Why No Tax On Overtime Is A Major Win -Action Economics

If we look at all options for taxation, income is arguably the second worst, right behind inflation. President Trump campaigned on “No Tax on Overtime” and is set to deliver this in the first year of this term, coupled with the extension of the 2017 Trump Tax Cuts. Since I earn a decent percentage of my income from overtime pay, I am in agreement with this policy. If no tax on overtime passed I would likely save around $7,000 a year in taxes. There are all sorts of tax incentives for things like going to college, saving for retirement, having children, and being low income, but there are no tax breaks for producing. No tax on overtime would effectively reward individuals who produce more value in the market place. Here’s a detailed breakdown of why his “No Tax on Overtime” a win for tax policy as a whole and as a political bargaining chip.

Taxation Options:

There are four relatively common forms of taxation: you can tax consumption, ownership, income, and inflation.

Consumption Taxes:

Sales Tax: This is a tax on all goods sold, the most basic consumption tax. The rich pay the most in taxes, because the rich consume the most. The “Fair Tax” is a type of sales tax that also included a Prebate, where at the start of the year (or every month) all citizens would receive an amount of money equal to the tax of basic necessities, effectively exempting something like the first 20K of spending from taxation.

Value Added Tax (Sales Tax with extra steps): The value added tax adds a tax at every step of the way for finished goods. The consumer doesn’t see what the actual tax is, but it is there. This is still a consumption tax.

Tariffs: Tariffs are another version of a consumption tax, but only on goods from other countries. Tariffs are often used to protect jobs in the country that raises them so that their workers are put on an even footing with lower paid workers in developing countries. Prior to the income tax our federal government was financed primarily through tariffs.

Usage Taxes: These taxes are for people who voluntarily use certain items: These are taxes on things like utility usage, gasoline, and road tolls. Individuals are taxed based on the amount of these resources they consume. These can be flat rate or graduated. Here is an example:

The city of Springfield institutes a tax on water usage. The first 2 units of water are taxed at 10% of the water bill. Units 2-10 are taxed at 25% of the bill. Units 10-25 are taxed at 50% of the water bill. Units 25-100 are taxed at 75% of the water bill. Any entity that uses over 100 units is taxed at 200% of the water bill. In this model the vast majority of users pay a low tax rate, while the small minority of users who consume the most resources pay an overwhelming percentage of taxes.

In general I believe that consumption taxes are the best form of taxation. Taxing consumption serves the goal of reducing consumption, while simultaneously rewarding ownership (wealth accumulation), and production (income). Consumption taxes are also largely voluntary, especially when a prebate is included like in the Fair Tax.

Ownership Tax:

An ownership tax is any tax levied based on the ownership of property. This is most commonly done on the local level from property taxes.

Property Tax: Property tax is a tax levied against real property, typically land and buildings. This is very common at the local level, however the idea of a national property tax has been floated and gained popularity under Georgism in the late 1800s.

Haircut Taxes: These are things like the famous “2 cent tax” where Democrats wanted to tax “rich people” on 2% of their net worth every year. Before cheering for these taxes, realize to fund a substantial portion of government spending the definition of rich would quickly include most people who have a job. A 2% tax on all assets owned by billionaires would raise enough money to fund the federal government for just 4 days.

Estate taxes: Estate taxes are the taxes levied on assets owned by someone who has died. Under our current system this is a double taxation because the income to generate those assets was already taxed. Estate taxes also typically can’t generate a large amount of revenue since the vast majority of economic activity is consumption and not wealth building. Estate taxes are typically used more as an avoidance tool to encourage people who have enough wealth to trigger estate taxes to spend or give away that wealth during their lifetimes.

Ownership taxes to me are highly un-American. They are direct thefts on ownership and discourage people from accumulating assets. In our current system they are effectively double taxation due to the wealth already having been taxed as income.

Inflation Tax:

Inflation tax is the tax that all citizens pay when the government prints money to pay its bills. Sure, the people didn’t have the taxes taken from their paychecks, but if the money supply is doubled, then everything will cost twice as much.

Inflation is very difficult to control, and through fractional reserve banking the benefits of inflation are given to the rich while the penalties are given to the poor. It’s robin hood in reverse. As a moderately rich person I benefit substantially from inflation. I bought assets with fixed rate long term mortgages while the government was busy printing money and asset prices were lower. I get to pay back my mortgages with future dollars that are worth much less than the dollars I paid for the building while the building increases in value. Meanwhile people who aren’t accumulating assets are seeing higher grocery prices, higher rents, and higher utilities, while asset prices climb and wages stagnate. When new money is printed it enters the banking system primarily as loans to buy assets. The rich get the new money, the poor and working class do not.

Income tax:

Then we have the income tax, which has been the favored tax of our national government for about 100 years. An income tax is paid on any income generated. Income has been defined in many ways and the US definition includes trading time for money. What this effectively means is that you as an individual are not the owner of your labor, the federal government is. This is a form of slavery.

