Re the tax policy argument for tips: I don't buy that argument at all. Fundamentally, why should compensation for wait staff labor be taxed differently from that received by the warehouse worker, regardless of whether it comes from the employer or the customer? In either case, it's direct compensation for labor and an accession to wealth, regardless of source. See, e.g., section 61 of the Code and Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955). Moreover, what is the basis for enshrining past tax avoidance - the fact that people routinely cheated on their taxes in the pre-credit card era by failing to declare their tips - into the present taxation structure? How is that good tax policy?
Personally, I think that American tip culture is out of hand and just serves to stick it to workers. It strikes me that making tips nontaxable will just incent employers to pay their employees even less, exacerbating the problem. Taken to the extreme, restaurants would just make their wait staff be independent contractors (e.g., like strip clubs do to strippers) such that all of their income is tip derived. If we want to throw low-income tip earners a bone, adjust the rate structure for everyone. Focusing just on the tip aspect is distortive, has no legitimate tax policy basis, and encourages bad employer behavior.
For what it's worth, I see a lot of "tipping" in other contexts. For example, law firms and investment bankers increasingly are taking "discretionary bonus payments" as part of their compensation for deals. While the fees are not mandatory, as a practical matter, clients are going to pay them if they want the service provider to do work for them in the future. Is that to be tax exempt as well?
Re the tax policy argument for tips: I don't buy that argument at all. Fundamentally, why should compensation for wait staff labor be taxed differently from that received by the warehouse worker, regardless of whether it comes from the employer or the customer? In either case, it's direct compensation for labor and an accession to wealth, regardless of source. See, e.g., section 61 of the Code and Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955). Moreover, what is the basis for enshrining past tax avoidance - the fact that people routinely cheated on their taxes in the pre-credit card era by failing to declare their tips - into the present taxation structure? How is that good tax policy?
Personally, I think that American tip culture is out of hand and just serves to stick it to workers. It strikes me that making tips nontaxable will just incent employers to pay their employees even less, exacerbating the problem. Taken to the extreme, restaurants would just make their wait staff be independent contractors (e.g., like strip clubs do to strippers) such that all of their income is tip derived. If we want to throw low-income tip earners a bone, adjust the rate structure for everyone. Focusing just on the tip aspect is distortive, has no legitimate tax policy basis, and encourages bad employer behavior.
For what it's worth, I see a lot of "tipping" in other contexts. For example, law firms and investment bankers increasingly are taking "discretionary bonus payments" as part of their compensation for deals. While the fees are not mandatory, as a practical matter, clients are going to pay them if they want the service provider to do work for them in the future. Is that to be tax exempt as well?