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, says a Virginia Tech expert.
There are roughly four million workers for whom tips make up a significant portion of their income. However, more than a third of those workers don’t earn enough to end up owing federal taxes.
“While the idea of tax-free tips sounds appealing, the actual economic benefit for many might be less significant than supporters suggest,” said Virginia Tech economist Jadrian Wooten.
Wooten says that while eliminating taxes on tips would certainly benefit some service workers, the impact would be fairly concentrated, impacting certain states more than others…particularly the important swing state of Nevada. Earning the support of the culinary union and its workers could prove vital. “For politicians, winning over this organized and vocal constituency can provide a significant electoral edge,” said Wooten.
The practice of tipping originated in the United Kingdom, but it’s an intrinsic aspect of American 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.
Sheryl Ball, who studies behavioral economics in the College of Science at Virginia Tech, says the psychology behind tipping is complicated
“In behavioral economics, we like to think of this as reciprocity,” she said. “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’s 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. “These sorts of nudges, which we know from behavioral economics often can affect people’s behavior,” said Ball. “They may be encouraging more tipping behavior and tips at a higher level than we’ve seen before.”
Now that tipping is more widespread, that feel-good motivation comes down more to understanding that many workers need them to live. “Giving people tips because you know that their actual wage is low is another motivation,” said Ball.
Virginia Tech
