I figure that tips are synonymous with low income (although that’s not always the case) and reducing income taxes on low income people is popular among not only rank and file Democratic voters but Republicans as well.
It seems more straightforward to just cut federal income tax for lower income people, which in many cases would mean an even larger Earned Income Tax Credit.
You could make a utilitarian argument that a dollar earned in tips should be taxed at a lower rate than a dollar earned in regular paycheck. Uncertainty and emotional labor probably do make a dollar in tips harder to earn, all other variables held constant, than a dollar in wage income.
I think that up to a certain point, tips should be taxed a little less for that reason. But the special, lower rate should phase out pretty quickly precisely to prevent the rampant tax avoidance that would happen without a phase out.
TBH, lower income Americans don’t pay very much in federal income tax and if you have kids, their federal income tax rate is effectively negative. That’s fine and how it should be. But I think that people under a certain income level should get an enhanced standard deduction for sales tax.
They wouldn’t have to itemize, unless they wanted to, just increase standard deduction based on what the average person at a given income level pays in sales tax. States and local governments get more money and lower income households pay less in overall taxes.