yes, income is still income. of course it's taxable.
whether you decide to get away with it is another issue, lol.
though some restaurants pay out tips colletively, so there you can't avoid taxes.
so it's generally better to tip in cash... sometimes even go out of your way to. like, 0.00 tips on the credit card but cash tips on the side.
and yeah... as Bodhesavta said waiters get below, way below, minimum wage.
once i wait to a buffet and thought i don't need to tip because it's a buffet, and as i was leaving, the waitress (or rather, attendent) actually came over and said, "you forgot to leave tips. we depend on the tips for income."
a lot of waiters and waitresses are illegal immigrants... that's fairly well documented. obviously not at the upper scale restaurants, where the restaurant owner actually files W-2 or 1094 or one of those tax forms.
anyhow. i hear a lot about these stories. don't know so much about cab drivers...
but i mean generally i like to tip a little more because we seem to be a little more fortunate than they are. what's an extra dollar?