For many, annually navigating a tax code they overwhelmingly feel is unfair and complex is a frustrating experience. But the Trump administration’s many new tax pledges — including no taxes on tips, auto loan interest, overtime pay, and more — could make it even worse. If enacted, they would provide only limited benefits to working Americans, while further complicating the tax code with arbitrary exemptions and loopholes.
Tax breaks should always strike a balance between the benefits they are creating and the costs they impose. While tax provisions can be used for laudable goals — including stimulating investment, promoting retirement savings, or reducing poverty — excessive or poorly designed exemptions can erode the tax base, create loopholes, and increase the cost of compliance for taxpayers and administrators. To be worthwhile, a tax break should deliver more in benefits than it costs in complexity. Trump’s various proposals don’t come close.
Trump argues that his “no tax” proposals are intended to alleviate the cost burden of middle and lower income Americans, but few would receive significant benefits. Most tipped workers already pay little to no income tax, so the exemption would do almost nothing for them. And worse, a broad tax exemption could even give high-earners a new way to game the system by reclassifying their wages as tips. Moreover, providing tax exemptions based on how people earn their paychecks inherently leaves many working Americans behind. While a waitress might qualify for tax exemptions on tip or overtime income, a truck driver or teacher wouldn’t.
But while most Americans receive few benefits from Trump’s “no tax” proposals, they will still be stuck with the costs. Since enacting these broad exemptions drastically shrinks the tax base, taxpayers who are unable to qualify for special treatment would be left to shoulder a greater share of the overall tax burden. Even if this doesn’t lead to immediate tax increases, the lost revenue from these expensive proposals would add to the national debt, crowding out vital government programs, driving up borrowing costs, and forcing an even larger tax hike in the future.
Furthermore, when numerous exemptions add layers of complexity to the tax code, it becomes more difficult for taxpayers to understand what they owe and for administrators to ensure the law is being followed. This creates opportunities for individuals and businesses to avoid taxation, whether through intentionally exploiting loopholes or unintentionally misinterpreting complex rules. A complicated tax code also becomes more difficult for the IRS to enforce, resulting in a larger “tax gap” — the difference between taxes owed and taxes actually collected — which both costs the federal government billions in lost revenue and undermines the fairness of the tax code
As Congressional Republicans begin to craft major tax legislation enabled by the budget resolution they passed last week, they should aim to craft a tax code that is simpler, fairer, and easier to navigate – not one that is even worse than the status quo.
During the busiest time of the year, the Trump administration has laid off or bought out roughly one-third of IRS staff, with plans for even more layoffs in the future. This will disrupt the agency’s progress in both modernizing its systems and improving its customer service and enforcement capabilities.
