a room with a large table and chairs
Photograph ©2024 by Brian Cohen.

Editorial: No Tax On Gratuities Is a Bad Idea.

How implementation of this idea can negatively affect you — the traveler.

Two of the worst candidates ever for president in the history of the United States both endorse the idea of no tax on gratuities as part of their campaign promises — and it is a bad idea for several reasons.

Editorial: No Tax On Gratuities Is a Bad Idea.

a group of people sitting around a table with umbrellas
Photograph ©2024 by Brian Cohen.

The practice of giving workers tips and gratuities has spiraled out of control in the United States. The “add tip” functionality that has been added to point-of-sale systems and other evolving technology is purportedly designed to guilt the customer into leaving more money or tipping more often to members of the staff at a dining establishment than the customer might have originally intended. More of those little hand-held machines are being used by various types of eateries. Some of those machines suggest leaving a gratuity of as much as 40 percent of the bill for servers; while others suggest leaving a gratuity of as much as 25 percent of the bill simply to take out food.

Worse is that the cost of food itself has increased due to inflation and disruptions in the supply chain among other factors — so even if the standard gratuity remained at 15 percent, the tip itself automatically increases based solely on the cost of the food.

A Conservative Example of Gratuities Which Are Not Subject as Taxable Income

people sitting at a bar
Photograph ©2024 by Brian Cohen.

If a server waits on five tables — each of which has five sets of customers that spend an average of 1.5 hours at each table — during a shift of eight hours at a restaurant and the average cost of a meal is $50.00 before taxes are added with the gratuity being 15 percent, the server earns $187.50 in gratuities alone. The pay does not include the meager and shameful $2.13 per hour minimum that the management of a restaurant is required to pay, which adds another $17.04 in pay. If the server works five days per week, the gratuities may average $937.50 and the base pay would be another $85.20 before taxes…

…but if the server no longer needs to pay taxes on gratuities, the income on the gratuities alone becomes $46,875.00 annually and does not include the $4,260.00 in salary before taxes or $3,322.80 after taxes. This is equivalent to a person who earns greater than $60,000.00 per year before taxes at a rate of 22 percent. Considering that conservative numbers were used — meaning a family of four would pay well more than $50.00 before taxes and gratuities; and that the gratuities may typically be more than 15 percent with each customer — that $50,197.80 after taxes becomes a rather decent to good annual income.

Would the suggested amount for a gratuity decrease once the requirement to pay taxes on gratuities is removed? Of course not. In fact, the opposite will likely become true: you will be badgered significantly more to leave as much of a gratuity as possible — even if you get no service. Gratuities become free money of which 100 percent can be kept by the earner if no taxes are levied on them — and that alone is a strong incentive to want to earn even more at your expense.

This sickening culture of tipping is already spreading to infect other parts of the world. Customers are not only expected to pay usurious tips simply for the privilege of picking up food at a take-out dining establishment; but we are also expected to pay gratuities to breakfast attendants at hotel properties, to members of the housekeeping staff even though services may have been significantly reduced, and even possibly to flight attendants — all of this in addition to ridiculous mandatory fees and taxes that are automatically added to our bills. The hamburger that costs ten dollars on a menu costs significantly more by the time a diner is ready to pay for the meal.

Taxes on Travel to Increase as a Result?

two beds in a room
Photograph ©2024 by Brian Cohen.

Another potential detriment to no taxes on gratuities is the loss of taxable income by the federal government of the United States. Assuming that that loss of income is an even one billion dollars per year, the federal government is not simply going to “shrug its shoulders” and say “oh, well — we are short by one billion dollars. That’s life.” The money has to come from somewhere. Will it come from an increase in taxes or a decrease in services that are offered by the federal government?

If so, the one place that seems to be a “cash cow” for revenue is the travel industry. When a government wants to increase revenue, it usually looks towards taxing people who travel because people who travel are typically not the constituents of politicians — so the constituents are not angry at the politicians who represent them. As one of many examples, a tax in the state of Georgia adds five dollars per night for hotel stays as the result of a law that became effective as of Wednesday, July 1, 2015, which means that a stay of five nights in the state of Georgia will tack on $25.00 to your folio — in addition to the room rate and existing taxes and fees — when you check out of your room.

