Payam Javan: Former President Donald Trump announced a new campaign proposal on September 12th, aiming to eliminate taxes on overtime pay for workers who clock in more than 40 hours a week. This pledge is part of his broader plan to reduce individual taxes for millions of Americans, including proposals to eliminate taxes on tips and Social Security benefits. Although Vice President Kamala Harris has not introduced a similar overtime tax proposal, she has also shown support for removing taxes on tipped wages, highlighting a shared interest in tax reform among both political figures.

The proposal could impact a significant portion of the workforce, particularly the over 34 million workers who averaged more than 41 hours a week last year. According to the Fair Labor Standards Act (FLSA), most hourly workers are entitled to time-and-a-half pay for overtime, but salaried employees only qualify if their earnings fall below a certain threshold. Trump’s plan may incentivize workers to take on more hours without fearing a higher tax bracket, potentially addressing the current decline in average weekly hours and the ongoing worker shortage. Analysts like Garrett Watson from The Tax Foundation suggest that such a plan could encourage more people to return to work, offering some positive economic effects.

However, Trump’s proposal may face significant fiscal challenges, particularly concerning its impact on federal tax revenues. Estimates from The Tax Foundation suggest that removing taxes on overtime pay could reduce federal income by approximately $227 billion over the next decade, with some scenarios predicting losses as high as $1.1 trillion. While the plan could benefit workers, it might complicate the tax code, adding administrative burdens for employers and the IRS. Additionally, the proposal would require Congressional approval, and with some Democrats expressing concerns over its potential to increase the federal deficit, it may face an uphill battle on Capitol Hill.