Trump and Harris Agree, No Tax on Tips. But is it a Good Thing?

Presidential campaigns are marked by heated debates, constant controversy, and opposing views about current problems and possible solutions. Rarely do they involve anything resembling agreement between candidates. During dueling campaign events in Nevada, however, both candidates Donald Trump and Kamala Harris suggested that tips received by employees should no longer be taxed. The proposals are widely seen as a way of courting the large population of service workers in Nevada, a key battleground state in the 2024 presidential race. There are many factors to consider when evaluating these promises made by both candidates. How genuine are they, and do they have a chance of becoming a reality? How much tax revenue will be lost, and how will it be made up? Is it the most effective way to provide a tax break to lower-income employees, and will it alienate lower-income employees who are not in tipped work? These questions are complex and will take time to answer. What is clear, however, is that eliminating taxes on tips will incentivize this compensation practice and increase the number of individuals who depend on tips to make a living. But, is that a good thing?

Tipping as an American Institution

Tipping first gained popularity in the United States in the wake of the Civil War, where business owners used the practice to avoid paying recently freed slaves in search of work. Instead of earning an hourly wage, these workers had to rely solely on the tips they earned from customers. The practice spread and was later enshrined in law by the Fair Labor Standards Act of 1938, which permitted employers to pay below minimum wage if employees received tipped that brought their earnings over the minimum wage. The federal tipped minimum wage currently sits at $2.13 per hour, meaning that in many states tips can make up the entirety of one’s take-home earnings rather than an added bonus to an hourly wage.

Today in the U.S., tips are deeply entrenched in the culture with many occupations relying on these tips to make a living. Tipping became increasingly widespread during and after the COVID-19 pandemic, as a way of thanking these “front line” service workers for putting their personal health at risk. Changes in payment systems also contributed, with companies like Square and Toast enabling touch-screen tipping at cash registers across the U.S., often in businesses where tips were not commonplace. Despite their increasing popularity, there are reasons to be concerned with the proliferation of tipping culture, where more and more employees rely on this unstable form of income.

Tips are Volatile and Unpredictable

Unlike a steady hourly wage or salary, people who rely on tips experience frequent changes in their earnings. On a busy Saturday night, they might earn two or three times as much as a slow Tuesday. Researchers deem this “pay volatility” and have connected this volatility with some undesirable outcomes. In my own research, I found that greater pay volatility was associated with more physical symptoms (e.g., stomach ache, headache, muscle strain) and insomnia. These findings were consistent across three studies, including a sample of people who work for tips. Other research has found that pay volatility increases the rate of employees voluntarily leaving their jobs—a costly problem for businesses and one that caused serious disruptions in the wake of the pandemic.

Separate from how much pay volatility people experience is how unpredictable their pay is. Can an employee count on earning a certain amount each week or month, or is this figure difficult to predict in advance? In an on-going research project my co-authors and I find that pay uncertainty causes people to overwork in a series of lab experiments. Even when financial rewards for completing a task become negligible, those who are paid an uncertain amount for each correct answer keep working longer than those who are paid the same amount for each correct answer. We propose that this pay uncertainty creates a feeling of financial scarcity for participants, where they become preoccupied with their earnings and ensure they are making enough money while neglecting other important information. Outside the lab, we expect that pay uncertainty might cause people to overlook important information like opportunities for higher paying jobs elsewhere, or chances to invest in education or training that will increase subsequent earnings.

Tips Increase Inequality

In addition to the volatility and uncertainty created by tips, the informal nature of the practice can create problems of fairness and discrimination across workers. For example, research shows that diners discriminate against black servers by tipping them less than white servers. This finding has been replicated and exists even when black servers are rated as providing higher quality service compared to white servers. There is also evidence of gender discrimination in tipping. While women tend to be tipped more than men on average, their earnings are also more dependent on their physical attractiveness. Research shows that differences in earnings between attractive and unattractive female servers is larger than their male counterparts thus perpetuating problematic workplace dynamics for women.

In essence, the unstructured, unregulated, informal nature of tipping creates problems where certain groups earn more while others earn less—not based on the quality of the service they provided but because of surface-level differences. If tipping is to become more popular, it will further perpetuate the inequality between certain advantaged and disadvantaged groups contributing to race and gender hiring and pay-gaps in the process.

Tips Increase Sexual Harassment

As anyone who has worked for tips can attest, such a dynamic puts a lot of power in the hands of the customer. These customers can decide whether to tip employees fairly or not, with no justification needed. Additionally, these tipped workers are often required to present a friendly and cheerful front towards customers, even in the face of rudeness or hostility. Our research shows that this power dynamic leads to more frequent sexual harassment towards employees. In both a survey of actual employees and an experimental scenario, we found that a reliance on tips coupled with expectations to remain friendly and cheerful resulted in customers engaging in more sexual harassment towards employees. Such a dynamic increases the amount of power that customers feel, which translates into increased rates of harassment.

Conclusion

Getting rid of taxes on tips is undoubtedly a popular proposal in Nevada. But if this proposal becomes a reality, the practice of tipping will become more widespread as employees and employers try to benefit from this tax break. Emerging research shows that we may want to think twice before incentivizing this kind of compensation. Tipping creates volatility and uncertainty in pay, which can be detrimental to health and well-being. It opens the door for the perpetuation of discrimination, contributing to race and gender pay gaps. And it creates a toxic dynamic that increases the prevalence of sexual harassment. These problems need to be carefully considered when weighing the candidates’ proposals and determining the best way to support service workers specifically and lower-income employees more generally.