Taxes, Tariffs, Tipping

Whatever you think about the discussion around economics and politics, it’s useful to have a framework for sorting things out.  We’re expecting to hear more jargon on taxes and tax policy as the November election approaches.  Below is a quick primer on some of the tax-related issues.

TAXES
We all complain about them.  But what is a tax? A tax is a mandatory payment to a government to cover the cost of services to the governed.  At their core, taxes are revenue raisers. They can be viewed as a disincentive for certain types of behaviors (like a cigarette tax, or viewing corporate taxes as an impediment to business investment); some view any tax as a kind of penalty for success.

You are subject to all sorts of taxes: taxes on salaries, on dividends from investments, on the gain of the sale of an asset, again on salaries (payroll taxes), on real estate (property taxes), on buying things (sales taxes).  Some of you running businesses might pay tax on your income even in “income tax-free” states like Washington.  (Thank you, the Business & Occupation (B&O) Tax.)  Everyone likes to gripe about taxes, but most want the services they support (Social Security, Medicare, police and fire services, public schools, roads and bridges, sports stadiums).

Different entities collect different taxes: federal, state and local governments, along with special assessment districts.  Some taxes collected at one level are redistributed: states that are economic engines (Washington, California, New York) are tax donor states, adding more to the federal coffers than they take in federal benefits or get in federal government spending in their states.  Washington has millions fewer residents than Ohio or Michigan, for example, which has paid less in federal taxes and received more federal dollars that the Evergreen State.  As Seattle Times columnist Danny Westneat recently pointed out, if you’re in the “Tax the Rich” camp, that’s sort of already happening.

TARIFFS
Tariffs are often confused with taxes, and for good reason.  A tariff is a form of tax, it’s an extra fee imposed on an imported good, and both add to the cost of an item.  But while taxes are typically imposed internally at the government level (it’s the Internal Revenue Service), tariffs are imposed by one country on another.  Nations have limited resources and comparative advantage in certain industries, and we trade to get those things we’re not producing ourselves. It doesn’t always go smoothly, though, and tariffs are used to protect home industries, resources or consumers, defend a national interest, or to influence the other country.

The most common use of tariffs is to restrict cheap goods into the country.  The whole idea of a tariff is to make the imported goods more expensive so that the goods made at home are price competitive in the eyes of consumers.  This often backfires, and the tariff imposed on the other country gets added to the cost of the item for us. An analysis of Trump administration tariffs on China resulted in reduced real income and GDP in the US, increased the cost of goods to the American consumer, and essentially wiped out the benefits of earlier tax reform for many US households. [1]

Tariffs are also used to protect national interests and to raise revenue. In 2018 and 2019, the US imposed tariffs on a wide variety of goods, from washing machines to aluminum and steel, to raise revenue; in 2022 the tariff on steel was changed to a quota instead, restricting imported steel, nonetheless.  Also in 2022, the US suspended most trade with Russia as a result of the invasion of Ukraine, and later raised tariffs on other Russian imports that were still allowed. The first major US experience [2] of tariffs was thanks to King George and involved the tax policy of Britain that led to the Boston Tea Party.

TIPPING
You all know this as the add-on for a service performed well: a restaurant meal, cab ride, a personal service like a haircut.  There is a fascinating history of tipping, and if you’ve traveled outside the US, you have received a taste of it.

Tipping dates back to feudal times (9th to 15th centuries), when it was essentially a bribe.  Those served (the upper classes, lords and vassals) paid a small sum to those who served them, with the idea of assuaging the vast differences in life circumstances.  Americans who traveled overseas in the 19^th century interpreted the custom as one of sophistication, adopted it and brought it home.

Tipping in the US became an even bigger thing after the Civil War, when many newly freed slaves entered service work.  This class of worker survived because of tips.  Different states responded differently, as you might guess, with some states outright banning tipping.  These bans were all reversed by the early 20^th century, but the anti-tipping movement lives on in a modern form in the US and has spread to Europe.

Director of the Food Labor Research Center at the University of California, Berkeley, Saru Jayaraman, notes that European unions have picked up on this issue, saying, “As professionals, we should not depend on tips for our livelihoods; we should be paid by our employers.” [3]  If you’ve traveled to Europe recently, you’ve found that tips are met with distain nowadays because it feels again like class distinction. (Wait staff in France is today under contract, negotiated through collective bargaining.)

The minimum wage doesn’t fix the issue with a “living wage” in the US for multiple reasons, including tip credit.  Tip credit allows an employer to offset the minimum wage with tip income.  In this way, the federal minimum wage of $7.25/hour can become $2.13/hour if you work in a job for which you are eligible to receive tips. [4]

TAXES AND TIPPING
So how do we get to “no tax on tips”? First off, kudos to recognizing that Americans working minimum wage jobs are struggling.  But they are not the only ones, so why carve out tax policy for only one type of low-wage employee; not all low-wage workers work in jobs for which they earn tips.  Yale University estimated that there were four million tipped workers (workers who receive $30 or more monthly in tips) in the US in 2023.

How you would get a “no tax on tips” to work gets complicated, because some employers are using tip income to meet the federal minimum wage requirement.  Another idea is to exempt a certain level of tip income per worker as non-taxable; here you might reduce the worker’s income that shows up on a tax return below what’s needed to “prove” they are working and thus are eligible for things like the Earned Income Tax Credit (EITC).

The other issue is that it may mean nothing to those affected.  Many low-wage workers don’t make enough money to pay taxes in the first place. The federal minimum wage totals $14,500 annually, for a 2000-hour year, 50 weeks of 40 hours/week. There are high-earning service workers. According to the Labor Department, the highest 10% of wait staff make more than $60,000/year; at current tax rates, that puts them in the 12% tax bracket.  Each tip dollar that doesn’t get taxed saves them 12 cents.

Lastly, it could create a wave of income manipulation to characterize certain income as “tip income” to make it tax exempt.

My own tipping habits changed during the pandemic, when I was inclined to tip often and generously to help local business owners and workers whose work was crushed by the constraints of the public health crisis. Since then, there’s been an adjustment both ways: I’m returning to my pre-pandemic practices (a generally generous tipper to anyone who brings me a meal, drives me safely somewhere, or keeps me blonde) while also reeling over tip creep (the spread of requests for tips from virtually all services and transactions (like picking up your own food order or at the supermarket check-out) and from a standard 15% to a baseline expectation of 18% or 20%).

ECONOMIC LINGO BINGO
That’s our rundown of taxes, tariffs and tipping.  More on capital gains tax policy, a proposed wealth tax, and the changes scheduled to happen to our overall tax regime after 2025 in a future post.

In the meantime, to help make watching the Presidential debate a little more engaging, NPR’s Planet Money program has published a bingo card.  You know more now about a few of these items than maybe you did 10 minutes ago.  Get your Economic Lingo Bingo card, turn on your jargon radar, and tune in.

[1] “For Many Households, Trump’s Tariffs Could Wipe Out The Benefits of the TCJA ,” Howard Gleckman, Tax Policy Center, 05/14/2019. Retrieved 09/10/24.

[2] Technically, we were not yet the United States, but those pesky colonists.

[3] “Have we reached a tipping Point,” France-Amérique, 03/12/24.  Retrieved 09/10/24.

[4] Fact Sheet #15: Tipped Employees Under the Fair Labor Standards Act (FLSA).