Workers Could Pay a High Price for Tax-Free Tipping | Opinion

Political scientists and pundits alike have identified a trend of growing political polarization in the United States and abroad. Liberals and conservatives live in increasingly separate spheres. They rely on different media sources for their news and socialize less with people who hold opposing opinions.

All of this has been brought to head by the upcoming presidential election. It is surprising, then, that both Vice President Kamala Harris and former President Donald Trump have found one area of agreement—a shared commitment to eliminate taxes on tipped income.

The implications of such a policy for tax revenue remain to be seen, as do the chances that any such proposal would realistically be enacted. One thing is clear—if tips are no longer taxed, they will become an increasingly popular form of compensation. But an increased reliance on tipping is likely to produce some unintended costs for the workers who rely on them.

Poorer Health

As anyone working in the service industry can attest, tips are a volatile source of income. Unlike those paid a salary or hourly wage, tipped workers’ earnings vary from one shift to the next. A bartender is likely to earn substantially more on a Saturday night than a Monday. And this volatility in pay has a cost.

In my own research, participants who experienced more pay volatility also reported more physical issues (e.g., headache , stomach problems, muscle strain) and more trouble sleeping than those with regular incomes. This same pattern held across three separate studies, including a sample of tipped workers.

Other work has shown that pay volatility also increases the rate at which employees quit their jobs—leaving organizations with substantial costs in finding and training their replacements. High rates of quitting were particularly noteworthy in the wake of the pandemic—creating “The Great Resignation.”

Overworking

A separate but related challenge that tipped workers face is the unpredictability in their earnings. While some employees can count on earning a certain amount in tips each shift, others are subject to higher levels of uncertainty. A taxi driver’s earnings, for example, might depend on factors that are difficult to predict like the weather or the presence of large events.

In an on-going study, my co-authors and I find that this uncertainty pushes people to work longer, even when financial rewards become negligible. We suspect that this uncertainty in pay creates a sense of financial scarcity.

According to experts, such scarcity captures participants’ attention, causing them to neglect other important considerations (like the declining value of financial rewards in our task) and focus too intently on maximizing earnings.

While such overworking might not be a problem in our short experiment, those who work for tips might be continually pushed to work more shifts to compensate for the uncertainty in their earnings. Over time, that will harm their health and well-being, causing more illness, absenteeism, and burnout.

Discrimination and Sexual Harassment

Tips are unique in that they are entirely at the liberty of the customer. Rarely do consumers have so much power to determine for themselves how much they will pay for a service. But the unstructured and informal nature of tips also creates problems with fairness among workers.

Prior work has found that diners tend to discriminate against black servers—tipping them less than their white counterparts. Even when black servers are rated as providing higher quality service, their tips are lower than white servers. When consumers are totally free to decide how much to tip, it becomes more likely that existing biases will shape their decisions—costing minority workers.

Tips also create problematic dynamics for women, who represent approximately two-thirds of all tipped workers according to some calculations. While women tend to earn more in tips than men, their earnings are also more dependent on their physical attractiveness. Many of these tipped jobs also come with strong expectations to be friendly and cheerful towards customers.

Across a survey of tipped workers and an online experiment, our research shows that this expectation, coupled with a reliance on tips, creates a problematic dynamic resulting in increased rates of sexual harassment. In short, customers feel a greater sense of power under such conditions, acting with impunity by harassing workers.

It’s hard to argue against helping out tipped workers—probably one reason why we see rare agreement between such vehemently opposed presidential candidates. These workers are twice as likely to live in poverty compared to those working in non-tipped jobs, and many were on the front lines of the pandemic as essential workers dealing with health threats and difficult work conditions.

Eliminating taxes on tips, however, will only add fuel to the fire by incentivizing more businesses to make tips a key part of their employees’ pay. Tipping has a dark side, creating volatility and uncertainty with costs to employees’ health. It also perpetuates discrimination and creates toxic work environments where sexual harassment becomes commonplace.

While agreement is good, both candidates may want to rethink their proposal and find other ways of supporting tipped workers specifically and lower-income employees generally.

Gordon Sayre, Professor of Management at Emlyon business school in France.

The views expressed in this article are the writer’s own.