Of course, the Federal Reserve Board of the United States can also simply order for more money to be printed — but that potentially weakens the dollar while simultaneously increases inflation. We have already seen the detriment of simply giving money away during and after the 2019 Novel Coronavirus pandemic and how that was one of the factors that caused inflation to increase to a rate as high as 9.1 percent in 2022 — which was the highest rate in greater than 40 years. That in turn created a lot of problems for what became an overheated economy — especially as many people temporarily lost the incentive to work for a living.

Final Boarding Call

a restaurant with tables and chairs
Photograph ©2024 by Brian Cohen.

As a reader of The Gate With Brian Cohen, you are likely one who travels — or, at least, a person who wants to travel…

…so who is likely to be among the hardest hit by the idea of no tax on gratuities?

You. That’s who.

Think about it: unless a person is a digital nomad who wanders from country to country with no permanent place to call home, travelers are among the people who are most likely to dine out at restaurants — typically more often than most people — and also among the most likely to financially fill in shortfalls in taxable revenue.

The bellhop, the server, the purser, the valet, the housekeeper, and the concierge are only some of the people who expect a gratuity from customers, whom they euphemistically call guests. More people who work in the travel industry in general arguably receive tips and gratuities than any other industry — especially if hospitality, dining, and cruises are included — and they are supposed to be taxed on that income.

Believe it or not, only between two percent and 2.5 percent of workers would directly benefit from their gratuities being exempt from taxes; so the fact that both Donald Trump and Kamala Harris — ugh…the very thought of either of them becoming president of the United States causes me to cringe — would even entertain the idea of eliminating gratuities from being taxed is farcical at best…

…but neither candidate for president of the United States has released any plan or details as to how eliminating gratuities from being taxed will actually work. Besides — according to this article written by Howard Gleckman from the Tax Policy Center of Urban Institute and Brookings Institution — “While Harris’s and Trump’s campaign ideas have received a great deal of attention, they would be irrelevant to more than 95 percent of households and even to many tipped workers.” Also — according to this article written by Alex Muresianu from Tax Foundation — “…it’s a poorly targeted change, with the potential for unintended consequences for both consumers and the federal budget.”

Furthermore, I cannot imagine that one can simply wave a magic wand and declare that gratuities are to no longer be taxed. Numerous changes would have to be implemented for this to succeed — and even then, those changes will take time.

I am neither an endless fountain of cash nor am I an employer of any of these people. How is the fact that servers do not earn a decent wage my fault? I do not operate a restaurant or other dining establishment. I am not the person who purposely sets the prices on the menu artificially low to give the illusion of what is the actual cost of the meal. Why am I required to cover what business owners cannot — or will not — pay?!?

Regardless, I am tired of being taxed on all ends just to live — let alone to travel, which has been a passion of mine for most of my life…

…so if the day comes to fruition when gratuities are not subject to taxation, I plan to reduce the amount I tip to service staff — or perhaps dine out less altogether. Why should my taxed dollars support income which is not taxed at all?

I personally believe that no tax on gratuities is a bad idea.

All photographs ©2024 by Brian Cohen.

  1. Agreed! There should be no singling out of any group in the paying – or not paying – of federal taxes.
    Our federal government needs an amount of money to run itself. That should come from a national sales tax, funding by all who purchase. Then no one is exempt from paying their share. And those who spend extravagantly will also pay extravagantly.
    In addition, we need to cut back on the billions spent on pork projects and shrink the federal government to a streamlined version of its current self.
    Hearing both parties yap on about how they will spend or allocate more of our money is sickening.

