Former President Donald Trump pledged during a campaign rally on Sept. 12 to eliminate taxes on overtime pay for workers who clock in more than 40 hours a week.
Trump’s latest campaign proposal joins the growing list of measures to lower individual taxes for millions of Americans, such as eliminating taxes on tips and Social Security benefits.
Vice President Kamala Harris has not introduced a similar overtime proposal, but just like Trump she has pledged to abolish taxes on tipped wages.
Who Would Benefit?
Over 34 million people worked 41 hours or more on average per week last year, according to Bureau of Labor data.
Overtime Fair Labor Standards Act (FLSA) regulations mandate that virtually all hourly workers are automatically eligible to be paid time and a half when their official workweek exceeds 40 hours.
Employees paid on a salary basis are only granted overtime pay if they earn below a salary threshold. Workers classified into two categories—executive, administrative, or professional (EAP) workers and Highly Compensated Employees (HCE)—can also be exempt from overtime pay if their salary is above that level.
The overtime rule also does not apply to the self-employed, freelance individuals, or “gig economy” workers.
Could Push People to Return to Work
Over the past few years, Americans have been clocking in on average fewer hours at the office.
According to a report published by the ADP Research Institute earlier this year, Americans’ median hours worked declined by nearly 2 percent between December 2019 and December 2023.
The average hours worked per week last year was 38.5, down from 38.6 in the previous year, according to the U.S. Bureau of Labor Statistics.
Another prevalent development in the labor market is a worker shortage.
The U.S. Chamber of Commerce projects that the economy is missing 1.7 million people from the workforce compared to February 2020.
According to Bureau of Labor Statistics, the labor force participation rate was 62.7 percent in August, below the pre-pandemic level of 63.3 percent.
While there are many reasons for these trends, Garrett Watson, a senior policy analyst at The Tax Foundation, noted that Trump’s proposal may facilitate a modest return to work, which could generate “some positive economic effects.”
“By providing a lower tax rate or scrapping it altogether, you’re not discouraging the behavior that folks think should be rewarded,” Watson told The Epoch Times.
“I think that’s the intuitive appeal, and you can see why some folks would be drawn to that.”
Indeed, under the current tax structure, workers might be apprehensive about working overtime because they fear being placed in a higher tax bracket.
Under the new plan, employees might be incentivized to accept additional hours or request more overtime work from their employers.
Impact on Tax Revenues
While the measure will benefit workers, it could face significant fiscal hurdles.
Policy experts at the research think tank estimate that removing taxes on overtime earnings would reduce federal revenues over the next 10 years.
The size of the decline in tax receipts would depend on the specifics of Trump’s plan.
If the federal government exempts all overtime pay from the individual income tax, the revenue reduction would be a conservative estimate of about $227 billion.
“It could go way upward from that, depending on how it’s designed and how many people respond in terms of behavior or for overtime,” Watson said.
“So there’s that sort of big picture challenge.”
According to The Tax Foundation, the revenue decline would be as high as $1.1 trillion if exemptions exist for “all pay associated with working more than 40 hours per workweek as opposed to overtime pay as defined by FLSA rules.”
The projected figure does not include federal interest costs.
Impact on Employers
Sean Higgins, a research fellow at the Competitive Enterprise Institute, says Trump’s plan wouldn’t make a difference for employers.
“Removing the income tax doesn’t benefit [or penalize] employers since it is workers who pay the tax,” he wrote in an analysis.
“Employers therefore have no new incentive to offer their workers more time, something they already avoid doing precisely because the FLSA’s overtime rule makes that expensive for them.”
Administrative Complexities
A challenge that may arise from the policy is increased administrative complexities.
According to The Tax Foundation, the concern is that exempting a component of wage income may “complicate the tax code” and raise administrative and compliance costs.
“Exempting a portion of wage income, based on hours worked, introduces an entirely new distinction in the tax code, requiring additional information reporting of hours, likely from employers and employees, as well as new administrative checks,” the group stated.
In the end, the public policy idea sparks another conversation as to whether overtime income should be taxed differently from other income, especially since current laws identify overtime with time-and-a-half pay, Watson said.
Hurdles on Capitol Hill
Trump’s proposal would require Congressional action.
In July, Rep. Russ Fulcher (R-Idaho) introduced legislation, the Keep Every Extra Penny (KEEP) Act, to eliminate income taxes on overtime pay.
The bill is the first time this idea has been attempted at the federal level.
The legislative pursuit, Fulcher says, would alleviate the inflationary pressures impacting millions of people by allowing “them to keep more of what they earn.”
Democrats, including Senate Finance Committee Chair Ron Wyden (D-Ore.), have criticized Trump’s proposal, saying it would significantly add to the deficits.
From The Epoch Times