In Waiter, Extra Tip, No Tax: A Distributional Analysis, Marilyn Hajj offers a poverty law take on a classic and timely tax question: the taxation of tips. Her refreshing article avoids tax law’s knee-jerk opposition to a tax break for tips by offering an analysis that advocates for redistribution to low-income tipped workers. Although she does not give the tip tax breaks in the recently enacted One Big Beautiful Bill Act glowing marks, she explains that the new law would be preferable to the earlier status quo if it were better targeted and more accessible to low-income workers.
Hajj begins with the story of tipping, which traces to the “vails” expected by household staff at English homes in the 1700s. American tipping “seems to have originated in the traveling aristocracy.” After the Civil War, it developed into a custom of class and race bias. Hajj writes that Black workers in service jobs, for instance at restaurants or as railroad porters, received lower wages, and that employers used tips to justify this. The hospitality industry successfully defeated anti-tipping statute statutes; initially obtained an exemption from the federal minimum wage; and continues to take advantage of a “tip credit” rule that results, in some states, in an hourly minimum wage of $2.13 for tipped workers. Of tipped workers, 37% do not make enough to owe any income tax and 11.3% experience poverty, which is more than double the rate for non-tipped workers.
Hajj writes with the voice of a scholar immersed in both poverty law and tax law. Tax law professors like to teach Commissioner v. Duberstein, a 1960 Supreme Court case that categorized tips as taxable income due to the absence of “detached and disinterested generosity.” But Hajj is not interested in the usual tax law question of compliance for taxes on tips. She argues that whatever the merits of a broad income tax base, that base should not be broadened on the backs of the poor, especially when the rich enjoy tax breaks galore. According to Hajj, tax relief for tips should be an anti-poverty policy, tailored to maximize the benefits for tipped workers.
Hajj argues that an ideal tax break for tips would be structured as a deduction, not an exclusion, from income. This would enable tipped workers to continue to increase tax benefits that increase with income, such as the child tax credit and the earned income tax credit, even though they might lose some such benefits, particularly the EITC, based on tip income in higher-income phase-out ranges. The tip provision in the One Big Beautiful Bill Act enacted in 2025 does this, through a “between-the-lines” deduction available to both itemizers and nonitemizers and capped at $25,000.
Hajj’s ideal tax break for tips also would phase out, as the OBBBA tip provision does. It features a graduated phase out beginning at $150,000 and ending at $400,000 for single filers. But as Hajj argues, this means that the OBBBA’s tip tax break benefits many workers who earn far more than the average of about $32,000 earned by a restaurant server. Here, she writes, the tip deduction is poorly targeted and does not match anti-poverty policy. She prefers a “cutoff” at $75,000, which is closer to median family income. She also objects to the requirement that workers provide social security numbers and file jointly, since this disadvantages immigrant families. And she argues that the law should also find a way to require service establishments to pay the full minimum wage to tipped workers.
Another issue is which workers will be eligible for the tip deduction. The OBBBA limits eligibility to occupations that “traditionally and customarily” receive tips, an approach that Hajj endorses. She worries that otherwise new professions may game the system by structuring compensation to include tips. She seems persuaded instead by the historic story of tipping and by the logic that the tip deduction is, although inadequate, an appropriate way to address existing wage suppression.
As Hajj explains, the tip tax provisions also include relief for employers, who are incentivized to report tips by the Section 45B tax credit. This credit equals the payroll tax on reported tips that exceed the amount needed to bring wages up to a minimum wage threshold. The OBBBA expands this credit to include beauty service establishments. Also, employers get a larger credit if the minimum wage threshold is lower, and the OBBBA allows food and beverage establishments to continue using the 2007 hourly rate of $5.15 rather than the current hourly rate of $7.25.
The full picture of poverty law also involves non-tax benefits such as Section 8 housing vouchers, SNAP food assistance, and Medicaid. Here there is an interesting interaction that Hajj might explore more. The expanded Section 45B employer tax credit and the reduced incentive, because of the OBBBA deduction, for employees to prefer unreported tips might mean employers will report more tips than they used to. If they do, is it possible that the reported income of tipped workers will increase even if their actual income remains the same? That could decrease the availability of non-tax benefits under other programs.
Sometimes perhaps we get too attached to the tenets of tax law. It’s true that a deduction for tips disturbs our collective commitment to the calculation of taxable income as a broad and inclusive concept. But it’s a small ripple compared to the ability to delay tax on wealth appreciation until sale or other realization. Hajj’s perspective shows us another important side of the tip tax break issue.