    1. I believe that your idea of a national sales tax has merit, NB_ga — but there are a lot of people who will argue that a national sales tax is unfair…

    2. If you only look at restaurants and tipping then you are short sighted. I own a dog salon and yes our groomers make a lot in tips. Those tips are optional and are the choosing of the client whether they want to tip or not. It is their option and always will be. However, as the business owner, I pay my groomers a very nice commission and when they get tipped, I have to pay employer taxes on the tip as well as the credit card fee for collecting it. Small business owners need a break also and if it means we don’t have to pay taxes in a gift to my employee, I’m all for it. The government needs to stay out of taxing gifts that people give to others that are their choice to give. From my view point, the client is happy to give to the groomer that just made their dog look and smell wonderful.

    1. Thank you for responding, Matthew.

      Here’s the $25.00 I owe you for doing so, as Willy so wrongfully implied…

  2. Agreed. Let’s instead have 100% tax on tips so that the entire practice disappears and we can return to a sane economy where business owners charge customers for their goods and services and then pay their own employees rather than charging their customers and then trying to guilt trip those same customers into then paying their employees for them.

    1. What I cannot stand about tipping is that it is expected, Doug — even if the service is abysmal.

      I also despise not knowing exactly what I will be paying until the check comes when the meal has concluded. Both tax and gratuity can potentially add significantly more to the bill than what is advertised on the menu, which is a form of false advertising, in my opinion.

      1. What you dont understand Brian, is that the waiter keeps about 50% of that tip on an average. They have to tip out the other workers like the hostess, bartenders, and busboys. In fine dining, they also have to tip out the somelier, back waiter and food runner. Nobody is forcing anyone to tip period unless its included for a large party or in a tourist destination. If you get “abysmal service, tip accordingly. If you get phenomenal service, tip accordingly. I don’t believe that a waiter shouldn’t pay taxes but your article doesn’t include the whole truth about the restaurant service industry. It is simply not true that the waiter keeps all the tip in most cases. Also, keep in mind, that waiter tips out on sales quite often and when someone comes in and decides not to tip because they don’t believe in tipping, that waiter still has to tip out the other service staff on those sales.

        1. I did know that the server typically does not keep the entire gratuity, Evan in the Service Industry — and I do believe that having a server who was not given a gratuity still tip out the other service staff on those sales is unfair…

          …but I equally believe that customers should not be forced to directly supplement the incomes of service workers with gratuities. I have been to several countries this year where the wait staff is paid a living wage and not tipped. It was nice to essentially pay the price that was printed on the menu without being expected to pay more. The food was not cheap; but it was not expensive either.

          This system seems to work in those countries. The food was good, the service was good, and I knew what to pay — and if the service was better than expected, I still have the option to leave a tip. That is the system that should be in the United States.

          You are correct that no one is technically forcing anyone to tip — but technology is used to try to guilt customers into tipping as much as possible.

          Thank you for bringing additional points to this discussion. I like to be as fair as possible…

  3. Ha ha ha, one of the travel bloggers that sat at home (not Matthew – but we all know he’s deep down a west coast simp) during the pandemic believing that was real is now going to tell us about taxation and economics, and oh, by the way, opine on the odiferousness of the two current candidates. Must be short on clicks for the month so he posts this click bait engagement stuff and then gets Matt to chime in.

    1. Wow, Willy — your comment proves that you have not read anything that I posted about the 2019 Novel Coronavirus pandemic over the past five years. I cannot even begin to tell you how wrong you are about each and every point you stated in your comment; so I will just say that everything you wrote is 100 percent incorrect.

      You obviously also are unfamiliar with my stand on “click bait”. I am convinced that you do not even know what the term actually means.

      Are you sure you are reading the same blog that I write?!?

  4. Taxation is theft by a government mob and anything that lowers it is a good thing. More people keeping their money so it doesn’t get into the pockets of defense contractors, wind up in Israel and Ukraine, in the hands of illegals, or go for more DEI or LGBtQA programs is a good thing.

