This may sound like a boon for the four million people working in the retail, service, and hospitality industries who struggle to make ends meet, but like so many political promises, this will generate more profit on the campaign trail than in one's own pocketbook, and not just because it’s a promise that requires the children in Congress to play nicely.
The best case scenario for retail service workers, and the most unlikely, is that their cash wages would increase twenty dollars per month. The most likely scenario would be no change to income whatsoever.
A question neither campaign has addressed is whether tips would still be recordable as income against the federal minimum wage.
Forty-three states have tipping wages - that is, restaurants are allowed to include workers' tips as part of their earned income toward the state or federal minimum wage, thus restaurants pay as little as $2.13/hr out of their pockets to tipped service workers.
The governing force in a free market system is equilibrium. When one variable changes in the system, corresponding variables adjust automatically to keep the system in balance - this is why government mandated changes in a predominantly free market never have the desired effects.
When the $20 minimum wage law for restaurants with more than sixty locations took effect in California, more than 10,000 jobs were lost and hundreds of locations were closed. A variable in the system - the cost of labor - increased, thus the system compensated by reducing supply. It is junior high school economics.
1.9% of retail service jobs in California were lost when the cost of labor increased twenty percent. What would happen if the cost of labor increased three hundred and fifty percent?
If restaurants were suddenly required to pay the full $7.25 federal minimum wage, that would increase their labor costs 350%, jeopardizing already razor-thin profit margins. Most restaurants, even chain restaurants, are small businesses - they are owned by individuals or small closely-held companies. A person who owns one or even ten Applebee's restaurants could not absorb labor costs that doubled or tripled. They would be forced to cut working hours and increase prices - reducing its potential customer base and repeat customers in an era when restaurant food prices have nearly doubled and the quality of service is highly questionable.
These are immutable laws of business that cannot be changed by legislation, no matter how well-intentioned it might be.
But that’s assuming that eliminating taxes on tips would increase the net income of retail and hospitality service workers. And that is a very big assumption. The Committee for a Responsible Federal Budget, whomever they might be, has estimated that eliminating taxes on tips would reduce federal revenue by about two billion dollars per year – or three-thousandth of a percent of the federal budget – hardly worth mentioning.
But that is only half of the story – and it is not the interesting half.
According to the IRS, the lower fifty-percent of earners pay about $500 of federal income tax. Using this number and a generous tax reduction of fifty percent, retail service workers would see their wages increase about twenty dollars per month - enough to buy two packs of cigarettes or six quarts of grass-fed organic milk.
But that is a misleading conclusion because of the opacity of the statistic provided. We know that the lower one’s income, the lower the tax bill. But as income reduces, the amount of taxes reduces to zero – quite rapidly.
A more detailed analysis reveals a more interesting fact: Ninety-three percent of minimum wage workers simply don't pay federal income taxes - and many of them receive more in returns than is paid in during the year.
And what about a moderately-successful tipped worker who averages fifteen dollars an hour? Wouldn't they see more money in their paycheck? Perhaps, but most would not see more annual income. Seventy-eight percent of people who make under thirty thousand dollars do not pay individual federal income tax.
The net effect of eliminating taxes on tips would not change the income levels for the vast majority of retail service workers, and if tips were not counted as income toward the minimum wage, it would have a catastrophic effect on the food service industry, especially full service restaurants.
It's not that I lack compassion for retail service workers, it's the system of capitalism that has no compassion for retail service workers - and multiple attempts to bolt-on compassion over the decades have not yielded satisfactory results. In fact, each attempt has resulted in a higher cost of living and a lower standard of living for those closest to the bottom.
Unless we adopt an economic system that favors people over profits, the story will not change and neither will the ending.