The Economics of Tip Extortion

Joel Salatin|August 1, 2023

Editor’s Note: These days, you can’t go anywhere or buy anything without being asked for a tip. Is it just a trend stubbornly hanging on after the pandemic… or a new way of doing business? Today, in the rational and free-thinking way Joel is famous for… he takes apart the economics of tipping and offers a true free market solution. Read on below.

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The tips versus pay controversy made the front page of The Wall Street Journal last week.

As you likely know, many businesses are now pinging customers with this message: “Tips are gratefully received.” Folks have tip fatigue and feel put upon.

I’ve been to Australia 16 times and have eaten in many restaurants there. Tipping is not part of Australian culture. The employees receive paychecks, and nobody feels any tension about tipping.

The first time I experienced this, I felt liberated.

The server wasn’t attempting to please me for selfish reasons, and I didn’t have to struggle with “How big of a tip is enough?”

My relief was palpable.

Until you’ve experienced it, the liberation is hard to describe.

Cheap Thanks

The Wall Street Journal article notes that appliance repair outfits, juice shops and even plant nurseries have joined the burgeoning “tip please” movement.

The whole thing seems like a punishment for gratitude. Why does every thank you have to be accompanied with money? Does that cheapen gratitude… or make it more valuable?

I think an argument could be made for either, which is why many of us feel such angst over the issue.

In the list of tippable occupations, meal servers are at the top, while self-checkout attendants are at the bottom. In between are everything from hotel employees to retail store cashiers.

Really? Is this some way of extorting folks who fear being considered miserly?

Many of us think businesses should simply pay their employees a decent wage… and that it’s disingenuous to force customers to pick up the shortfall for businesses that don’t.

Current data shows several trends.

Adding It Up

First, the percentage of businesses asking for tips has risen from 6.2% in 2019 to 16% today. That’s an astounding increase.

Second, most businesses in the tipping sector see the practice as a way to keep price points low enough to remain competitive.

Isn’t marketing psychology amazing? You see a meal for $17 and think it’s a deal, but when you add a 20% tip, it becomes $20.40.

Why can’t the shop next door charge $20.40 and post a big sign that says, “I’m paying my waitstaff $20 an hour so they don’t have to live on tips. My prices are authentic. Thank you for making this easier on all of us.”

What would be wrong with that? I think customers would flock to such a business.

The problem with the tipping concept is that it’s clouded in unknowns. Nobody posts, “We’re paying $3.50 an hour, and our waitstaff depends on your tips to afford food for their kiddos tonight.”

Another business may pay its workers $10 an hour and still ask for tips. Or $20 an hour. As a customer, you don’t have a clue what the internal (infernal?) financials are, making the decision about whether to tip a shot in the dark.

By tipping, I’m supposed to solve a problem… but I know almost nothing about its causes.

The True Cost

Interestingly, no business mentioned in the Wall Street Journal article admitted wanting to use tips to avoid taxes. That’s probably the biggest reason for wanting tips. Tips enable businesses to pay low wages, which in turn reduces payroll taxes, workers’ compensation withholdings and other applicable taxes.

To discuss tipping culture in a front-page article without even mentioning tax avoidance is negligent.

I’ll admit, I hate having to make sure I have some small bills in my wallet every time I take a shuttle to the airport. And every time I ask a valet to get my car from the lot. It always feels like a shakedown.

Imagine if I told my customers the price I charge for a dozen eggs doesn’t really pay for producing eggs, and my workers need tips to feel appreciated.

What would that say about my business? How would it add integrity to a transaction?

My customers would need to know how much it costs to produce eggs… what the labor portion of that cost is… and what the price would need to be to fairly cover all costs. All this would need to be known in order for a person to make an informed decision about tipping.

Defenders of tipping argue that it’s optional, but if workers depend on tips to live, is it really?

Finally, tipping culture doesn’t account for philanthropy done in private.

Out in the Open

The fact that I just gave $1,000 to a neighbor who lost their home in a fire can’t be known by the airport shuttle driver who thinks I’m a skinflint for not pressing a $5 bill into his hand.

In no-tipping cultures, anyone can find out what people in a given business are being paid. It’s all out in the open. But in a tipping culture, everything is clouded in obscurity and ignorance, which never make for satisfying transactions.

In the end, tipping is emotional and cultural extortion that hurts the generous more than the miserly.

If we want the miserly to pay their fair share, we should dismantle tipping culture and force businesses to be open about pay, income and expenses.

“We pay our servers $18 an hour plus profit-sharing bonuses. They love the paycheck stability, and we know you’ll love being freed from tipping angst. Enjoy your meal, and please come back.”

If I had a restaurant, that’s what I’d put on the front window. I bet folks would come in.

How about you?