    If you say the political candidates are bad, then them with less of our money is a good thing. It is perplexing how you can compare Trump to Kamala. Trump is the only anti war President in 100 years who rather see talking instead of endless foreign wars and conflict. Surely, he’s better than every President since Reagan on a pro freedom level at home and better than possibly any President in history on the basis of not going to war.

    1. I was not comparing Donald Trump to Kamala Harris, David Arnett. They are just both bad candidates for different reasons. Surely we have more qualified people in the United States who can successfully lead this country…?!?

      I agree with you that there should be less taxation by the government — especially if the tax money winds up in corrupt hands and is not fully used for the services for which we pay — but we do need some way to fund the federal government for our benefit.

      What do you think about what NB_ga proposed in terms of a national sales tax and eliminating income tax altogether? Would you be on board with that idea?

      1. What it takes to run for national-level office even for Congress and have a reasonable chance to win is a much more taxing experience than it used to be. Then you have to add in the risks that come with running for or being a public official in this era where the division between private life and public life is narrower and what it means for the person and their near and dear ones and we get an even more extreme self-selection problem than would otherwise be expected from political candidates.

        Like with religion, politics too is attractive to scoundrels of pretty much the same “leadership” sort — the former tend to be as bad or worse but get less national/international attention even as their flock often think of them as being great persons in private too (when they really were not). The general public just tend to see the dirty laundry of the politicians washed in public more than the dirty laundry of the “religious” “leaders” in the country who ride high on being part of tax-exempt institutions.

        1. That seems to be true, GUWonder.

          I had actually thought of running for office myself some years ago, which you already knew as you responded to the most recent of the following two articles…

          https://thegatewithbriancohen.com/i-am-running-for-president-of-the-united-states-vote-for-me/

          https://thegatewithbriancohen.com/i-am-still-running-for-president-of-the-united-states-in-2020-vote-for-me-as-a-write-in-candidate/

          …but then thought better of it for some of the reasons you cited.

          It just is not worth it for numerous reasons…

  5. I hate the tipping culture that we have created and I agree with a lot you say but there are some counter points to this.
    The Democrats in Congress already are working on this and put the TIPS Act into play in mid-September, introduced by a Democrat from Nevada because, well they need the votes to get re-elected. The Republicans have also played in this pool as well.
    Many places are putting much higher minimum wages into place even for highly tipped jobs.
    The government is so irresponsible with revenue and debt it wouldn’t have any impact on services as we continue to go broke.
    Trump, Kamala, or any other President in the US can’t just do away with a tax code like this. It takes Congress to impact this taxable income area. They would have to sign it into law or veto it.

    Candidates make promises like this that can be hard to fulfill. Like Biden promised and Kamala promising to eliminate student loan debt. You can’t just make it happen with the stroke of a pen. They would have been better off to try and lower the student loan interest rate (1% would be good) or take other relief actions that would be legal and impactful.

    No matter what happens we need to stop with the crazy tip culture. I’m not tipping someone for giving me my bag of food at a self-service fast food counter. I’m not tipping the “suggested” amount on some iPad because someone pressed two buttons and handed me a beverage they didn’t make. Crazy.

  6. The idea of no tax on tip income is a lousy idea and will encourage cheating on taxes and shifting employee income into “tips” and out of fixed hourly or even salary income.

    That said, there is no way that Kamala Harris is anywhere near as awful a person and/or as candidate for US President as Donald Trump. And I say that as someone who dislikes Kamala Harris and will pinch my nose when voting for her in November. But I think Trump is going to win enough of the “swing states” that Trump wins the election unless and until Harris fixes her campaign act and gets a functional campaign message in a way that she isn’t doing and seems unwilling and unable to fix. But it’s not just her. The Democrats are lousy with messaging, in large part because they can’t keep it simple and stick to a simple message.

    1. Harris IS sticking to a simple message…
      1. Smile and say little
      2. Increased capital gains tax and increase taxes in order to make them pay their fair share.

      1. Harris has been doing more TV shows with the legacy major broadcasters than her main opponent and she wanted another debate against her elderly chicken opponent who is avoiding it like it’s the plague.

