Tipping and taxing

A smart post in defense of tipping from Greg Beato gets at one of the benefits of tips that many writers neglect to mention:

Make it automatic and it also becomes easier to track, easier to regulate, easier to tax. We tip billions and billions of dollars a year, and it’s not just that the recipients of our largesse manage to avoid paying taxes on much of what they collect. The business owners who use tips as a rationale to pay their employees lower wages end up paying less in payroll taxes, too. And by keeping menu and other prices lower than they would be in a tip-free economy, tipping reduces the amount of sales tax the government can collect as well.

Whether this is a good or bad thing depends on one’s perspective. As someone who goes out a lot, I’m glad the people I tip get to hold on to more of their earnings. And as someone who receives tips, I disagree with those who say I’d be better off if we eliminated tipping and moved toward mandatory service charges or living wages. From a previous post on this blog:

What a service charge would do is give servers less say in how their income is spent. With tipping they can spend it however they choose and enjoy a nice bonus in the form of cash tips that can be partially hidden from taxation. With a service fee the income would be fully taxed or […] some of the income would be shifted into untaxed health insurance expenditures or retirement funds. This might be better in the paternalist sense of wanting people to plan ahead for their insurance and retirement, but it might not be welfare enhancing for the servers. It would put them in the same position as lots of other American workers: Spending more than is optimal on health insurance because of the tax subsidy, tied to their employer for fear of losing that insurance, out of luck if they lose their job, and with less income to spend on other things. As a restaurant worker myself, I say thanks but no thanks. I’d rather take the cash.

Of course if you think that it’s more important to maximize the tax base and make sure no one is evading taxes, then a service charge is the way to go.


Restaurant Econ 101

The economic logic in Friday’s NYT op/ed about restaurant service charges was a little off, but it’s nothing compared to the crazy thinking in the only letter they published in response to it:

Waiters need a strong union to negotiate with restaurant owners for a realistic pay scale and other benefits. Diners should not pay for them.

Eating in a quality restaurant costs four or five times as much as cooking at home. The food itself isn’t expensive. It costs more because it is cooked for us and served. The bill includes those costs. Therefore, a tip or a service charge is redundant, asking diners to pay a second time for service costs that are already included in the price of their meal.

Instead of changing the name from tip to service charge, the diner should not pay either.

People, restaurants are businesses. They pay their employees by receiving money from customers. They can get that money through tips, by adding a service charge, or by working it into the cost of a meal, but ultimately it’s all coming from the same place. If you’d prefer that restaurants operate as charities for creative types in need of a day job, please, just come out and say so!

[Would it be petty to mention that the letter writer lives in Berkeley? Yes, it probably would!]


Starbucks vindicated

Last year Starbucks took a lot of heat in the press for an $86 million ruling against them for taking tips from baristas and giving them to management. In reality the “managers” in question were shift supervisors doing essentially the same job as baristas and customers leaving tips reasonably expected them to get their share. I defended Starbucks at the time and I’m glad to see that a California appeals court has reached the same conclusion [full decision in .DOC format here):

Specifically, the undisputed facts show: (1) the vast majority of the time shift supervisors and baristas perform the same jobs; (2) these employees rotate jobs and work as a “team” throughout the day; (3) customers intend that their tips placed in the collective tip boxes collectively reward all of these service employees; and (4) Starbucks’s manner of dividing the collective tip boxes among the service employees (based on the time worked by each employee) is fair and equitable. […]

Because the trial court’s interpretation of section 351 was not supported by the statutory language and led to a result contrary to the fundamental purpose of the statutory scheme, it is one that the Legislature could not have intended. We reverse the judgment in its entirety.

Cue allegation from amazingly persistent commenter Gary that the appeals court must have been bribed by Starbucks in 3… 2…

[Via Starbucks Gossip.]