Fairfax columnist John Birmingham’s column raises some interesting issues about the practice of tipping for provision of goods and services, especially the aggressive way tipping is pursued in the US where restaurant tips of up to 20% of the bill appear to be the norm. In Australia tipping is nowhere near as ubiquitous, and anyone who tips much more than 10% of the bill in a restaurant is a grandstanding wanker.
Birmingham observes:
Here in Oz, despite the best efforts of some in the hospitality industry, we remain feckless and lackadaisical tipsters. Is it because we’re all just tight bastards with a dollar, or because we assume people are properly paid here?
Are they?
I gotta confess I wouldn’t have a clue.
Clearly research isn’t Birmingham’s specialty. It took me only a couple of minutes Googling to find the answer. The minimum wage in Australia is currently $15 per hour, and our dollar and cost of living are roughly equivalent to the US. According to Wikipedia anyway, the US situation is very different:
As of July 24, 2009, the federal minimum wage in the United States is $7.25 per hour. Some states and municipalities have set minimum wages higher than the federal level (see List of U.S. minimum wages), with the highest state minimum wage being $8.67 in Washington. Some U.S. territories (such as American Samoa) are exempt. Some types of labor are also exempt, and tipped labor must be paid a minimum of $2.13 per hour, as long as the hourly wage plus tipped income result in a minimum of $7.25 per hour.
You can see why American service industry employees are so aggressively insistent on coercing customers to tip. They’d starve to death if they didn’t.
Given this effective legal compulsion underpinning tipping in the US, it occurs to me that it bears most of the attributes of a consumption tax on goods and services, and a very heavy one at that, with the proceeds instantly distributed to the low-paid by market forces. ((In the Blank Tapes Case in 1993, the High Court held the Keating government’s proposed royalty on blank cassette tapes to be a tax, even though it was collected by tape retailers and sent straight to copyright collection societies for distribution to copyright holders. That is, the revenue was not collected by government nor did it ever pass through government coffers (which is part of the reason why the Court found the tax was unconstitutional). US-style tipping is more efficient, in that the intended recipients collect the “tax” for themselves. ~ KP)) Of course there’s no legal compulsion to tip so it isn’t formally a tax on the classic Australian legal definition. However, anyone who has forgotten to tip in the US would know exactly how ‘voluntary’ the practice actually is.
If one regards tipping as taxation, I strongly suspect that the ostensibly low US total tax take wouldn’t look anywhere near as impressive by comparison with the supposedly high-taxing socialist Europeans. I wonder if any economist has crunched the numbers based on some reasonable estimate of the total value of tips in the US compared with Europe or Australia? Of course, to be fair you’d also need to measure the extent to which tipping operates as an income-redistribution mechanism. Presumably that adjustment would also show US income inequality to be not quite as radically different from the Europeans as it seems (unless Gini and similar measures already adjust for this, which I’m hoping someone might be able to tell me).
yes, interesting thought. Tipping in principle is included in income taxation so at least part of it is there in terms of earnings inequality. As to whether it is taxation, no way since it is neither compulsory nor indiscriminate (no tipping in Supermarkets or take-away diners). Since tipping is in principle subject to income tax there might be some estimates around, though i doubt they are very accurate.
Erm… for something to be a tax shouldn’t the revenue from it be controlled by a government? Isn’t tipping just better described as a highly ‘incentivised’ format for a very private transaction? The financial effect basically seems to be fairly neatly contained entirely within the food service industry on a cost recovery basis…
By the way i noted that cassette royalties case, but that was still a duty imposed by government. Tipping is the raw market at work.
The point of tipping is not to ensure employees make a wage they can survive on, but to provide incentive and reward for excellent service.
I tip exactly the same in Australia and the US – 15-20% if the service is well above what I’d expect, 5-10% if a little above, a token ‘keep the change’ amount for making par, and not at all if you’re crap at it. Seriously, give me my change back and I will take every cent of it out the door. I don’t care how little you’re being payed – you deserve nothing at all if you’re rude or incompetent (actually, you’d need to be both… rude and competent makes par, as does friendly and bumbling).
