Earlier quoted context omitted.
> they're not being reported as income and taxed.That might not be the "law", but that's pretty much de-facto what happens everywhere In other words, it punishes the most virtuous; those higher on the spectrum unscrupulousness benefit the most. Not a good arrangement.
For tipped employees, most of whom are getting all their federal and state taxes back at refund time, giving them the money directly does nothing other than increase efficiency of the overall system because you cut a party out of it.
The issue raised is whether this arrangement punishes honest actors and rewards dishonest ones. The answer is "yes, it does."