Tuesday, August 13, 2024

Bad vibes on good tips

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Aug 13, 2024 View in browser
 
POLITICO Morning Money

By Sam Sutton

Presented by Wells Fargo

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QUICK FIX

Former President Donald Trump and Vice President Kamala Harris both support eliminating taxes on tipped income for service workers. It’s a politically advantageous policy — particularly in swing-state Nevada’s hospitality meccas — but tax experts are certain it would upend traditional compensation models and gouge another hole in the U.S. budget.

“There’s a broad agreement among policy experts that this is a problematic way to do tax policy,” Marc Goldwein, the senior vice president and senior policy director for the Committee for a Responsible Federal Budget, told MM.

The nonpartisan CRFB estimates that Harris’s proposal, which also calls for raising the federal minimum wage, would increase deficits by $100 billion to $200 billion over the next decade “before accounting for changes in tipping behavior.” Trump’s plan to exempt all tip income from federal income and payroll taxes would reduce revenue by $150 billion to $250 billion, though it could be “significantly more once behavioral effects are incorporated.

What does CRFB mean by “behavioral effects?” 

If you make tips tax free, workers and employers have an incentive to try to make gratuities a larger share of income. In practical terms, consumers would see more “Add gratuity?” pages when they swipe their credit cards — and not just at coffee shops, restaurants and bars.

“It causes people to make economic decisions that play to the tax code,” Goldwein said. “So even with the best guardrails, it would cause us to move more toward a tip-based economy.”

The Harris campaign says it would work with Congress to limit the tax exemption to the leisure, hospitality and gaming industries. As Nick Niedzwiadek and Bernie Becker reported on Monday, Harris would also include income restrictions to ensure that a tip-exemption would not be exploited by the wealthy.

That would only stop “egregious cases,” Goldwein said, noting that tipping is now de rigeur at fast casual restaurants where it wasn’t previously an option. Surveys suggest that consumers have grown increasingly frustrated at being asked for tips at self-service kiosks or when they place pickup orders online.

The creation of industry or income-specific guardrails would invariably lead to policy fights over which workers were excluded. Your MM host tips taxi drivers, plumbers and furniture movers. Should their tips be exempt? What about building doormen, sanitation workers and pool cleaners? What about gig economy workers?

Depending on how wages fluctuate at tipped positions, tax exemptions could lead some workers to cycle out of lower-paying “care economy” jobs at health or child care facilities for positions at leisure or hospitality businesses. Improving access and affordability for those services has been a core tenet of Harris’s campaign.

“If you want to help low-wage workers, raising the federal minimum wage — and eliminating the tipped minimum wage — would be more effective policy levers for doing that,” Ernie Tedeschi, a former chief economist for President Joe Biden's Council of Economic Advisers, told MM.

Of course, implementing a tax exemption for tips without guardrails would pose its own challenges. Shortly after Trump announced his plan to move forward with the policy, Sen. Ted Cruz (R-Texas) introduced the No Tax on Tips Act. The bill was derided by progressives like Center for American Progress Action Fund’s Brendan Duke, who said it lacked protections to keep white collar financiers from shifting their compensation to a tip-based model. (It’s not so far-fetched. Some fintechs ask for “tips” when they advance paychecks to their customers.)

Duke, a former senior policy adviser to Biden at the National Economic Council, said Harris’s tip proposal is stronger because it’s part of a suite of policies designed to address cost-of-living challenges for low-wage workers, including raising the federal minimum wage and expanding child tax credits.

Still, “my view is that the tip tax proposal is probably the least effective” within that suite, he said. Eliminating taxes on tips is “the most pro-worker thing in Trump’s policies. And this is a very small part of a sweeping package from Kamala Harris when it comes to workers.”

IT’S TUESDAY — I too rely on tips. Harris said she’ll roll out her economic policy platform this week. How’s that going? If you know, tell me at ssutton@politico.com.

 

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Driving the day

The National Federation of Independent Business optimism index for July will be released at 6 a.m. … The Producer Price Index for July will be released at 8:30 a.m. …

Soft power — With $4 trillion of assets to put to work, Middle Eastern sovereign wealth funds are starting to exert their influence over American asset management firms. One major challenge: Israel’s war with Hamas.

