More Tipping

We need more tipping. Yes, read that again, we need more tipping. You are probably confused right now and think this is a bit of a hot take. Hear me out.

Tipping in efficient.

There has been a significant backlash against tipping since the COVID-19 pandemic. It is expected. Asking for tips looks like passing the company responsibilities to the customer. This may be the case but it results in more money in the pocket of the consumer and more money in the pocket of the worker.

Consider the alternative. If tipping were banned, then industries where tipping is customary will need to increase wages. On the surface this looks like a good outcome. People get paid more for their work and you get happy workers. However, you need to fund these wage increases with price increases. So far it looks good. Consumers pay more for the product, the additional cost is passed along to the worker. That would be great if you lived in a place without a functioning government that did not collect taxes. It isn’t just the income tax on the wages, and yes the tips should be declared. There are other taxes eating away at the transfer of resources from the consumer to the worker.

First you will have to deal with sales taxes. Most goods and services are taxed on their retail value. So, for argument’s sake you went out for dinner and the appropriate tip was $10. If tipping was banned, then the total bill value should go up $10 so what you would have paid in tip to the worker is collected and passed onto the worker in the form of greater wages. If you live where I do in Ontario, Canada you then have to pay 13% in Goods and Services Tax which would be an additional $1.30 out of your pocket to pass the same amount to the worker.

Secondly, you have to consider payroll taxes in your jurisdiction. I’m not talking about income tax, I’m talking about deductions from the paycheque or amounts employers must pay to employ people. This money will erode the amount of cash that reaches the employee.

Tipping is more efficient. Even if the worker declares all their tips, they will get more money and the consumer will pay less money than if the employer charged a higher amount for the good or service and passed the equivalent of today’s tip on to the employee. Governments need money and they will find any way to get it.

So, tip your servers and anyone else who deserves it and be grateful that they are getting more and you are giving less.