TAXES, RESTAURANT TIPS, and the filthy rich

Copy of 1040Two(Just finished a big project and will be back next week with new stories. In the meantime, here’s a repost …this issue keeps coming  up.)

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 . . .

Everyone knows the tax-system is set up differently for the super-rich, but lately it’s become clear how thoroughly the game is totally rigged.

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.)

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18 Responses to TAXES, RESTAURANT TIPS, and the filthy rich

  1. Llylak says:

    I agree wholeheartedly that tax laws must be amended, loopholes for the rich restricted. It’s beyond me how they can complain about the 47% not pulling their weight when they pay lower rates than servers, as you say. You did an admirable job summing up the situation. Did you know that when your site first comes up the color scheme is red, white, and blue? Now more stories, please. 🙂

  2. JT says:

    Spot on with this story. The only way to fix this problem is for a flat tax rate linked to income ranges and below a certain income no tax at all. That way it would eliminate all the tax loopholes the privileged take advantage of. This will likely never happen because the IRS conglomerate is fully integrated, staffed and a major government agency. So it will not go away. Not to mention all the tax examiners, preparers and lawyers who would lose the jobs. Lobbying and big money will always rule in the USA
    Tips are essentially a gift. Employers should not report it as income or otherwise follow Europe and suck it up pay a good wages, excluding tips.

  3. DAbertini says:

    Good post well argued. Maybe you should have been a lawyer but I got bad news for you. Nothing’s gonna change.

  4. Mike Q says:

    Llylak: More stories next week, Lly. Thanks for reading, and sharing your thoughts. I chose that opening pic because I liked it best in a Bing search. I only noticed the red-white-and blue after I put the post up. You’ve got a sharp eye. Always good to see you here, Lly.

    JT: Someone should put you in charge, JT … I have a feeling you could straighten them out. Ever think of going into politics? See you at the Blues Jam tomorrow …

    DAbertini: We can always dream, DA … just have to get enough people really aware of how bullshit this is.

  5. Mandy says:

    What was Romney’s tax rate last year? Just under 15%, and he’s slagging off people who don’t pay enough taxes.
    Good point about tips. Why do rich people get a special tax rate on their alternative sources of income and we don’t? Oh yeah, cause tipped employees don’t have lobbyists paying off politicians. I feel like they keep encroaching on tipped income too. A few years ago, the government (not sure if this is just CA) decided to “double tax” included gratuities on large parties- they tax the restaurant owners, and employees on these tips, something that doesn’t even seem legal.
    Politics will always be stupid as long as obscene sums of money are required to get elected.

    • Tessa says:

      He also donated the remaining percentage to charity, which you can do. It is also more efficient to donate your money to charity, less hands in the pot dipping into the money.

      • Jake says:

        Less hands in the pot? I hope you know that the Mormon church requires its members to donate 10% of their income and what happens to that money? Estimates say that only seven tenths of one percent, that is only .7% of the 8 billion dollars the Mormon church rakes in each year is spent on “charities.” The rest they invest in businesses which because of their “religious” status are tax free. The Mormon church owns an estimated 30 billion dollars worth of tax free businesses such as included in this partial list.

        •$2 billion megamall in Salt Lake City
        •A Newspaper
        •11 radio stations
        •A TV station
        •A publishing and distribution company
        •A digital media company
        •A hospitality business
        •An insurance business with assets worth $3.3 billion
        •1 million acres in the continental U.S.
        •Properties in Britain, Canada, Australia, Mexico, Argentina, and Brazil worth untold hundreds of millions
        •7,000 acres on Oahu
        •Parking lots
        •Office parks
        •Residential buildings
        •A 42-acre tropical theme park
        •A business college
        •11,000 acre hunting preserve
        Of course how much the Mormon church owns and how they spend their money is not exactly known because they refuse to disclose this financial information. Like Mitt Romney and his taxes.

