It has been suggested that tips should be untaxed. I wonder what everybody thinks of this proposal?

OTOh, it would help some of the lowest paid workers in our society, and also their employers, who are mostly small businesses. Very important in times of inflation.


It also might seem unfair that two workers, both making similar incomes but from different sources could pay widely differing taxes. But we already exclude some kinds of income from taxation - municipal bond income, e.g.

37 views and no opinions, yet.

I think I lean toward not taxing tips being a good thing. Some of this was because growing up, that was effectively the situation. I worked as a waiter for a while, after dropping out of Rice. My “pay” was $3 per eight hour shift (NOT per hour), plus a free meal, plus tips, which ran $5-6/night. Slept in my car. I was back in school the next September.

We don't tax municipal bonds in order to reduce interest costs on municipalities. It's the federal (and, in most places, the state) government(s) subsidizing municipalities. Local government is empowered to solve local problems.

We historically have trouble taxing tips because cash has been hard to track and not worth the effort. For most tip-earning employees, the benefit to the IRS of proving that cash tips have been under-reported is negligible. Tax agencies would spend more on the investigation than they would collect back in taxes and penalties, if proving the error is even possible. Why should a given waiter who earns, say, $17k/yr working full-time* be taxed less than a retail employee who earns the same amount? If the tax rate on a person earning that little is too high, then do something to reduce the effective tax rate on everybody in the earnings bracket. There's nothing qualitative about the work or the compensation structure that the government has a compelling reason to encourage. The difficulty of tax agencies collecting that data is washing away as we shift from cash transactions to electronic. It doesn't make sense as policy.

The reason you're seeing the proposal now is because a certain Republican presidential candidate who previously lost Nevada by only about 2.4% on two prior occasions is showing historically uncharacteristic popularity with Latino voters this cycle, leading his campaign to believe that he can flip the state this year. He's betting that this promise will prove popular enough in Vegas among the casino and hospitality workers to tip the state to his benefit. There's not an economic or fiscal justification. It's pandering to a constituency.

* https://www.payscale.com/research/US/Job...ourly_Rate $8.15/hr * 40 hrs * 52 weeks. I know that's not perfect, but taken for the argument.

(06-22-2024 01:34 PM)franklyconfused Wrote:  We don't tax municipal bonds in order to reduce interest costs on municipalities. It's the federal (and, in most places, the state) government(s) subsidizing municipalities. Local government is empowered to solve local problems.

We historically have trouble taxing tips because cash has been hard to track and not worth the effort. For most tip-earning employees, the benefit to the IRS of proving that cash tips have been under-reported is negligible. Tax agencies would spend more on the investigation than they would collect back in taxes and penalties, if proving the error is even possible. Why should a given waiter who earns, say, $17k/yr working full-time* be taxed less than a retail employee who earns the same amount? If the tax rate on a person earning that little is too high, then do something to reduce the effective tax rate on everybody in the earnings bracket. There's nothing qualitative about the work or the compensation structure that the government has a compelling reason to encourage. The difficulty of tax agencies collecting that data is washing away as we shift from cash transactions to electronic. It doesn't make sense as policy.

The reason you're seeing the proposal now is because a certain Republican presidential candidate who previously lost Nevada by only about 2.4% on two prior occasions is showing historically uncharacteristic popularity with Latino voters this cycle, leading his campaign to believe that he can flip the state this year. He's betting that this promise will prove popular enough in Vegas among the casino and hospitality workers to tip the state to his benefit. There's not an economic or fiscal justification. It's pandering to a constituency.

* https://www.payscale.com/research/US/Job...ourly_Rate $8.15/hr * 40 hrs * 52 weeks. I know that's not perfect, but taken for the argument.

Thanks, Frank. I agree with much of what you say. I especially like "do something to reduce the effective tax rate on everybody in the earnings bracket". I am a big fan of lowering taxes.

However, I also see that some tip-heavy occupations might get an outsize benefit. I was talking to a poker dealer the other day who used to be a registered pharmacist, but switched to dealing because the money is significantly better. A waiter in an upscale restaurant would benefit more than a waiter in a greasy spoon.

As for the pandering, certainly it is pandering, like all candidates do, e.g., forgiving student debt or promising to make appointments from a certain demographic. I was just wondering if THIS type of pandering had a more widespread benefit than other types of pandering. It seems to hit a lot of people in lower tax brackets without regard to race or sex. But WHY candidates pander to voters is not the question I was wondering about - it was "is this a good idea or not". Thanks for your input.

It would also make my tip 20+% more valuable... thus I can tip 'less' and the server still ends up with 'more'. I guarantee those 'tip jars' and most cash tips never get taxed anyway.

I think it certainly encourages more under the table sort of activities... as in if you don't like the food, I'll comp it for you... or give you something for 'free'.... and you tip me but don't pay my boss for the food. Bar owner (who don't have some fairly sophisticated systems in place) could lose a fortune.

I've never run a restaurant so I don't know if there is any savings or penalty for operators on not having to report those tips or how that would impact ensuring that these people at least make min wage... or what that means for the time they spend setting up or cleaning up... etc...

GENERALLY I'd say its a good idea and I'm for it.. that's perhaps 5% (25% of my 20% tip) of my 'dining out' budget that avoids taxation.... but that doesn't mean there aren't some problems that would need to be worked out. Frankly, I'd be happy for us to go to Europe's model of no tipping and higher wages... but I'm not sure lots of servers would go for that. I mean, you can make $10/hr working at McDonald's or SUbway.... or work for tips at Chili's. SOmetimes that would be a hit.... sometimes a miss.


To Frank's comment about the pandering...

Sure... but for the reasons you mention... paraphrasing... that taxing those amounts can be more work than its worth... it is also not fiscally irresponsible like most pandering... it DOES generally fit with Republican ideals... AND because these are taxes on voluntary expenditures that generally go directly to the recipient... people can adjust their tip (or not do it at all)....

AND by and large,... tipped employees are not among the top wage earners.

We might see some industries going to 'tips only'... like your lawn guy etc

(06-24-2024 09:43 AM)Hambone10 Wrote:  It would also make my tip 20+% more valuable... thus I can tip 'less' and the server still ends up with 'more'. I guarantee those 'tip jars' and most cash tips never get taxed anyway.

I think it certainly encourages more under the table sort of activities... as in if you don't like the food, I'll comp it for you... or give you something for 'free'.... and you tip me but don't pay my boss for the food. Bar owner (who don't have some fairly sophisticated systems in place) could lose a fortune.

I've never run a restaurant so I don't know if there is any savings or penalty for operators on not having to report those tips or how that would impact ensuring that these people at least make min wage... or what that means for the time they spend setting up or cleaning up... etc...

GENERALLY I'd say its a good idea and I'm for it.. that's perhaps 5% (25% of my 20% tip) of my 'dining out' budget that avoids taxation.... but that doesn't mean there aren't some problems that would need to be worked out. Frankly, I'd be happy for us to go to Europe's model of no tipping and higher wages... but I'm not sure lots of servers would go for that. I mean, you can make $10/hr working at McDonald's or SUbway.... or work for tips at Chili's. SOmetimes that would be a hit.... sometimes a miss.

I think the current IRS rule is to estimate tip income at 8% of sales.