salaried, employee more venerated than twenty hours of effort, beyond the forty-hour norm, exerted by a commissioned employee or a small business owner? This distinction in income origin is both arbitrary and senseless. How an individual earns their income, so long as its through legal means, should not be a determinant in his or her tax liability to society.

These two targeted provisions that will benefit a narrow slice of the population do not provide the bang for the buck, and the buck is quite pricey. The Joint Committee on Taxation estimated the cost of every provision in the House passed Big Beautiful Bill and found that the No Tax on Tips and No Tax on Overtime would collectively cost $163.7 billion over the next decade. It is important to note that both of these provisions are scheduled to expire on December 31, 2028, or only four years into that decade.

If these dollars are to be removed from the federal purse for tax relief then they would be more effectively allocated towards broader tax relief for the public. This could be done either by expanding the standard deduction, restoring a limited version of the personal exemption, or further increasing the child tax credit. The current legislation does two of these but in an incredibly limited manner. The standard deduction would be increased (for one year only) by $1,000 ($2,000 for married filers) and the child tax credit would be increased by $500 (reduced to a $200 increase by the Senate). These provisions are miniscule and grossly outweighed by the targeted provisions.

The Republican Congress should look to recent history and apply the merits of the Tax Cuts and Jobs Act to the One Big Beautiful Bill.