Tipping- Wages or Gratuity

Former President Donald Trump has announced that he will eliminate federal income taxes on “tips.” While Mr. Trump may be well meaning, it is doubtful that he has considered the unintended consequences of doing that.

Let’s understand the purpose of “tipping” – you know, the one your parents taught you. Not the one that is now identified in the online “fact checking” baloney. The one you were taught as a child is that tipping was a gratuity given in acknowledgment of good service. It was centered primarily in the leisure industry (waiters/waitresses, bartenders, housekeepers, drivers, etc.). Now the “fact checker” dopes have concluded that it is the remnants of a racist society. But then again what isn’t the remnants of a racist society in their myopic world.

But the concept of tipping has been more than marginalized; it has been stood on its head. Tipping has nothing to do with the quality of service delivered. It is more or less mandatory and served with a large dose of intimidation by hovering staff with table side computers and counter “flip” screen that require the customer to act immediately in full gaze of the server. And it has grown with the cooperation of “management” as they have shifted more and more of the responsibility for worker compensation to the customer. It has become so institutionalized that now fast food joints and baristas have come to expect a tip for merely handing you your order. And the size of the former gratuity has grown from ten percent to a point where thirty plus percent shows up on the intimidating computers. It is no longer a “gratuity” it is segment of wages – now part paid by management and part paid by consumers.

And it is this shift from “gratuity” to “wage” that has made it disproportionately unfair to men and women working in the service industry – particularly those who provide the best service – you know, “merit” based. Let me explain.

Two waiters working in a fast casual restaurant working the noon shift are assigned tables randomly. Waiter A draws a four top table with four business types. They order from the menu – usually a familiar meal – at an average price of $22.00 per head. Waiter A delivers the order to the kitchen and thereafter dutifully recovers the dishes when prepared and delivers them to table and distributes them accurately. Waiter A tends to other orders and eventually make his way back to the table to recover the used dishes and ask whether any desserts from the menu are needed and which are declined. Waiter A clears the remaining dishes and returns with his hand held computer and presents the computer to the table for confirmation and tip – the “suggested tip options” range from twenty percent to thirty-two percent. The underlying bill is $88.00 and least acceptable tip is another $17.60 bring the grand total to $105.60. If the customers request separate bills, Waiter A pushes another button and out comes four bills for $26.40 percent. Regardless Waiter A receives $17.60 in tips. (I would do the math for those forced to endure a primary education utilizing teachers unions personnel in the Portland public schools but it would take too long and we would have to spend hours debating the application of new math and whether basic arithmetic is another remnant of a racist society.)

And now on to Waiter B. Waiter B draws a table with with four diners – husband, wife and two children under the age of seven. Waiter B presents the menus, including children’s menus with cartoons and crayons. Waiter B engages in a discussion with the couple about whether they could order just fruit for the children, to which the children object and a negotiation ensues with the children settling on “mac & cheese.” The husband orders a cheeseburger – well done – and the wife orders a chef salad after being assured that it will not contain tomatoes. Fruit juice ($1.50 each) is ordered for the children and a diet cola ($2.50) for the husband and plain ice tea ($2.00) for the wife. The children’s prices are $8.70 each, the husband’s price is $13.80 and the wife’s is $12.00 even. By this time, the youngest child has spilled his water and Waiter B goes to his station to retrieve towels to clean it up and refresh the water. Waiter B delivers the order to the kitchen and returns to the table when he gets the “hi sign” from the wife and directs her to the bathroom with both children in tow. The food arrives and Waiter B sorts accordingly at which point the husband states that he would like pickles with his burger and the wife sends the salad back because the kitchen staff has put tomatoes on the salad. Waiter B returns with the pickles and after due time brings out a new salad without tomatoes but with additional dressing.. When the meal is finished Waiter B begins to clear the table and asks about dessert. The children both want ice cream with chocolate sauce and the husband and wife decline but ask that Waiter B bring additional spoons. Waiter B returns with the two dishes of ice cream and four spoons. The ice cream was $1.75 each for a children’s portion. When everyone is done, Waiter B clears the table – and it is a mess with macaroni and cheese and ice cream and a spilled fruit juice everywhere. The total bill is $54.20. Waiter B presents the bill with his hand held computer to the table for confirmation and tip – the “suggested tip options” range from twenty percent to thirty-two percent. In this instance the tip, at twenty percent, is $10.85 for a grand total of $65.05.

Waiter A did little more than take, transmit and deliver the order and received $17.60 while Waiter B did significantly more (clean up spilled items, provide additional requested items, return and redeliver a mistake from the kitchen, and provide directions) and wound up with $10.85 – about forty percent less than Waiter A. The compensation had nothing to do with effort and everything to do with the price of the meal. And yet we are now to assume that tips are a segment of the waiter’s wage rather than a gratuity.

It has an ancillary and even more venal effect. In times of rapid inflation like we have experienced under the cognitively challenged President Joe Biden, the leisure industry can “hold down their prices” by elevating the rate of tips. Thus customers are misled by prices and employees are left to the mercy of customers fed up with paying a third more than advertised because the amount of a tip is never included in the advertised price.

And therein lies my concern over the proposal to exempt tips from taxation. And that is precisely that businesses already deeply embedded in the tipping racket will increase the percentage for tips to continue misleading customers as to the true cost of service. Other businesses will soon adopt a tipping mechanism to do likewise. (We have already experienced a number of businesses who routinely ask whether you if want your change – including hardware stores, delivery companies, and laundries.) The idea that those “tips” will be exempt from taxation will simply encourage further abuse.

So who benefits from the exemption of tips from taxation? Well, the employees because they don’t have to pay taxes and the owners because they can continue to shift the burden of pay wages to customers. But not the customers because they will continue to pay the whole amount – tips and base price. And not the taxpayers because they are asked to pick up the short fall in revenue and I don’t mean general tax revenue. I mean that taxes paid by employees and employers for Federal Insurance Contributions Act (FICA) and better known as Social Security. It also include various state and federal unemployment insurance programs. In both such instances employees eligible for the benefit of these programs will minimize their contributions to them. Since there is no actual Social Security Fund, existing taxpayers will have to pick up the short fall. The same is true with unemployment insurance programs. A closer look at such programs will produce additional instance in which the general taxpayers will be required to fund the difference.

And while I am generally in favor of anything that reduces the tax burden, I don’t favor such “parlor tricks” if the results is to shift the burden on to others. It is here though that I come face-to-face with the reality of government interference in our lives. There are many things that the government could to do restrict the application of Mr. Trump’s proposal to those portion of the leisure industry that would benefit from exempting tips but that means more government intrusion, more rules and regulation, more public employees to promulgate and police those rules and thus more burden on the tax base – less revenue but increased costs associated with implementation. Quite frankly, I would rather have the tax exemption for tipping tha the bloated bureaucracy for monitoring any rules.

But the one thing that the government should do if we are to enter this compensation morass is to eliminate tips from calculating minimum wages paid. And this, in turn, should incentivize consumers to do what they should do – move back to limiting tipping to the provision of superior service.