Good morning.
This past weekend in Miami, I had a flashback to sitting in an Olive Garden outside Disney World in the late 1980s, listening to my dad ask a waitress why she’d added an extra 20% charge to our bill. Her response: “I heard your accent and presumed you wouldn’t tip.”
To a proud Scot and generous tipper, it was an insult. (Here’s a tip: Don’t stereotype.) But she had a point: Foreign visitors often do tip less as it’s not the norm in their culture. However, when I noticed on my recent trip that every restaurant bill I got in South Beach had a 20% service fee added, I shrugged. It felt less like a knock on my Canadian accent than proof that tipping culture is flawed.
Tips are in the news right now as Donald Trump and Kamala Harris have both promised to stop taxing them. Immigration? Inflation? Let’s keep Uncle Sam out of the tip jar! Could somebody slip a twenty to the aide who made this the rallying cry to bring our great country together? Then again, is it a good idea?
Americans are generous tippers, though surveys show increased resentment about the spread of tipping culture. Service workers have long relied on tips because of staggeringly low salaries that makes them reliant on the kindness of strangers for a decent day’s pay. The federal minimum wage for tipped employees is $2.13 an hour, vs. $7.25 for others. But if workers don’t make enough in tips to reach $7.25, employers have to make up the difference. Where the money comes from would determine whether it’s taxable. As states like California raise salaries to a minimum of $16 for everyone, banning employers from paying tipped workers less, there’s less desperation for tips.
A service charge is also not a tip. A 2022 court ruling said that such mandatory fees are considered wages. So those servers in South Beach face taxes. Of the 150 million or so taxpayers in the U.S., there are about 6 million tipped workers, reporting some $38 billion in tips. Compared with almost $4.7 trillion in gross taxes, that’s chump change.
Not taxing such income, though, could spur the growth of a wider underground economy. Where there’s a tax arbitrage, there’s a way. We already live in a world where flight attendants and deli store owners invite you to pay a gratuity on basic purchases—and ride-share passengers feel pressure to tip on overpriced trips to keep their rating high.
One of the most thoughtful leaders I’ve met on this topic is Danny Meyer, the restauranteur, investor and entrepreneur behind dining institutions from Gramercy Tavern and The Modern to Shake Shack. Meyer did away with tipping for a few years prior to the pandemic, incorporating it into the price of each dish at some restaurants. It was hard and he brought tipping back during the pandemic. Now, he also gives a portion of revenue each night to kitchen workers, who aren’t allowed to receive tips. As Meyer told me at the time, diners have a right to tip and he feels a responsibility to guarantee his staff a living wage.
More news below.
Diane Brady
diane.brady@fortune.com
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This edition of CEO Daily was curated by Joey Abrams.