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September 23, 2024 16 mins

Kamala Harris and Donald Trump both have proposed eliminating taxes on tips for service workers. While seemingly beneficial, it might just not add up according to renowned economics expert Larry Kotlikoff.

Named one of the world’s 25 most influential economists by The Economist Magazine, Kotlikoff has advised the Federal Reserve, the International Monetary Fund, the World Bank, and various other prestigious organizations. He is also a Professor of Economics at Boston University, with expertise spanning personal finance, inequality, taxation, Social Security, climate change, investing, healthcare, deficits, and insurance. 


Email us at shadean@bu.edu

The “Distinguished” podcast is produced by Boston University School of Hospitality Administration. 

Host: Arun Upneja, Dean
Producer: Mara Littman, Executive Director of Strategic Operations and Corporate Relations
Research and Content Creation: Lan Lu
Marketing: Anne Dawson
Editing: Isabella Laikin and James Leon

Music: “Airport Lounge" Kevin MacLeod (incompetech.com)
Licensed under Creative Commons: By Attribution 4.0 License
http://creativecommons.org/licenses/by/4.0

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SPEAKER_01 (00:04):
It is seldom that major party presidential
candidates agree on any issue.
However, in this election cycle,there is an issue on which they
both agree.
Both have come out in favor ofeliminating all taxes on tips
for service workers.
While this might seem like abenefit for service and

(00:25):
hospitality workers, it's worthexploring what kind of impact it
will have.
To provide clarity on thisissue, we are joined today by
Larry Kotlikov, a renownedeconomics expert, named one of
the world's 25 most influentialeconomists by the Economist
magazine.
Kotlikov has advised the FederalReserve, the International

(00:46):
Monetary Fund, the World Bank,and various other prestigious
organizations.
He's also a professor ofeconomics at Boston University.
I'm Arunub Neja, Dean of the PewSchool of Hospitality, and I
would like to extend a warmwelcome to Larry on the
Distinguished Podcast.

SPEAKER_00 (01:02):
Everyone, it's great to be with you.
Thanks for having me.

SPEAKER_01 (01:05):
Before we dive in, I just want to make it clear that
our focus today is on money andpolicy, not politics.
So, Larry, help us understandthis proposal from both the
presidential candidates toeliminate taxes on dips for
service and hospitality workers.

SPEAKER_00 (01:24):
I've got to tell you, this is one of the
stupidest proposals I've everheard advanced in a long career.
So the only thing this is goingto do is dramatically hurt uh
hospitality workers who arereceiving tips.

(01:52):
So what we're talking about hereis eliminating FICA taxes,
Social Security taxes.
But the way the FICA, the SocialSecurity system works is that
it's highly progressive.
So these contributions that youmake when you're a waiter or bus
person or a cook in the back ora pot washer, uh, well, whatever

(02:15):
it is that you're doing inhospitality, but the ones who
are getting uh out thereinteracting with the public uh
and getting tips, uh, they'renot going to be making FICA
contributions.
So therefore they're not goingto be getting uh future Social
Security benefits to the extentthey would otherwise be getting.
And the way the system works isthat for every dollar a low-wage

(02:41):
worker contributes uh to SocialSecurity, they get back in
present value far more than adollar because the system, the
system is highly progressive, asI mentioned.
So uh this is going to uh in ona lifetime basis cost uh service
workers who are getting rereceiving tips uh a lot of

(03:03):
money.
And uh it's also going to uhkind of spread the word to uh
people who are working uh asservice workers for in other
occupations where tips are not ageneral thing, like a contractor
or a uh you know a plumber, thatuh not paying taxes uh on money

(03:30):
they receive uh is okay becausethe waiter in the in every
restaurant I go to doesn't haveto pay taxes, so why should I?
So it's okay if I uh ask to getpaid in cash.
And now all these otherlow-wage, basically low-earning

(03:51):
workers will be not making FICAcontributions.
And uh uh again, uh they mightsave some money on their federal
income taxes, but it won't bereally enough to make up for the
loss of future Social Securitybenefits.
So I think this is really firstorder stupid, and uh the fact

(04:13):
that both candidates aresupporting it is testimony to
how bad our uh you know theireconomic advisors are, uh, that
they don't actually explain tothem uh what really uh they're
recommending.
I mean, we have countries inLatin America who are uh in

(04:35):
terrible trouble for decades, uhnot just Latin America and
Africa and all the emergingcountries of the world, even in
Russia, uh, where theunderground economy, the
informal sector, as they callit, is massive, and they don't
can't collect enough revenuefrom these people to provide

(04:56):
decent schooling and uh watersupplies and public goods of all
kinds, highways.
And they're doing everythingthey can to get everybody into
the formal sector.
And here we have the twopresidential uh candidates
promoting the informal sector.
It's crazy.

