During the last election, President Trump made “No Tax on Tips” the centerpiece of what he claimed would be “pro-working class” tax reform. Congress moved to fulfill that promise when it created a new tax deduction as part of the “One Big Beautiful Bill” (OBBB) passed last summer. But new preliminary guidance from the Treasury Department about who can actually claim the new deduction makes increasingly clear just how unfair this policy really is to most working Americans.
OBBB allows workers with incomes less than $400,000 to deduct up to $25,000 of income they receive in tips from their taxable income through 2028. Many experts warned that such a policy would likely encourage savvy professionals to restructure their existing income as tips to benefit from the deduction, so Congress also attempted to limit it to only professions that “customarily and regularly” received tips in the past. Last week, the Treasury Department released a preliminary list of occupations that would qualify – and it includes many that neither voters nor lawmakers were probably intending to give a special tax preference.
For example, the list includes “digital content creators.” Most of the revenue content creators receive generally comes from subscriptions or advertising, but some platforms also allow viewers to make voluntary payments. This practice is particularly common on livestreaming sites like Twitch and OnlyFans, the latter of which is often used to stream sexually explicit content. What this means is that someone who posts adult content on OnlyFans can pay substantially less in taxes than most workers with the exact same income simply by soliciting voluntary payments from their viewers, because the IRS will consider those payments to be tax-deductible tips.
Consider this scenario and its consequences for the fairness of our tax system: An adult content creator earns $80,000 a year on OnlyFans, two thirds of which comes from subscription revenue and one third from voluntary payments. That content creator would pay roughly $4,480 in federal income taxes if they claimed both the standard deduction and the maximum tips deduction. But a nurse, teacher, or firefighter who made the exact same income and was similarly situated economically in every other way would have a federal income tax bill of $9,060 – more than twice as much.
The point here is not to denigrate the work of content creators. But would anyone really argue that they provide more value to society than those other professions, such that they deserve to pay half as much in taxes? Not likely.
One might think the solution here would be for Treasury to narrow the final guidance only to those traditional customer-facing service professions voters and lawmakers likely had in mind when they supported the tips exemption, such as waiters and cab drivers. But that approach would still raise reasonable concerns about unfair treatment for workers who do not qualify for a special deduction. After meeting with Treasury officials earlier this week to discuss the implementation of OBBB, one Republican member of the House Ways & Means Committee said that the administration’s goal in administering the tips deduction is to ensure that “If you’ve received tips before, you qualify.” Under that standard, it’s hard to argue that content creators who previously received voluntary payments that could be considered tips shouldn’t be able to deduct them. But what other, more-restrictive standard could Treasury use that doesn’t risk running afoul of the statutory guidance based on a bureaucrat’s subjective judgment?
The reality is that – no matter how well-intentioned – any attempt to create special tax carve-outs such as the tips deduction inevitably creates inequities, invites abuse, and shifts the burden onto everyone else. Making tips tax deductible does nothing for the 97% of working Americans who do not earn tips, or the 40% of tipped workers whose incomes were so low they already owe no federal income tax. But they will pay the price: the roughly $32 billion in increased deficits needed to fund the deduction for four years will increase inflation in the short term, and the permanent hole that the policy leaves in the federal budget will likely force Congress to eventually raise taxes on working Americans more broadly to recoup the lost revenue.
The tips deduction is likely here to stay at least until 2028. But when it expires, policymakers who want to create a more worker-friendly tax code should aim to replace it with changes that treat workers with similar incomes similarly. For example, they could expand the Earned Income Tax Credit, which rewards low and middle-income families for working. Or they could take the more ambitious step of replacing regressive payroll taxes with progressive consumption taxes, as I have previously advocated. Either of these approaches would result in working Americans paying lower taxes on their earnings than under current law, with the greatest benefits flowing to those with lower- and middle-incomes – regardless of how they earn that income.