To make matters worse, it is a tax on production rather than consumption. This is especially true of a graduated income tax plan where the tax rate paid increases as income increases. At the federal level the income tax tops out at 37%.

The income tax is also terrible because of the administrative burden and lack of privacy it creates. I just filed my taxes, and my federal return was 92 pages. It took me 2 days of effort to complete. I maintain that government agents should not know who is paying me, or how much. The income tax makes all of that information public.

Why The Income Tax Needs To Die:

The income tax needs to die because it punishes production and is a form of slavery. Rewarding production is a pinnacle of western Capitalism. We should not only reward production, we should reward production so much that we are the only country in the world that does anything remotely close to it. If we had a 0% income tax the United States would become the tax haven of the world and attract immense business development. We could then fund our government with consumption taxes.

Why No Tax On Overtime Is Good Policy:

Now that we have established that income taxes are terrible and ALL should be eliminated, why specifically do I believe that no tax on overtime is good policy?

Fundamentally this goes back to the argument that the income tax is a form of slavery. If the current income tax system states that the Federal Government is entitled to a portion of ALL an individual’s labor, then it stands to reason that a step in the right direction would be to put a limitation on the amount of labor subject to taxation. Eliminating taxes on overtime is that step.

All employers treat overtime differently. The most common treatment of overtime is that is is paid after 40 hours in a week. I have worked for some employers where it is paid after 8 hours in a day and all day on Saturday and Sunday, regardless of how many hours have been worked. In general no tax on overtime would change overall tax policy to state that the Federal Government only owns a portion of the first 40 hours of an individuals labor per week, and anything beyond that is 100% the individuals.

There are some spots where this gets tricky. Since some contracts already state overtime in non standard ways (such as any hours after 8 or all day on weekends) it might make sense that there are limitations put on this. I could see some employers and unions getting crafty and labeling all work after 4 hours as overtime or all work on Friday-Sunday as overtime.

What About Salaried Workers?:

This argument was posed to me and at the time I didn’t have a good answer. I thought, well, the invisible hand of Adam Smith will guide them to quit their Salary jobs and work hourly because the benefits now outweighs a Salary position. Employers wanting to attract top talent will make more positions hourly instead of salary, and more people will benefit. There is, however a better solution.

Employers become required to track the hours of salaried employees, just like with hourly employees there is a time clock. At the end of the year the amount of hours worked over 40 per week is divided across the total number of hours worked and then that multiplier is tax free. Salaried employees who don’t want to reveal their hours worked to their employers or the IRS should be able to opt out of this reporting, so long as they are OK with not receiving the tax exemption for hours over 40 per week.

As an example:

Steve is Salaried at $100,000 per year. In 2025 he worked a total of 2,400 hours. This is 400 hours over a standard 40 hours a week 50 weeks a year work year. 400 hours divided by 2,400 total hours is 16.67%. Multiply by $100,000 and the top $16,670 earned by Steve is NOT subject to taxation because it is overtime compensation.

This provision for salaried workers is unlikely to exist in the first no tax on overtime bill.

How Much Will No Tax On Overtime Help Workers?

Think about an average worker who earns $25/hr with 10% of their hours being overtime pay. This would be someone working 44 hours per week. Their base pay for 50 weeks in a year is $50,000. Their earnings in overtime would be $7,500. This individual is in the 12% tax bracket and would save about $900/year.

Now let’s analyze someone who earns $50/hr and works an average of 20 hours of overtime per week. $50 an hour gives a base pay of $100,000 per year on a 50 week work year. This individual earns another $75,000 in a year by working extra time. Under the current system this individual get a double whammy. Not only does he pay income tax on this amount, but he also pays a progressively higher income tax rate. His top tax bracket is 24%. He would pay $13,840 in income tax on his base pay for an effective rate of 13.8%. All of his overtime pay fills up higher brackets and on the $75,000 of overtime pay he earns he pays $17,697 in overtime taxes, a rate of 23.6%.

Existing Tax Breaks:

We have tax breaks for all sorts of things that reward one group of people and not other groups of people. The tax code is used to create incentives and disincentives to specific behavior. Rewarding hourly employees who are paid overtime while not providing a benefit to salaried employees is not as extreme of a tax inequity as other spots in our system:

Mortgage Interest Tax Deduction: This can only be used by people who itemize taxes, which are mostly people in higher tax brackets. Also, this is only available to home owners, not renters. Our tax code subsidizes the mortgage interest of high income people borrowing lots of money.

401K deductions: Our tax code rewards saving money for retirement, with the vast majority going to high income people, as people in a higher tax bracket are more likely to have money to save for retirement, and they get a larger tax deduction than someone in a lower bracket.

Rental Property: Rental income does not have to pay the self employment tax of 15.3%. In many instances rental property owners also qualify for the 20% QBI deduction, further reducing their tax bill. Rental property owners can also deduct all of their interest expense from their loans.

Child Tax Credit: We give tax credits for people to have more children.

Earned Income Credit: We give a tax credit based on family size and structure to people who have a low income.

