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Tax Evasion on Gratuities

Author

Listed:
  • John E. Anderson

    (University of Nebraska-Lincoln)

  • Örn B. Bodvarsson

    (University of Nebraska-Lincoln and St. Cloud State University)

Abstract

Tax evasion on tips earned by servers is a pervasive problem, one that has received almost no attention in the tax evasion literature. The authors develop a model of joint server and employer tax compliance to derive predictions for how the customer tipping rate, the server’s sales and tax rate, and the expected IRS penalty on employers influence compliance by both parties. They test the model by examining interstate differences in reported hourly pay (wages plus reported tips) during 2001. They use the Occupational Employment Statistics surveys, data on IRS regional audit rates, data from each state’s food and beverage service industry, and information on each state’s minimum wage and tax laws to perform ordinary least squares and two-stage least squares estimation. Empirical results generally provide strong support for a number of the theory’s predictions.

Suggested Citation

  • John E. Anderson & Örn B. Bodvarsson, 2005. "Tax Evasion on Gratuities," Public Finance Review, , vol. 33(4), pages 466-487, July.
    • Handle: RePEc:sae:pubfin:v:33:y:2005:i:4:p:466-487
    DOI: 10.1177/1091142105277408
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    References listed on IDEAS

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    1. Alan Macnaughton & Michael R. Veall, 2001. "Tipping and the Mcquatters Formula," Public Finance Review, , vol. 29(2), pages 99-107, March.
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    Citations

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    Cited by:

    1. Lynn, Michael, 2016. "Why are we more likely to tip some service occupations than others? Theory, evidence, and implications," Journal of Economic Psychology, Elsevier, vol. 54(C), pages 134-150.
    2. Ge, Qi, 2018. "Sports sentiment and tipping behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 95-113.
    3. Siglé, Maarten & Goslinga, Sjoerd & Speklé, Roland & van der Hel, Lisette & Veldhuizen, Robbert, 2018. "Corporate tax compliance: Is a change towards trust-based tax strategies justified?," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 32(C), pages 3-16.
    4. John E. Anderson, 2005. "Fiscal Reform and its Firm-Level Effects in Eastern Europe and Central Asia," William Davidson Institute Working Papers Series wp800, William Davidson Institute at the University of Michigan.
    5. Stefan Gössling & Sébastien Fernandez & Carlos Martin-Rios & Susana Pasamar Reyes & Valérie Fointiat & Rami K Isaac & Merete Lunde, 2020. "Current Issues in Tourism Restaurant tipping in Europe: a comparative assessment," Post-Print hal-02546589, HAL.

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