  6. Colleen says:

    Let’s not forget that the top 1% pays 41% of federal income tax; the top 5% pay 60% percent and the top 10% pays 70% of the federal taxes when 46% pay none.

    • KJ says:

      First of all your numbers are incorrect. The top 1% paid quite a few percentage points less than 41%. However, that is not the point. When someone making a few mill a year has to fork over a couple hundred thousand, they probably live more comfortably than a single mother… According to a study published this month, income inequality in the U.S. is worse today than in 1774! Some historians even believe income inequality is at an even larger disparity today than it was during the Roman Empire! This is quite plausible as a study entitled “Trends in the Distribution of Household Income Between 1979 and 2007″ found that ‘real household income’ (after taxes have been deducted) for the top 1% rose by a whopping 275% just in the past three decades (from ’79 to ’07). What is even more appalling is that during the recession between 2001-2007 (yes I know it continued after ’07 but that data did not continue into 2008) the 1 percenters’ incomes initially dropped in 2001 but by 2002 had regained all losses and by 2007 had regained all losses plus 85%!

  7. Mike Q says:

    Mandy: None of it makes common sense, Mandy. The government needs money and they’ll tax anything they can get away with … there are already “sin” taxes. When you buy a bottle of liquor in MA, I believe 20% of the purchase price is for pre-included tax (before sales tax.) Cigarettes and cigars … same thing, maybe more. Seems the only people who keep low tax rates are those who “influence” the legislators with their multi-million-dollar “contributions.”

    Colleen: Maybe they pay 41% of all the taxes because they make 90% of all the money, Colleen. In which case they should be able to pay the same share of their income that everyone else does. (But other than politics, I love you.) 🙂

  8. Case says:

    Hope more bar stories are coming up, I come here to get away from this.

  9. Mike Q says:

    Case: Check back this Saturday, Case. I know this post is not in our usual mode … it was just something that was bugging me. You’re right, this isn’t a political blog or about taxes, but this is something restaurant workers see every week on their pay checks. I promise not to let this happen too often. 🙂

  10. Joe Sixtop says:

    What a great post. Let everybody know!

  11. GK says:

    Been a long time. Let’s have a new one.

  12. Mike Lucey says:

    Mike….always wondered how your life turned out. And also wondered if you kept your eternal optimism and good humor….seems you have! Am still binge reading your older posts! Glad I stumbled on your site Brother!

  13. Mike Lucey(aka Gerbil) says:

    Hey Mike,was wondering about you…love your blog. Email me when you get the chance!!

  14. John Almonte says:

    Great take, Mike. Nicely done! My daughter was a server for a few years and made next to nothing but was harshly taxed on the meager tips she received.

    By the way..welcome back to your blog. It’s been too long. Hope all is well with you.

  15. Gary says:

    Re: The Mormon church, sept 25th comment above.
    10% tithing is not required and nobody knows if you are paying or not.
    In all instances that I have seen the church pays taxes on all of its businesses. The church even pays real estate taxes on its church properties voluntarily. It is not required by law.
    Re: what the church donates to “charities”. It appears that the real picture is that the church donates an incredible amount of food and goods. There is hardly a major crisis where the Mormon church does not just contribute. They transport the food and goods in their own trucks. There are no flags posted onsite or public relations distributions, they just get it done. I remember local stories during Katrina. Besides the food and goods there were Mormons who came from other states to help provide services by some of their skilled craftsmen members.

    I have observed over the years many families who were in dire need and they received food & clothing and in some cases their utility bills paid on a weekly or monthly basis as needed. Their only requirement was that the family being helped was doing all they could to help themselves as well. I have seen the church find jobs for some of these same people.
    I was thinking about all of this recently when I saw a group of people cleaning up a local park on a Saturday. It was not just picking up trash. It was wheelbarrows, shovels, clippers and truck hauling time. Yep, it was those pesky Mormons again.
    How do I know all this? I watched my father involved in many of these activities.

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