- An option under discussion in the Trump administration is allowing the top tax rate to go back up to help cover tax cuts on income earned via tips, a senior White House official told Axios. That comes as President Donald Trump’s tax cuts from his first term are due to expire at the end of the year, while Congress works on legislation to extend them.
The Trump administration is considering an option to let the tax rate on the wealthiest Americans go back up to help pay for tax cuts on income earned from tips, a senior White House official told Axios.
Ending taxes on tips was one of President Donald Trump’s top campaign pledges, and he has reaffirmed it since returning to the White House. But extending his earlier tax cuts and making them permanent was also a campaign pledge.
The Tax Cuts and Jobs Act of 2017 was Trump’s signature economic policy achievement in his first term and lowered the top income tax rate to 37%. The law expires this year, and failure to extend it would send the top rate back to 39.6%.
Republicans in Congress are crafting legislation to renew Trump’s tax cuts while also looking for areas to slash federal spending to help offset some of the fiscal impact.
The possibility of letting the top rate rise comes as Republicans acknowledge the political risks of the tax-cut agenda, which Democrats have said will help the wealthy and result in cuts to Medicaid.
“If we renew tax cuts for the rich paid for by throwing people off Medicaid, we’re gonna get f—ing slaughtered,” the White House official told Axios, which added that discussions are still early and nothing has been decided yet.
Indeed, even former Trump advisor Steve Bannon has warned against Medicaid cuts amid a quiet rebellion among Republicans representing working-class and low-income areas.
“Medicaid, you gotta be careful,” Bannon said on his podcast last month. “Because a lot of MAGAs are on Medicaid, I’m telling you. If you don’t think so, you are dead wrong.”
The White House didn’t immediately respond to Fortune‘s request for comment.
Trump has also said his steep tariffs are another way to raise federal revenue, providing more leeway to cut income taxes.
Reports over the weekend said he is pushing his advisors to get more aggressive on tariffs, perhaps even a single levy of up to 20% on nearly all U.S. trading partners.
Meanwhile, eliminating taxes on tips may not be as populist as it seems, as benefits would be limited while it could worsen tipping fatigue and encourage wealthier Americans to report more of their income as tips.
Families could their see annual tax bill come down by an average of $1,700 with the elimination of tip taxes, according to a recent report from the Budget Lab at Yale University.
But only about 4% of families report tips to the IRS, and they are mostly young, unmarried, and lower-income, the report added.
“This means that many tipped workers do not pay income tax to begin with and would not benefit from a new deduction,” the report said.
On the flip side, a separate report last month from the Economic Policy Institute warned that high-income professionals, like lawyers, financial advisors, and accountants, could report their fees as tips to avoid paying tax.
In addition, some low-income tipped workers would lose money by no longer being eligible for the Earned Income Tax Credit and Child Tax Credit, according to the report, while employers would have less incentive to raise base pay.
“A regressive tax gimmick that encourages the proliferation of tipping is not helpful to the workers who genuinely need help, and certainly not a ‘lifeline’ to anyone,” EPI said. “It would, however, be a boon to unscrupulous employers and tax cheats.”
