A broad-based, low-rate tax system that eliminates provisions such as the new deductions for tips and overtime would impose fewer unnecessary economic costs and promote equal treatment under the law.

In July 2025, President Trump signed a large tax and spending package into law. Among the many new additions to the tax code are two income tax deductions for tip and overtime income. Both are available from 2025 to 2028. This brief provides an overview of these new provisions, their economic and budgetary effects, and recommendations for Congress when they expire.

There is no principled reason to treat income from overtime or tips differently from any other labor income. Narrow carve-outs shrink the tax base, treat similar taxpayers differently, complicate compliance, and increase the economic costs of the income tax. A broad-based, low-rate tax system that eliminates provisions such as the new deductions for tips and overtime would impose fewer unnecessary economic costs and promote equal treatment under the law.

The Cost of New DeductionsThe Cost of New Deductions

The Basics of the Tips and Overtime DeductionThe Basics of the Tips and Overtime Deduction

Who Benefits from the Tips Deduction?Who Benefits from the Tips Deduction?

• Economic Distortions of the Tips Deduction

ReformsReforms

ConclusionConclusion

The new deductions for tips and overtime illustrate how narrowly tailored tax preferences, no matter how well-intentioned or politically popular, ultimately erode the integrity of the tax system. Rather than encouraging additional work, they primarily reward the reclassification of income, impose new compliance burdens, and distort work decisions. Their temporary nature only compounds the uncertainty for workers and employers, inviting costly adjustments that may expire in only a few short years. When the provisions expire after 2028, Congress should resist calls to extend them. A cleaner tax code that treats all income neutrally, applies a broad base, and relies on lower marginal rates is a more durable, pro-growth alternative.

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