Society: Why we tip and would eliminating tip taxes make any difference?

Working and dining in a restaurant – different roles. Image by Tim Sandle.

Eliminating taxes on tips — an idea supported by both major party 2024 presidential candidates — could benefit some service workers but the overall impact may not be that dramatic, according to Virginia Tech research.

In the U.S., there are around 4 million workers for whom tips make up a significant portion of their income. Such is the extent of low pay in the service sector that more than one third of those workers do not earn enough to end up owing federal taxes.  

Yet is the removal of taxation on tips likely to address poverty? “While the idea of tax-free tips sounds appealing, the actual economic benefit for many might be less significant than supporters suggest,” says Virginia Tech economist Jadrian Wooten.

Wooten observes that eliminating taxes on tips would benefit some service workers; however, the impact would be fairly concentrated, impacting certain states more than others.

The practice of tipping originated in the UK, but it has become an intrinsic aspect of US consumer culture. While some service jobs have been connected to tipping for generations, our cultural expectations around who we tip and how much has changed dramatically in recent years, especially during and after the COVID-19 pandemic. 

Would a no-tax-on-tips policy incentivise workers to push harder for more tips? Or would employers simply seek to to shift the burden of wages onto customers?

A second researcher, Sheryl Ball, who studies behavioural economics in the College of Science at Virginia Tech, has explained how the psychology behind tipping is complicated.

There are complex situational, individual, occupational and national determinants of tipping behaviour.

“In behavioural economics, we like to think of this as reciprocity. Someone does a good job of taking care of you when you go to a restaurant or ride in a taxicab, so you want to reward them for their good work.”  

Ball explained that we may also tip well in the hopes of better future service — both for ourselves, as well as the broader community, effectively training people to continue to deliver good service.

“People also tip because it makes them feel good,” said Ball. Historically, she says, tipping came from the upper classes. That allowed them to feel good about their actions but also served as a statement of social status.

There is also a new motivation for tipping that has come about in the past few years, driven by technology. Many establishments are now using iPads with suggested tip amounts, which are called nudges. They may be encouraging more tipping behaviour and tips at a higher level.”

Now that tipping is more widespread, that feel-good motivation comes down more to understanding that many workers need them to live, Ball explains, adding another dimension to the tipping process.