Is America approaching peak tip?

The country’s gratuity madness may soon calm, so long as Donald Trump does not get his way

June 20, 2024, The Economist

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Things are big in America. That is true of houses, cars and food portions. Perhaps most shocking of all is the size of tips. In much of the rest of the world, gratuities are a small gesture for good service. In American restaurants they are de rigueur. And they are becoming more generous and more common. For workers who already get them, tips are growing; for those who do not get them, tips may be coming their way. But this cannot go on for ever. Look closer at the tipflation gripping America and a surprising conclusion emerges: the country may be approaching peak tip.

As with so much these days, Donald Trump has a hand in this. At a recent rally in Las Vegas, he casually inserted a radical proposal about halfway through his speech. “For those hotel workers and people that get tips, you’re going to be very happy. Because when I get to office we are going to not charge taxes on tips,” he said. It was, he argued, only right to stop the government from going after the earnings of people who provide good service.

This looks like smart politics. Mr Trump’s pledge appeals to employees in the food industry, about a quarter of whom are Hispanic, a crucial group of voters. The fiscal implications are, however, ominous. In 2018, the most recent year for which data are available, Americans in hospitality jobs and the like reported about $38bn in tipped income. Losing taxes on that—worth some $10bn—would create a noticeable hole in the federal budget.

More worryingly, a tax exemption for tipping would alter incentives. Workers and employees in any tippable job would switch to lower base pay, leaving more to be covered as tips. Service jobs beyond restaurants, from car repairs to dentistry, would probably adopt tip-heavy wage structures. The Committee for a Responsible Federal Budget, a research group, reckons that tax losses could grow to about $50bn a year. Congress would have to be punctilious in drawing up rules to forestall tax evasion.

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