Generally speaking, Americans are more generous when the money goes to directly to a service person than to a faceless business that sets itself up as a middleman in that relationship.
Changing this would mean making explicit and obvious things that were previously implicit and looked past: Front-of-house would need/want/demand a far higher hourly wage than what the back-of-house workers would/cloud, and everybody would have to report ALL their income for taxes.
There is also the problem that unprofessional service staff might not try as hard to please the customers, though maybe those get filtered out over time.
The change is that the IRS now holds the restaurant owner accountable for the taxes due on the tip. The result is that instead of the money going to the server directly, it first has to pass through the hands of the business owner. I don't know if this still goes on, but some years back I recall hearing that some restaurant owners would then "distribute" those tips to other members of the staff — the busboys, kitchen help, etc.
Traditionally, waiters always "tipped out" the busboys and bartenders they worked with, on any given shift, and better service (theoretically) promoted more generosity from the waiter. But now that the business owner has his hand in it, the business owner will operate according to his own interests. The waiter is cut out. The waiter has less control, and less direct incentive. The waiter has less of a payoff.
Rumor has it (or, if you will, common sense has it) that some owners abuse their role as middleman.
The owners always had to withhold taxes from their wait staff, just as your taxes are withheld by your employer.
The difference is that since almost all tips are now on credit cards, the business owner doesn't need to assume the % sales to withhold, and withholds based on virtually all of their employees tips.
The end result is that the wait staff can't commit tax fraud by not reporting tips. The business owner didn't have to report cash tips, only withhold based on a % of sales. They still withhold on % of sales if actual tips are less than the % of sales.
That said, gifts totaling under $15,000 are non-taxable.
https://www.palisadeshudson.com/2013/09/if-gifts-are-not-inc...
Yup. A couple of restaurants in the Seattle area tried this. "20% price increase, no more tipping".
Over time, their employees left, saying they were being paid less.
Remember this the next time you hear the "if you tip 15% or less I'm literally paying to serve you!" (which is also BS. The IRS, if you don't disclose tipped income, assesses a standard rate. If you're truly earning less than that in tips, you can document it and pay less. But almost no-one wants to do that because the IRS is behind the times, and almost all servers make more in tips than that standard rate).
One reason several of them have mentioned is that many customers are happy to regularly tip much more than 20%, and this is often correlated with the highest spending customers. Making it a non-discretionary 20% puts an artificially low cap on how much they earn from the customers that pay the most. At one time some customers would leave extra cash on the table after paying the "no tipping" bill, but no one carries cash anymore.
Places that net $40/hr have enormous difficulty hiring right now. These are not poorly paying jobs but the broader lifestyle is pretty terrible even at good restaurants, made even more terrible because of the employee shortage.
One overlooked issue is that many restaurant workers in the big cities are originally from "flyover country". When the restaurants closed during COVID, a large number went back home. I was talking to a waitress in the middle-of-nowhere Iowa a few months ago and she had just moved back after several years working in New York City restaurants.
I don't think I've ever seen a sign advertising anything near that for restaurants.
I have friends working these jobs. The consistent pattern is that they are only working the minimum number of shifts required to pay their bills, and they live pretty cheaply. You can't staff the restaurants when all of your employees only want to work 1-2 days a week. They could easily work more hours, and did before COVID, but are choosing not to now. And because restaurant work is extremely flexible and available on-demand, it makes their life flexible.
Many people have adapted their lifestyles to having less money and not working, especially with the generous unemployment benefits. Restaurant workers I know fall into that camp. My SO was receiving $75k/year on unemployment during COVID and turned down jobs paying $125k+ because they discovered the unemployment benefit was sufficient for a lifestyle of doing nothing that they were happy with. Not likely to take a job anytime soon either.
As a tangential observation, while I know many people in this position, none of them is doing much with their newfound free time. Just kind of coasting.
Isn't the solution obvious? Adjust wages/prices to such a degree that it does fully compensate for the missing tips.
It works perfectly for many tens of millions of restaurant workers in two dozen developed countries around the world.
The bottom line is that it is the workers making the choice you disagree with, in pursuit of their own self-interest. It would be one thing if choosing one policy over the other was revenue-neutral to the restaurants and workers, but empirically that is not the case.