Trump’s proposal to end taxes on overtime pay could cost billions

WASHINGTON — Former President Donald Trump is calling for exempting overtime pay from taxes, the latest in a string of vague tax proposals that have befuddled tax experts, worried fiscal hawks and seemingly charmed voters.

Trump floated the idea this past week during a campaign rally in Tucson, Arizona, telling the crowd that it would supercharge incentives to work more and put money back in the pockets of many Americans.

“It’s time for the working man and woman to finally catch a break, and that’s what we’re doing because this is a good one,” he said.

The pitch is part of what has become Trump’s playbook during the presidential race: tossing out potentially huge tax cuts, defined in just a few words, to try to win over middle- and working-class voters. He has also vowed to exempt tips from taxes and end taxes on Social Security benefits, two ideas that have proved popular. At the same time, he has said he would further cut the corporate tax rate.

As with his promise to end taxes on tips, though, Trump left many key details about the overtime plan unaddressed, making it hard to estimate its costs. Among the open questions is whether overtime pay would be exempt from just the income tax or if the exception would also apply to the payroll taxes that fund Social Security and Medicare.

There is also the issue of how many Americans could benefit from Trump’s idea. More than 34 million Americans worked more than 40 hours a week in 2023, according to the Bureau of Labor Statistics, but only a subset of that group are owed time-and-a-half pay for overtime under federal law. The rules are complex, but, in general, Americans earning a salary of more than $43,888 a year may not be owed overtime, depending on their job. Americans paid by the hour, currently about 55% of the workforce, are broadly eligible for overtime pay.

“The vast majority of hourly workers are automatically overtime eligible, regardless of how much money they make,” said Heidi Shierholz, who was the chief economist at the Department of Labor under the Obama administration.

The relative ease with which hourly employees can earn overtime could create a huge tax incentive for more Americans to reclassify themselves as hourly workers. The cost of the tax cut would depend on whether such legislation limited the ability of corporate executives or high-paid lawyers to modify their own compensation and make a chunk of it tax free.

Arthur Laffer, a father of supply-side economics who at times advises Trump on tax policy, said in an interview that any final plan would need to include guardrails. Overall, it should encourage Americans to work more, he said. Alabama this year began excluding overtime pay from its state income tax.

“It should not be a serious problem to be able to devise a system that works well,” he said. “This is a good first shot.”

The Tax Foundation, a think tank that generally favors lower taxes, produced a range of estimates for the cost of Trump’s idea. Assuming the exemption only covers pay currently considered overtime, the think tank said the plan would cost roughly $227 billion over 10 years if applied to the income tax — and an additional $145 billion if Americans also did not owe payroll taxes on overtime earnings.

The cost could be far higher if all pay earned after working 40 hours a week were not taxed. The Tax Foundation analysis estimated that cost at $1.1 trillion over 10 years.

Michael Strain, director of economic policy studies at the American Enterprise Institute, a right-leaning think tank, said the potential fiscal cost of the plan was not justified.

“The outlook for the U.S.’s fiscal situation is dire, and, therefore, any additional tax cuts should have a very strong economic argument to support them,” Strain said, listing benchmarks for boosting economic growth.

“And I don’t see any reason to think that eliminating taxes on overtime, or eliminating taxes on tips, serve any of those goals,” he said.

Much of Trump’s tax agenda could be budget busting. He is also seeking to extend tax cuts he signed into law in 2017, a move that could cost roughly $4 trillion over a decade, according to the Congressional Budget Office. Ending taxes on Social Security benefits could cost roughly $1.6 trillion over a decade, according to the Committee for a Responsible Federal Budget, and plans to cut the corporate tax rate and end taxes on tips would cost hundreds of billions more.

Trump’s main proposal to bring money into federal coffers is a dramatic expansion of tariffs on imports into the United States. The tariffs could raise substantial revenue, but probably not enough to plug the fiscal hole created by his proposed tax cuts, according to budget analysts.

Vice President Kamala Harris’ campaign attacked Trump’s idea on overtime pay as cynical, pointing to a move by the Trump administration in 2019 to roll back an expansion of overtime eligibility.

Although the Harris campaign attacked Trump, it did not criticize the merits of the proposed tax cut. Trump’s previous proposal to not tax tips, also widely criticized by economists, was eventually endorsed by Harris.

This article originally appeared in The New York Times.

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