Tips Should Be Taxed
Tips Should Be Taxed
The government needs to stop trying to pick winners and losers
It’s one of the few things Donald Trump and Kamala Harris agree on. Tips should not be subject to federal income tax. Trump first mentioned this in June at a campaign rally, and Harris echoed it in August. The proposal quickly gained traction. A lot of Americans are struggling with higher prices, tippable employees more than most. About four million American workers are employed in positions that regularly receive tips, or about one in every forty workers. They are more likely to live in urban areas, where housing costs and other prices have risen dramatically over the last four years. Tippable employees are also more likely to be low-income and young. Along with the millions of restaurant servers and coffee shop baristas whose main source of income is customer gratuity, there are tens of millions of other Americans who once worked in those professions, and remember what it was like to have a paycheck that was constantly in flux. This has led to the proposal gaining support from unexpected people, such as Ted Cruz.
While this proposal may be popular politically and should be in the dictionary as a perfect example of populism, it’s terrible economically. Here’s why.
The primary issue is one of fairness. Taxes are tipped just like any source of income because they are income. A bizarre source of income, based on a simple idea that America decided to turn up to 11, but income nonetheless. Some say that tips count as “gifts” rather than income, and thus shouldn’t be taxed. But tips are not treated as gifts by US law. To see why, look no further than the minimum wage. Except in Washington, D.C., and a few other places, the American minimum wage is divided into two: the standard minimum wage and the tipped minimum wage. Because some employees are regularly tipped, effectively outsourcing part of a wage from the employer to the customer, tipped employees don’t have to be paid as much as other employees. If tips were to be reclassified as gifts, then that outsourcing is no longer occurring. Thus, there should be no tipped minimum wage. Teachers don’t receive a tipped minimum wage despite it being normal for parents to buy them a small gift for Christmas or at the end of the school year for that reason. Those are gifts, while tips at a restaurant are wages. The difference is in the expectation. It is expected that restaurant diners will tip their server at the end of the meal, even if the service was just average. Thus, it really isn’t a gift.
Because tips are wages, they should be taxed as wages. To treat them otherwise would be unfair. Many tipped employees already don’t pay tax on cash tips. To give them a pass on all tips would just be another example of the government choosing winners and losers. Currently, the federal income tax stands out for its relative fairness. There aren’t a million ifs, ands, or buts about who gets taxed what. There are some exceptions, such as tax rebates for having children and whatnot, but overall, one person who makes $50,000 a year is treated pretty similar to everyone else who makes $50,000 a year. If we suddenly claim that some employees who make $50,000 a year are far different than others, it won’t stop just at tipped employees. Opening this door will lead to a patchwork of exceptions of just who should be taxed.
It’s easy to imagine that groups such as government employees, non-profit workers, and others would quickly clamor for their own tax relief. If a server makes $80,000 a year and doesn’t have to pay tax on their income, why should an inner-city teacher who makes half that? What about the part-time employee at the homeless shelter who makes even less? This is not a path we should start down. The tax code is designed so that those who make more, pay more. Salaries should be taxed like bonuses which should be taxed like commissions which should be taxed like tips. To do otherwise is going to open a Pandora’s box that will never shut.
Additionally, many Americans, including myself, feel that tipping has gotten out of control over the last decade. What was once relegated to only full-service restaurants, taxis, and delivery drivers has exploded to include just about any place where the customer has a face-to-face interaction with a minimum-wage employee. It’s enough to make someone adopt Dwight Schrute’s approach to tipping. Removing the tax on tips would move our already annoying system into the stratosphere. Employees would have a higher incentive to seek tipped positions, and employers would benefit from outsourcing their wages to the consumer. It’s easy to imagine all retail outlets moving to the tipped wage model. For now, I don’t feel pressure to tip the person ringing up my new pair of shoes or blue jeans - I’d like it to stay that way.
For those who believe that American tipping culture has unfairly outsourced wage responsibility to the consumer and effectively hid the true price of a service, this proposal should be met with resistance. Further incentivizing employers to classify employees as tippable will only beget more tippable professions. Legally, employees only need $30 of tips per month to be classified as tippable. At that level, almost every retailer could put a tip screen up and say their employees should only be paid the tipped minimum wage, and probably be correct. Let’s not go that route.