Only Obama acolytes sing the praises of their Hawaiian Messiah for achieving a meagre economic growth, sputting along at barely above 1%. If a Republican was producing numbers like that you can bet your ass that the name of Herbert Hoover would be mentioned in every sentence describing the current Republican leader. Ironically, it was President Bush, not Obama, who signed off on legislation that is savaging the middle class. However, it is Barack Obama’s IRS that is putting the law into effect. So let’s take a look at how real tax policy is hurting middle class and lower middle class people. Let me take you inside a Hair Salon.
As part of the Housing Assistance Tax Act of 2008 Congress passed yet another new information reporting requirement that will cost small businesses money at a time when cash flow is critical to survival. Beginning in 2011 banks and credit card merchant services companies will be required to prepare and file Form 1099 K reporting a variety of different merchant transactions, despite objections raised by the financial services industry.
Merchants who presently pay transaction bank and merchant service charges presently charged for the privilege of accepting customer credit cards, presently ranging between 2.75% and 3.5%, will see their rates increased as a result of this new requirement as they pass the cost of complying with the new law to their customers. Small businesses already reeling from the recession will be hurt hardest by these increases and will be forced to increase their prices for goods and services to compensate for the additional costs.
What does this mean in practical terms? If you put a tip on a credit card, you are costing the business and the employee you thought would benefit from the tip a lot of money.
Before 2011, if you wanted to give your hair dresser a tip, you used a credit card. The business in turn gave the employee their portion of the tip and it was up to the hair dresser to pay the income tax on the tip. That was then.
Under the current law, a tip on a credit card is counted by the IRS as part of the gross revenue for the business. That means the business has to pay tax based on tips that show up on credit cards. Then, assuming the business passes the tip on to the employee, the “tip” is taxed again as part of the gross income of the person who got the tip. The IRS is taxing the same money twice.
In other words, if a server (let’s say is in the 25% tax bracket) in the past would have received a $10.00 tip that person would realize $7.50 after taxes. Today if that same server (25% tax bracket) received a tip through a credit card (let say the small business is also in the 25% tax bracket) the server would only realize $5.00. So the Federal Government discovered a sneaky way to increase taxes on small businesses and workers who depend on tips.
Hair dressers in successful hair salons can earn upwards of $50,000 in tips. For the business, this means an annual revenue of $100k-$300k in tips. Under the current law, the Federal Government is taxing the business on that number as well as taxing the employee. If you think that the typical hair dresser is part of the 1%, you are a moron.
So, what is an owner of a hair salon to do? Bend over and take it up the poop shoot from the IRS? Nope, they are going into the gray market. Clients are being encouraged to pay in cash or by check. The cash is flowing into a financial system that, for now, is beyond the effective reach of the Federal Government. Instead of generating more income, this Federal law is givng business owners and employees and incentive to move into the cash world. Bottomline? Less income for the Federal Government.
Who’s next? Restaurants. This law actually dampens business growth and lowers the income of those who depend on tips. This is the economic reality that many real Americans face.
But Obama is on track to do far more damage than Bush. According to the WSJ:
The government defines “economically significant” rules as those that impose annual costs of $100 million or more, and the Bush, Clinton and Bush Administrations each ended up finalizing about 45 major rules per year. The average over Mr. Obama’s first two years was 63 but then plunged to 44 for 2011 and 2012 so far. The bureaucracies didn’t slow down. They merely postponed and built up a backlog that is about to hit the Federal Register.
We’d report the costs of the major-rule pipeline if we had current data. But the White House budget office document known as the unified agenda that reveals the regulations under development hasn’t been published since fall 2011. The delay violates multiple federal laws and executive orders that require an agenda every six months…
The regulatory flood from Barack’s bureaucrats will drown small businesses, who already have been struggling to keep their heads above water in the festering, putrid pond that is the U.S. economy.