        As JC would say, “it’s the economy, stupid”.

  7. I think a lot of comments are missing the whole “push” for this “no tax on tips” thing by politicians.

    1) The Supremes have ruled that politicians can accept post-event “gratuities”. Pre-event “bribes” are still illegal.

    If a politician accepts a post-event of gratuity of say $500k for approving a project, his or her “gratuity” would be “tax free”.

    This is not about the service industry workers…other than buyin their votes

  8. Most tipped employees under report their tips by a lot…..like a real lot. The government wasn’t getting the tax revenue from those underreported tips anyway and it didn’t really make a lot of financial sense to go after the dishonest employees. This really doesn’t really move the revenue collection needle that much. It’s better optics for the uneducated tattood class that are stuck with lifelong occupations as bartenders, waitresses, wheelchair pushers etc.

    1. This is basically rewarding and whitewashing long-standing practices of tax evasion, related money-laundering and other problems that are part and parcel of “the tipping economy”.

      The country should not be giving a rubber stamp of approval to an aspect of the economy that is super messed up and encourages disrespect for compliance with the tax laws, regulations and comes with various other problems even for the tipped workers.

    2. That in part would explain why employees whose majority of their compensation is gratuities are so protective of any perceived negative changes to their livelihoods, CHRIS — and why I loathe the very culture that this practice has bred in society.

      Having been to several countries recently where gratuities are not expected or a small service charge was included on the bill, I dislike the tipping culture even more…

      1. I was fine with tipping 10% on pre-tax spend at food and beverage venues in North America and also in less developed countries than the US — it was sort of the standard when I was a wee little kid. But since 10% nowadays is considered an insult in the US and I have come to appreciate places where tipping is not expected or not expected to be more than a rounding up of the bill, the net result is disappointment that our country has gotten more extremely into tipping. Nothing Trump does surprises me, so additional disappointment from him is basically impossible from me. Harris is another sorry, so I was disappointed me when she decided to play the traditional “me too” card in support of tipping culture.

      2. The move away from cash and to card and other electronic spend at food and beverage venues has increased the likelihood that the IRS and/or SSA would be able to run up revenue due them from tipped income if tipped income was properly classified and tracked as ordinary income subject to FICA too.

  9. Surprised no one has suggested this: If I have a $200 dinner for four, where I would normally leave 15%, $30 tip. Since I know the service staff isn’t paying tax on that money, I can in good conscience cut my tip by approximately $5 rationalizing that they will net the same as before the tax change; they don’t lose and I benefit! I’m not saying this is right (or wrong), just that anyone who thinks about money will have this thought cross their mind and some / many may act on it. Law of unintended consequences from another I’ll conceived tax policy.

  10. This is why I tip in cash only. Servers and bartenders work hard. I know, I’ve been both. These folks do not represent the high-end of wage earners, but they keep the economy rolling. I hope they figure out a way to eliminate taxes on tips.
    When you pay by card, ‘The Man’ knows if the tip is included and taxes the server accordingly. Cash lets the server decide what to do with that money. Now I am absolutely positive that every server dutifully reports every bit of cash they get to the IRS, right? (/s) I say let them keep it.

  11. This is not fair to everyone else. I know a server who makes nearly $100.000 in tips. None of that would be taxed. Is that fair to the citizen who makes less than that but has to pay taxes on all they earn.

  12. I agree with BBCIe. I try to put cash in the server’s hand as a “gift”. I venture to guess that most would agree it would be awful if we were taxed on every birthday and Christmas gift we gave our children, grandchildren, nieces and nephews, etc.
    I agree that the tip-shaming has gone too far. However, I’m not ashamed to ignore that tactic.
    As for a Value Added Tax (VAT) or National Sales Tax, I think it would be far less regressive than the current income tax is but I think such a VAT or Sales tax should have a provision for filing exemptions based on a minimum amount of income (earned and otherwise) that it takes to support a family of varied size. If the minimum income isn’t reached, then a VAT refund should be given to the tax payer.

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