Trump is about to send tipping culture into overdrive

Yahoo

a day ago

'When I get to office we are not going to charge taxes on tips, on people making tips,' Donald Trump promised on the campaign trail. 'If you're a restaurant worker, a server, a valet, a bell hop, a bartender, one of my caddies –your tips will be 100pc yours.'
The billionaire president has stayed true to his promise. The bulk of the tax cuts outlined in Trump's 'big, beautiful' tax and spending bill, currently before the Senate, reward the wealthy.
But one populist clause within the legislation is a plan to scrap federal tax on tips – one of Trump's key campaign pledges.
The tax break is popular with US service workers – everyone from hairdressers to restaurant staff – but may not be so popular with customers.
American tipping culture is already in overdrive, and people hate it. A policy that was once the sole domain of the restaurant and hospitality sector has rapidly proliferated since the pandemic. Takeaway coffee orders now prompt demands for a few bucks extra and even stopping by a news-stand for a paper or some gum can lead people to pay an extra 20pc on their bills.
Many Americans have noticed this creep and don't like it. As one Reddit user put it online: 'What the f--- am I tipping for? Is it not bad enough that I just paid over $5 (£3.7) for a small bottle of water?'
Trump's tax break is likely to push a wave of new jobs to adopt restaurant-style tipping policies and will incentivise businesses to restructure their employees' pay, so that they receive a larger proportion of their income from tips.
Maurice Obstfeld, former chief economist at the International Monetary Fund, says: 'Number one, this is going to induce new employers to classify more compensation as tips.'
It may already be happening. Chris Bakke, a San Francisco entrepreneur and investor, wrote on X recently:
The message, which may have been a joke, was in response to news that the US Senate had passed the No Tax on Tips act – a bipartisan bill proposing a tax deduction of up to $25,000 for cash tips. It is separate to the president's proposals, showing the broad support for the policy across the political spectrum.
Both Republicans and Democrats present the policy as a boost for blue-collar workers. However, economists warn that people could end up with lower baseline pay as a result of the changes, putting more pressure on customers to top up earnings. That means even more social pressure and financial pain at the checkout.
The plans laid out in Trump's tax and spending bill offer the same level of tax break as the No Tax on Tips act. Under the current law, staff are required to report tips to their employer if they total $20 or more in a single month. Businesses then include the tips in salary calculations – withholding federal income tax, social security tax and Medicare taxes.
The new exemption will only apply to tips paid in cash, not by card. Workers must earn less than $160,000 per year to qualify and be working in occupations that 'customarily' receive tips. The US Treasury will publish a list of these occupations when the bill is passed into law.
The total cost to the public purse will be around $15bn per year. The impact on American consumers and tourists visiting the US will also be huge.
Abir Mandal, senior policy analyst at the Tax Foundation, says tax exemptions on tips will create 'perverse incentives' for employers. It will encourage businesses to make employees source more of their wages from tips, with a lower proportion from their salaries.
Expectations for tips could also become far more widespread, and bigger. Chris Edwards, a tax expert at the Cato Institute, a libertarian think tank, says: 'I think different job types will shift their types of compensation. You can think of all kinds of professions where it could become more normal.'
Luggage handlers at airports are an obvious potential example, says Mandal. 'They are given a salary. You can give them like $1 or $2 for carrying a bag, but in general they are paid a wage. If this thing takes off, perhaps their income could be reconfigured so that they would make a lower wage but expect a larger tip per bag.'
Tipping has always been the norm in US restaurants, but something changed during the pandemic. More people had food deliveries and wanted to show their appreciation for drivers, widening the tipping net.
At the same time, wage growth accelerated sharply as the economy reopened but restaurant bosses and other small business owners struggled to match it. As a result, demands for tips grew.
'The expectation of tipping has grown quite dramatically,' says Stephen Barth, an attorney and hospitality law professor at the University of Houston. 'It was already growing and then during Covid it expanded exponentially.'
The share of bakeries asking for tips has soared from 36pc to 49pc in the five years to July 2024, for example, according to analysis of payroll data by Gusto. Among coffee shops, the proportion has jumped from 56pc to 72pc.
'For a lot of small businesses, they run on very tight margins, which means that owners couldn't always raise wages. Tips let them pay more to their employees without hitting their budgets,' says Nich Tremper, senior economist at Gusto.
The growth of electronic payment terminals, such as Square, has also made it easier to request tips. Whereas with cash it was up to a customer's discretion, now they are confronted with a menu of tip options and have to actively opt out. Even some card machines now have this as the default option.
Tips are even now entering shops. The share of retail businesses using tips as part of their employees' pay nearly doubled in the five years to July 2024, rising from 3.86pc to 6.6pc. One in six health stores, 16.2pc, now pay their staff partly in tips.
If Trump's bill passes, tipping will become even more important to staff wages, but potentially also more irritating to give.
'Only cash tips will be untaxed if this legislation passes. There may be added pressure on consumers to pay tips in cash. It'll make things awkward. And people already hate tips in America,' says Mandal.
The change to federal tax policy is likely to trigger a wave of similar policies at a state level, he adds. States typically try to conform their own taxable income in line with federal policy.
That may sound good for workers. But Barth says it amounts to just a 'subsidy for employers'. The tax break will reduce pressure on employers to raise wages and companies could actually cut workers' base pay as a result, demanding they make up the difference through tips.
It hits at the heart of what many customers dislike about the recent transformation in tips. What was once a way of showing appreciation for good services has transformed into an expectation with no real link to the quality of experience. If you don't tip, it's not a sign that you're unhappy with the service – it's a signal you're a bad person.
Obstfeld is scathing: 'This was a campaign promise that was made to essentially pander to voters and the economic rationale for it is basically nil.'
The public may soon share his anger as demands for tips mount up.
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