A common sound bite is “No tax on tips.”

Is it really that black and white? Not exactly.

In the July 2025 One Big Beautiful Bill Act, eligible workers can claim a federal income tax deduction for up to $25,000 of qualified tip income per year (for tax years 2025 through 2028). It is a deduction, not an exemption. There are 70 types of jobs in six categories who qualify. See Fidelity for some specific links to who qualifies and look at the Federal Register for a full list.

For high earners [single, $150,000 income] [married $300,000 income, the deduction phases out. For low earners who don’t qualify for federal income tax, the deduction won’t help them. See Bipartisan Policy Center.

Tips are still taxable income which includes payroll taxes and any state or local taxes, if any. In addition, accurate documentation by both employee and employer are required. There are exceptions, such as a teenager who is claimed as a dependent on his/her parent’s tax return may not be eligible for the full tax deduction. Take a look path the National Taxpayer’s Union Foundation for more information.

Many people will benefit from this deduction until 2028, so that’s a good thing.

On the other hand, most people don’t understand WHO really pays income tax. They hear a commonly cited statistic that says the top 1% pay 40% of income taxes, while 40% of Americans supposedly pay no income taxes.

This statistic mixes up high income with high wealth.

Many people counted among the “non-payers” of income tax still pay significant payroll taxes.

However, billionaires’ wealth comes primarily from investments and inheritances. Their wealth isn’t necessarily classified as taxable income. They are part of the 40% who pay no or defer most income taxes.

Billionaires don’t take salaries. Salaries are income. Salaries are income that is taxed. So billionaires do not , in general, pay income taxes; they are able to defer or avoid them.

Progressive taxation historically was founded on the idea that people who benefit most from capitalism should contribute more to sustaining the country. Wealthy Americans accumulate wealth but do not contribute proportionally through taxes.

How do billionaires establish wealth? Their wealth comes from their stock portfolio that they own.

How do they get cash? They put that considerably valuable stock portfolio up as collateral for loans, loans that provide cash as well as pay for interest on the loan. They can borrow and renew huge amounts. They only are taxed when they sell their stock, which they seldom do.

In other words, billionaires do not pay income tax like regular people do. Nor do they pay payroll taxes. Unrealized appreciation generally isn’t currently taxed, while dividends, interest and realized gains generally can be taxed. They are not paying their fair share.

What would be more fair? Several possibilities, including inheritance taxes, but one idea is to bring “fair share” back into the equation. Reduce preferential treatment for different types of income, so that income from investments, employment, partnerships, and other sources is treated more uniformly. Understand that “a dollar is a dollar.” HOW someone acquires a dollar should not determine whether it receives a substantially different tax treatment.

Billionaires have so much wealth now that they own their own hospital floors, dedicated to them even if nurses go on strike. They have their own schools. They have private access to things regular people do not.

In other words, public discussion emphasizes individual tax loopholes, but not the larger structural issue: the U.S. effectively taxes salaries while failing to adequately tax investment gains and inherited wealth. The public needs to understand the difference between taxing ordinary high earners [who do pay payroll taxes] and taxing enormously accumulated fortunes that avoid fair participation in sustaining our nation.

Salaries are relatively easy to tax, while enormous increases in investment wealth can remain untaxed as long as assets aren’t sold. Wealth can then be leveraged through loans and transferred to heirs through mechanisms that receive favorable tax treatment.

A solution is to broaden the tax base—especially to investment gains and inherited wealth. Also, create a fair structure without preferential treatment among different forms of income. The solution is not to simply increase the rates paid by high earners who already receive large taxable salaries.

We need to start with proposed solutions—taxing unrealized gains at death, changing inheritance taxation, eliminating preferential capital-gains treatment, etc. as policy proposals. That would allow for a break in tax rates for regular earners.

We probably wouldn’t need to tax any tips, or perhaps anyone whose livelihood depends on tips.

For an overview of the issues watch Heather Cox Richardson and Dr. Ray Madoff discuss these issues here. The discussion’s focus is that wages are being effectively taxed while investments and inheritances escape taxation. There’s a lot of nuance to these issues, but it’s a start to the conversation. Take a look.