Trump Vows to End Taxes on Overtime. Here’s What It Means for the Economy

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.
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 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.
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.
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.”
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.
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.