And I’m talking about the food bill – my choice to order an expensive bottle of wine over a middling one is not something for which the waitstaff need a reward, because one is already going to the wine person.
Needless to say, I think the Australian model does a MUCH better job of incentivising good performance, though paradoxically the rewards tend to be lower for those who really excel. Tips here taper off from 15% upwards no matter how well you perform, while in the US that’s what Inspector Basil Clouseau-Fawlty could achieve at a canter.
Even if one calculated the implicit consumption tax due to tipping, I doubt it would alter the relative tax burden between Europe and the US too much. VATs are levied on almost all goods and services, whereas tipping is for a small sub-set of goods and services. Moreover, many European restaurants incorporate service charges into their billing (so, in addition to the VAT) as well, so things aren’t as different as they seem.
In terms of incentives, getting more shifts at a job with a decent income (Australia) surely creates decent incentive for good service?
In spite of the rhetoric about incentives in the American system, I suspect it has new to do with keeping labour costs down, in an industry where it is culturally acceptable to shift those costs off the books.
“our dollar and cost of living are roughly equivalent to the US”
I thought the most recent IMF estimates for Purchasing Power Parity (PPP)for the $AUD was somewhere down around US68c?
“If one regards tipping as taxation” then one ought to regard any price as taxation.
[…] Tipping, the hidden American tax. […]
Well, it’s true tipping is bigger in America than in Australia, but on my last trip I noticed how few transactions actually require tipping. It’s basically for sit-down food and drink outlets, taxis and expensive hotels. In the decent mid-range hotels I stayed, I left maybe $3-4 per day for the cleaner on a $100-200 tariff, so a pretty small percentage. In diners, restaurants and bars, of course the 15% minimum-unless-something-is-wrong standard applies. But these sorts of transactions make up a relatively small share of overall expenditure for most people. Even if they represent a larger share of expenditure for the well-off, that is still a small amount overall.
And for me, it’s a better system. The quality of service in the US is miles better than in Australia, where even in expensive restaurants it can be patchy and in average restaurants it is usually abysmal. What irks me in the US is the need to calculate sales tax on top of menu prices. That’s where our GST labelling rules are a godsend.
Given the outstanding levels of service and the shockingly cheap prices in the US, compared to Australia, I’d say we should bring in the same system of low-minimum wage/high tipping here.
It’s a very big assumption take that different service standards in Australia and the USA are driven by the remuneration differences, given other variables including high employment rates in Aus, etc.
Ken, I’m not clear on why you mind it helpful to think of tipping as a tax. I realise that you concede that it’s ‘redistribted’ instantaneously, but I still don’t see what tax-like characteristic you’re identifying. In a system where you pay substantial tips, it just means that you’re paying the waiter for her services directly and making her accountable to you rather than the restuaranteur. It’s just like paying the anaesthetist directly when you have surgery in a private hospital — one could equally conceive of a system where the anaesthetist is employed by the surgeon. To the extent that you are paying the waiter yourself, you should expect the price of the food itself to be corresponding lower. The fact that tips are not specified is just a detail: as long as the waiter knows what she can count on on average, the syatem works well enough.
After thinking about it again, I see what you’re saying. The tips are a wage subsidy; the government outsources the collection of the necessary revenue to the benficiaries, who extract it by cajoling and harassing. The same principle as soldiers collecting their pay through plunder, or officials in poor countries extracting a living wage from bribes.
It’s just not clear why the wage subsidy would be necessary. The customer goes to the restaurant voluntarily, so her total utility from the meal plus the service must be at least equal to the price of the meal plus the tip. Therefore, if the waiter were to receive the entire remuneration as salary, and the restauranteur were to increase the price of the meal by just enough to fund the extra salary, no one would be worse off monetarily (and everyone would be better off morally).
Wage subsidies are necessary where the buyer’s price doesn’t cover the cost of production, and the difference is paid for from some other revenue source.