The Issues with Targeted Tax Exemptions

Tax proposals to exempt specific types of income, such as tips and Social Security benefits, may undermine the goal of achieving a simpler and lower tax regime. Lowering overall tax rates on income is beneficial, but selectively exempting certain incomes introduces inefficiencies and encourages manipulation of the system. For instance, if tipped income were to be completely tax-exempt, it could incentivize businesses to reclassify parts of their employee compensation as tips, rather than higher wages, leading to unequal treatment among workers. This kind of gaming presents risks of creating a fragmented tax system where some sources of income are unfairly privileged over others, ultimately complicating tax policy and raising rates on remaining taxable income.