The current issue is that so many people already do not pay tax on some or all of their tips. So the idea of making that no longer criminal (tax evasion) is not inherently insane or unworkable.
from https://www.forbes.com/sites/kellyphillipserb/2023/03/05/americans-are-tipping-more-and-more-often-the-irs-wants-its-cut/
Tips are subject to income and payroll (Social Security and Medicare) taxes. Employees are supposed to report all their tips to their employer, who can then withhold the proper tax and pay the employer’s share of payroll taxes. But compliance has always been low, particularly since so many tips have traditionally been paid in cash. In its Tax Gap studies, the IRS estimates that it gets 99% of what its due on regular wages, where taxes are withheld and reported to both the IRS and the taxpayer on a W-2, but just 55% of what it’s owed on tips (the same percentage it figures it collects from self-employed sole proprietors).
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Over the last three decades, the IRS has launched a series of programs that encourage employers to voluntarily calculate, report and collect taxes on a certain level of tips in exchange for protection from tip audits for themselves and their tipped employees. Except that’s not working great either. A 2018 study by the Treasury Inspector General for Tax Administration estimated that 30% of employers with tip agreements in place were underreporting.
The recent move toward customers more often paying tips electronically (through an on-screen tap) should improve compliance, as it makes tips easily trackable. But it would be easy enough for the IRS to say that that income is not taxable.
I don't think this is inherently a bad idea. Rich people get all kinds of tax breaks. People who rely largely on tips don't, and they need it more.
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