SPEAKER_01 (05:15):
Okay, Larry, so um very provocative uh thoughts,
but let's unpack this one byone.
And I want to make sure thatpeople listening understand what
you mean when at the beginningwhen you started talking about
um not paying federal taxes.
So there is this concept ofstandard deduction, which um you
know has really increased overthe last few years.

(05:38):
Um, and then there are personalexemptions.
So are you suggesting that a bigproportion of service workers
are being covered under thefederal standard deduction and
personal exemptions?
So they're not paying federaltaxes.
So at the end of the day, theyare paying only the 6.2 percent
FICA since Medicare everyone hasto pay.

(05:59):
So they are only saving 6.2percent.

SPEAKER_00 (06:04):
Well, that's probably that.
That's close to what I'm saying,but the total tax is uh 12.4
percent, which is the employerplus the employee uh shares of
FICA.
Now, no economist uh worth hissalt uh or hersalt uh thinks
that the employer paid share ofthe FICA tax is actually being

(06:25):
paid by the employer.
If I am working for you andUncle Sam says uh Arun, you have
to pay uh$300 uh uh a week uhfor an extra taxes for Larry,
you're just gonna cut my wagesby$300.
So because you're not uh oryou'll fire me and hire somebody

(06:46):
else, but you don't have to paythat tax on.
So uh uh the point is thatemployer pay, it's just the
employer putting the the taxpayment into the mailbox and
sending it.
And in fact, they're puttingboth shares into the same uh
check and sending it to UncleSam, and it's all being done
electronically, not even with amailbox.

(07:08):
So this whole distinctionbetween employer and employees
is completely fictitious, andit's meant to suggest to people
that the uh the size of the FICAtax is much lower than it
actually is.
But so the other implicationhere is that um when you uh uh
eliminate this uh a FICA taxthat the employers are paying,

(07:31):
uh it uh it should lead uh themto uh pay their their workers uh
uh potentially more moneybecause they don't have to have
this obligation.
So that's the uh the plus sidehere.
The workers' pre-tax earnings uhmight end up higher uh because

(07:52):
the employer has a smaller FICAtax obligation, if you like.

SPEAKER_01 (07:56):
Aaron Powell Well, I'm not sure that I've heard
anything about eliminating theFICA contribution from the
employer side.
So if um an employee is earning$100 in tips and they don't have
to pay the 6.2 percent, theemployer still has to pay the
6.2 percent.
So uh they might continue to endup paying, whereas the employee

(08:16):
will save that 6.2 percent,which as you mentioned before is
going to bite them when theystart taking social security at
the at the retirement time.
Because um, as you've explainedmany times on all your podcasts
and writings, um the more youare paying into, the you know,

(08:37):
it takes top 30 years of yourcontribution to determine what
your social security earningsare going to be.

SPEAKER_00 (08:45):
Well, you know, you're absolutely right that uh
how exactly this goes down andthe details matter, and that um
you know the the benefit isultimately connected to your
covered earnings, not to yourexact tax contribution.
So if they so that if they youknow if they just abolish the
FICA tax in total and said,we're not gonna report, if

(09:10):
you're not paying any FICAtaxes, then Social Security
probably won't record anycovered earnings.
Now, if your employer is payingtheir half of the of the check
um or sending in their half ofthe total check, then maybe
they'll cover Society will callyour uh, let's say$15,000 of

(09:32):
covered wages or$20,000 ofcovered wages$10,000 rather than
$20,000, in which case yourearnings record will be half as
large when you hit retirementage and start trying to go
collect a benefit.
So exactly how this thing uh ishandled in the law will matter.

(09:54):
But the idea that they can dothis without even discussing the
benefit side, I mean, they're uhyou know, we don't know how
commerce would end up uhtranslating no taxation of trips
into what happens to SocialSecurity benefits.

SPEAKER_01 (10:13):
Right.
And the the other point I wantto make sure that um regardless
of whether Social Securitycounts no wages or they count
half the wages, but every dollarthat these employees are putting
in is giving them a much biggerbang for their buck when they
retire.

(10:34):
And any loss here is gonna bitethem at the retirement time.
So this is another huge, bigimplication that you pointed
out.

