We’re taking a break today from our usual bar stories. Something has been bugging me lately with all the talk about who pays taxes, and how much they pay.
And while my gripe is strickly about restaurant tips and a broken tax system, I think the details might interest everyone.
All restaurant employees who make a living on tips — who make even one dollar from tips — pay federal income tax on what they receive. My complaint is . . . why do they pay at a rate twice as high as the fat cats who make millions?
How harshly would you expect the US government to tax a restaurant tip as little as a quarter — as compared to someone’s $1,000,000 bonus? The answer might surprise you.
First let’s look at what a tip actually is, and what it isn’t.
A tip is a gift under $13,000 . . .
Have you ever seen a customer buy a round of drinks and then say to the bartender — “Get one for yourself.” It happens all the time. It’s gesture of appreciation. It’s a gift.
Likewise when a customer leaves a tip (so the bartender can buy him/herself a drink later — or buy whatever they want), that’s also a gift.
It’s certainly not wages. There’s no agreement guaranteeing how much will be given, . . . in fact, the customer can decide not to leave any tip at all. (What if a tip really was wages? Would the customer be liable for state and federal employer taxes?)
Nope . . . a tip is a gift, pure and simple, and as a gift under $13,000 it’s not subject to gift tax.
But the government needs money, and I suppose they justify taxing tips because at the end of the day, at the end of the week and the year, we do have that money to spend.
So the government counts these gifts as income.
And they tax them at the same rate as wages.
Now to the fat cats . . .
Even after hiding money in exotic offshore tax shelters and taking advantage of every tax loophole — when declaring what remains the super-rich can still pay at a rate much lower than yours and mine.
Restaurant employees (like most working folks) pay at a tax rate of 25 -35%. But many of the super-rich often pay as little as 15%, 10% . . . and sometimes pay nothing whatsoever.
How is this possible?
One advantage the super-rich have is the use of clever financial terms like “carried interest,” “capital gain,” and “deferred income.” They use this high-sounding jargon to suggest that unlike other forms of “income” (such as tips) . . . THEIR income should hardly be taxed at all.
For example by using terms like “active losses” vs. “passive losses,” and “total return equity swap” — the super-rich can essentially choose their own tax rate. According to Victor Fleischer (a tax expert and law professor at the University of Colorado), these folks save:
“ . . . substantial amounts of money by pretending that regular income received as a management fee for running a private equity firm is not income, but is instead a capital gain.” (Emphasis mine. Source.)
That way they only pay only 15%, rather than 35%. (Fleischer believes this is actually illegal even as many multi-millionaires continue to do it.)
Not only can the super-rich apparently choose their own tax rate — they can switch back and forth when it suits them, to make even more money. They simply declare their losses at a 35% rate, while paying taxes at the 15% rate. (Source — Rebecca Wilkins, senior tax policy counsel at Citizens for Tax Justice.)
Those of us stuck at a 25 – 35% rate on tips might wonder . . . . how do they get away with this?
It’s simply, really . . . just follow the money
The people wheeling and dealing with their taxes simply contribute millions and millions of dollars to
influence law-makers and politicians. Using those clever financial terms, the “influenced” legislators pass tax-avoidance strategies designed only for the super-rich.
Thus the super-rich really don’t have to break any laws (in most cases) . . . because in essence they’re the ones who wrote the laws. (Or more accurately, paid to have them written.)
Let me just say here, I’m not a communist and I firmly believe in the America way. I’m not looking to demean someone’s success, or to redistribute any of their wealth.
I just don’t think multi-millionaires should pay at a tax rate one-half (or even lower) than that of bartenders, waiters and waitresses, and the other workers of this country.
Anyway, sorry for the rant . . . back soon week with more bar stories.
(We included the comments from the first time this was posted … please feel free to add your own.)