From Bloomberg’s Heather Perlberg, Matthew Martin, and Nicolas Parasie: “Some Middle Eastern fund managers were frustrated with US billionaires — including BlackRock Inc.’s Larry Fink and Apollo’s Marc Rowan — for publicly expressing what were perceived as pro-Israel views. While those comments haven’t hurt their firms’ ability to deepen financial ties with the region, they reflect the tough balancing act they face to keep expanding here.”

Diplomacy — Senior U.S. Treasury officials will travel to Shanghai this week for a meeting of the U.S.-China Financial Working Group, Ari Hawkins reports. The agenda includes discussions around the governance of the International Monetary Fund and capital markets issues, as well as strategies to crack down on illegal fentanyl imports into the U.S.

Deskbound at BofA — Managers at Bank of America regularly told low-level investment bank staff to pull all-nighters and work on off days. After a former Green Beret died after putting in more than 100 hours a week, the bank is under pressure to repair its culture, The WSJ’s Alexander Saeedy reports.

First in MM: State financial regulators push back on climate disclosure — A coalition of 26 conservative state financial officers wrote to the Financial Accounting Standards Board urging the body not to "politicize" accounting principles by including climate disclosure reporting, Jordan Wolman reports.

FASB hasn't formally proposed including climate disclosure in its Generally Accepted Accounting Principles. But the officials are preemptively expressing their opposition as the board works through a public consultation period for several projects.

The letter calls out the SEC climate risk disclosure rule, among other frameworks around the world, as regulations "that purport to be about financial reporting but in reality are about commandeering the financial system to advance a substantive climate agenda that has not been democratically approved in the United States."

 

A message from Wells Fargo:

Wells Fargo seeks broad impact in our communities. As a company, we are focused on building a sustainable, inclusive future for all by supporting housing affordability, small business growth and financial health. We have donated nearly $2 billion to strengthen local communities over the last five years. What we say, we do. See how.

 
The Economy

Private credit’s consumer bet — Private credit firms have been buying up tens of billions of dollars in consumer loans across the U.S. and Europe over the last year. But as the economy starts to slow, those portfolios will carry much more risk.

“We need to constantly reevaluate our assumptions. Higher unemployment is going to drive more volatility, especially on the subprime consumer,” said Dominick Ruggiero, co-CIO of Fortress Lending Funds, per Bloomberg’s Abhinav Ramnarayan and Kat Hidalgo.

Speaking of consumers under pressureInflation has faded, but prices for essentials like rent and car insurance are still climbing fast, The WSJ’s Harriet Torry and Terell Wright report.

 

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At the regulators

More support for Goldsmith Romero — Seven former federal inspectors general filed a letter to Senate Banking Chair Sherrod Brown (D-Ohio) and ranking Republican Tim Scott of South Carolina urging the Senate to “swiftly confirm” CFTC Commissioner Christy Goldsmith Romero to lead the Federal Deposit Insurance Corp., according to a copy obtained by MM. The signatories include Scott Dahl, David Montoya, Kurt Hyde, Steve Linick, Neil Barofsky, John Roth and Joanne Chiedi.

 

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On Wall Street

Risks abound — Markets were muted on Monday ahead of this week’s inflation data, Bloomberg’s Rita Nazareth reports. With the U.S. warning of a possible Iranian strike against Israel, oil climbed to $80 a barrel.

Fly Around

Still shippin’ — Roughly $2.3 billion in dollars and euros have been shipped to Russia in defiance of export bans, Reuters reports. It’s indicative of how Russia has been able to circumvent sanctions designed to block cash imports.

 

A message from Wells Fargo:

Wells Fargo seeks broad impact in our communities. As a company, we are focused on building a sustainable, inclusive future for all by supporting housing affordability, small business growth and financial health.

In 2023, examples of our work include:
· Donated approximately $300 million to over 3,000 nonprofits in support of housing, small business, financial health, sustainability, and other community needs.

· Opened HOPE Inside centers in 15 markets supporting 57 retail branches to help empower community members to achieve their financial goals through financial education and free one-on-one coaching.

· Launched $10,000 Homebuyer Access℠ grants that will be applied toward the down payment for eligible homebuyers who currently live in or are purchasing homes in certain underserved communities.

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