SPEAKER_00 (10:41):
Yeah, I mean, you need to have a fully articulated
that President Trump proposesthis and Vice President Harris
says, well, you know, uh thiscould really hurt, depending on
how President Trump, if he'selected, uh implements this,

(11:02):
this could really hurt uhservice workers, uh uh people
receiving tips.
And here's how.
Uh so if we want to do this, umwe have to do it uh in this way,
so their social securitybenefits are not reduced.
But then we have to ask, whyaren't we doing it for uh other

(11:22):
people who are earning the samepay?
Uh is this fair?
We're trying to achieve equity.
I mean, that would be okay, anintelligent response that would
suggest that we're dealing withsomebody who's actually
thoughtful, who's going to run,make other decisions in the
public sphere in a thoughtfulmanner, with the facts, with the

(11:43):
knowledge of how things actuallyoperate, as opposed to, well, he
proposed it on for it.
I mean, that's that to me isvery disappointing uh on both of
their parts.
I mean, he's he's proposingsomething without even knowing,
I think, what he's talkingabout, and she seems to be
confirming it without knowingwhat she's talking about.

SPEAKER_01 (12:06):
Right.
And that was actually, this isuh the next question I wanted to
ask, which is you know, thereare employees, you know, people
labor working in so manydifferent industries.
Why pick on this one industryand say that you're not gonna be
taxed on a portion of yourearnings?
What kind of economic orpolitical or some what kind of

(12:28):
rationale there would be to pickand choose winners and losers
and say we're gonna help you,but not help you, even though
you both might be earning thesame.

SPEAKER_00 (12:37):
You're absolutely right.
It's probably uh would probablybe ruled unconstitutional by the
Supreme Court if it, you know,it would somebody would uh would
file a lawsuit uh claimingunequal treatment, and the
Supreme Court would probablyoverrule it.
So the whole thing's a politicalstunt, really.
Uh and maybe it's to garner thesupport of the service workers

(13:01):
union uh on the part of Trumpand uh to get more of uh that
union's uh members uh voting forhim, and then uh and then Harris
has to come and be equally uhsupportive of unions.
Maybe that's really what's goingon here, but it's um you know,

(13:23):
in the end, uh peep it I thinkit would be much more um
valuable to uh a potential uhwaitress or waiter uh to
understand that um they have a aleader who's actually thinking
about all aspects of theirfinances, not just the immediate

(13:45):
uh higher paycheck that theymight get.
But if they're if we're talkingabout doing something that's
going to uh basically uhboomerang on them in a very bad
way, uh that somebody has enoughconnection to the real world and
connect and knowledge of howthings actually work in the
fiscal system to prevent someother politician from doing them

(14:09):
damage.

SPEAKER_01 (14:11):
Okay, so I next next question I have for you is um
are these taxes prettysignificant that it would leave
a substantial hole in thefederal budget, increase our
already pretty high deficitspending that we are already
doing.

SPEAKER_00 (14:29):
Well uh they're not if we're just talking about how
we're taxing uh service workerswith respect to FICA taxes, uh
then it's not going to be muchuh uh it's not gonna matter much
to current revenues.
And really in present value, ifwe're talking about their

(14:52):
benefits being dramaticallyreduced uh relative to their
current taxes, uh the federalgovernment might actually save
money over the in present value.
Okay?

SPEAKER_01 (15:04):
That's the opposite of what they're trying to do.
That is so interesting.
Larry, thank you so much.
That was very interesting totalk to you.
A lot of interesting points cameup.
Uh really appreciate you comingon.
So there you have it.
Um, it is not yet a fullythought-out proposal, and I
think we should wait for all thedetails to come out.

(15:26):
I know that there are some billsthat have already been
introduced, but those might bejust instant reactions from some
politicians.
Um, I think we have to wait formore details to filter out from
the two respective campaigns toexamine this in more detail, and
watch out uh this podcast formore detail.

(15:46):
Thank you so much.
Thank you, everyone.

SPEAKER_00 (15:49):
Great to see you again.

SPEAKER_01 (15:50):
Same here.
Bye-bye.
Special thanks to the team thatproduced this podcast, producer
Mara Littman, editor and soundengineer Andy Halleck, and the
entire team at Boston UniversitySchool of Hospitality
Administration.
To keep up with DistinguishedPodcasts, be sure to subscribe
wherever you listen to yourfavorite podcast.

(16:10):
You can also learn more about BUSchool of Hospitality by
visiting bu.edu slashhospitality.
Have a wonderful day.
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