Education tax credits: We give Educational tax credits to encourage people to seek further education, but only from specific institutions and often does not cover trade schools (that would lead to hourly employment with overtime), but does cover Bachelors degrees (that are more likely to lead to salaried employment).

Electric Cars and Solar Panels: We give tax credits to people who buy electric cars and solar panels. These credits are non-refundable, and these are large expenses, which means the majority are available only to high income people.

Capital Gains: We charge a much lower tax rate for capital gains than we do for earned income, with the minimum being 0% and the maximum being 20%

What Does No Tax On Overtime Cost?:

Current estimates show that it would cost about $57 billion in lost federal revenue if income taxes are exempt from overtime. This is if Social Security taxes are still withheld from both the employee and the employer. This would be 0.8% of the US federal budget of $7 trillion.

This would increase to $129 billion per year if we also exempted social security taxes on both sides from taxation. This would be 1.8% of the federal budget.

If we include ALL workers over 40 hours, then it would total $261 Billion in cost. This would be 3.7% of the federal budget.

This shows that no tax on overtime could be achieved without blowing up the federal deficit. With this large incentive for employees to work more hours, we will become more productive per person in our country. With more production we will export more goods and services to other countries, and reduce prices in our country.

No Tax On Over Time Is Good Politics For A Republican President:

The Democrats have claimed to be the party of labor for the last 100 years. Many unions have it written in their bylaws that they support the Democrat party. Unions and non union skilled tradesmen and women have voted strongly for Democrats historically, but with Donald Trump that has changed. A final nail in the coffin of the Democrat party will be when the Democrats ALL vote to block no tax on overtime, while ALL of these union workers earn over time.

No tax on overtime will put more money in hard working American’s hands. These are typically people who work with their hands and build this country. Ironworkers, plumbers, electricians, teamsters, laborers, carpenters, and nurses. Union and non union skilled tradesmen and women care about how much money they bring home. It’s why so many volunteer for overtime and work 60+ hour weeks at times. It is why many travel away from home for weeks on end to “go where the money is” following overtime pay. If OT is not taxed the Republicans stand to gain a lot of votes.

Trump won the popular vote by 1.5% and lost the union vote by 16%, with union voters supporting Harris 57% to 41%. If the Republican’s pass no tax on overtime this will go from 41% to 75%+. What will that do? That will flip every single state that is remotely close and JD Vance will win in a massive Landslide, bringing congress and senate seats with him.

The Republicans would not lose ground. These are the states Trump lost by 12 points or less. ALL of them would flip red. The Democrats have been buying votes of those who don’t produce for 50 years through the welfare system. The Republicans can buy the votes of those who do produce through the tax code.

New Hampshire 3% 4 electoral votes
Minnesota 4% 10 electoral votes
Virginia 5% 13 electoral votes
New Mexico 6% 5 electoral votes
New Jersey 6% 14 electoral votes
Maine 7% 11 electoral votes
Illinois 11% 19 electoral votes
Colorado 11% 5 electoral votes
New York 12% 28 electoral votes

Winning these states and the states the Republicans won in 2024 will change the game in the house of representatives from a narrow margin to a large majority, which will allow for relative ease in passing future legislation.

The Senate will be even wilder, with the potential for a super majority in 2028, especially if no tax on tips and no tax on overtime passes prior to the 2026 mid terms.

No Tax on tips falls in the same ballpark:

Who receives the most tips? Waitresses. Who are waitresses? primarily younger women. Who do young women primarily vote for? Democrats.

Women represent 69% of tipped workers.
Women between the ages of 18-29 tilt Democrat 65% to Republican 30%.
70% of tipped workers are under age 40.

This represents a massive potential voter swing for Republicans if they can pass no tax on tips, especially if they pass it along party lines with no Democrats supporting it.

Overall no tax on tips is popular with all voters. 73% of Republican, 75% of Democrats, and 73% of Independents support no tax on tips.

If a waitress earns $40,000 a year, but $25,000 is from tips, this changes the game. I believe the tipped income would/should still count as earned income for tax credits so this passing should not penalize those tax credits.

No tax on tips would cost roughly $17 billion per year, or about 1/4 of 1% of the US federal budget. It costs very little, but helps working Americans tremendously.

We also need to look at what tips actually are. Are they income derived from work or are they a gift? Gifts are already excluded from taxation on up to $19,000 from each donor to donee, so this covers 99.99999999999% of al tips given. A tip is not mandatory in most circumstances and is given of free will to another person, generally as a special thank you for how they made them feel with their interactions with no required predetermined amount. Sounds like a gift to me, and gifts aren’t taxed.

Conclusion:

The income tax is a terrible thing and any restrictions we can put on it should be welcomed. No tax on overtime and no tax on tips are both good policies to combat this tax. For Republicans who are against either no tax on tips or no tax on overtime, even if they don’t love the policy, thy should embrace it because it will be an effective tactic to gain a larger part of the electorate in future elections.