[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



                                                   S. Hrg. 102-000 deg.

ASSISTING SMALL BUSINESSES THROUGH THE TAX CODE: RECENT GAINS AND WHAT 
                          REMAINS TO BE DONE

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                     WASHINGTON, DC, JULY 23, 2003

                               __________

                           Serial No. 108-29

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house


                                 ______

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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania      FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina           DONNA CHRISTENSEN, Virgin Islands
SAM GRAVES, Missouri                 DANNY DAVIS, Illinois
EDWARD SCHROCK, Virginia             CHARLES GONZALEZ, Texas
TODD AKIN, Missouri                  GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia  ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania           ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado           MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona                DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania            JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire           MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado               LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana               ENI FALEOMAVAEGA, American Samoa
STEVE KING, Iowa                     BRAD MILLER, North Carolina
THADDEUS McCOTTER, Michigan

         J. Matthew Szymanski, Chief of Staff and Chief Counsel

                     Phil Eskeland, Policy Director

                  Michael Day, Minority Staff Director

                                  (ii)


                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Pitrone, Thomas C., the National Small Business Association......     4
Quick, Roy M., Jr., U.S. Chamber of Commerce.....................     5
Poppen, Janet K., Women Impacting Public Policy..................     7
Sullivan, The Hon. Thomas M., U.S. Small Business Administration.     9
Olson, The Hon. Nina E., Internal Revenue Service................    10
Mastromarco, Dan R., the Argus Group.............................    12
Battle, Dena, National Federation of Independent Business........    13

                                Appendix

Opening statements:
    Manzullo, Hon. Donald A......................................    22
Prepared statements:
    Pitrone, Thomas C............................................    25
    Quick, Roy M., Jr............................................    31
    Poppen, Janet K..............................................    43
    Sullivan, The Hon. Thomas M..................................    49
    Olson, The Hon. Nina E.......................................    58
    Mastromarco, Dan R...........................................    72
    Battle, Dena.................................................    83

                                 (iii)

 
ASSISTING SMALL BUSINESSES THROUGH THE TAX CODE: RECENT GAINS AND WHAT 
                           REMAINS TO BE DONE

                              ----------                              


                        WEDNESDAY, JULY 23, 2003

                  House of Representatives,
                        Committee on Small Business
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 3:14 p.m. in Room 
2360, Rayburn House Office Building, Hon. Donald A. Manzullo 
[chairman of the Committee] presiding.
    Present: Manzullo, Velazquez, Schrock, Akin, Beauprez, 
Majette, and Sanchez.
    Chairman Manzullo. Today, the Committee will consider 
proposals for assisting small businesses through the tax code. 
We will first briefly review recently enacted tax relief for 
small businesses, but he primary focus of the hearing is to 
consider additional proposals that could further aid America's 
ailing small businesses.
    Last May, the President signed into law H.R. 2, which 
provides $320 billion in net tax relief to American taxpayers 
over the next 10 years. A considerable portion of this relief 
is directed towards small business.
    H.R. 2 assists small businesses by increasing the small 
business expensing provision and by lowering marginal tax 
rates. In addition, the bill increase first year bonus 
depreciation from 30 to 50 percent.
    During the last Congress, Congresswoman Nydia Velazquez and 
I introduced H.R. 1037, the Small Employer Tax Relief Act of 
2001. In preparing to revise that bill for reintroduction into 
the 108th Congress, it is important to solicit the very best 
ideas available for assisting small businesses.
    With us this afternoon are seven distinguished witnesses. 
The panel is comprised of both government witnesses and 
representatives of small business advocacy groups. We look 
forward to hearing your recommendations.
    We have got a problem on the Floor, and Ms. Velazquez and I 
think that we have votes that have been rolled in the Financial 
Services Committee, so what I am going to do is limit your 
testimony to four minute period. I want to get through the 
group here, and I want to start with the non-government 
witnesses and the witnesses who have come from out of town so 
in case we have to adjourn this in a hurry the people that have 
come the farthest distances and have been inconvenienced the 
most at least will have had an opportunity to get their 
testimony heard.
    Ms. Velazquez, did you have an opening statement?
    Ms. Velazquez. Yes, sir.
    Chairman Manzullo. If you could go ahead and do that, I 
would appreciate that.
    [Mr. Manzullo's statement may be found in the appendix.]
    Ms. Velazquez. Okay, thank you, Mr. Chairman.
    Small businesses are the engine of this economy. They are 
key to our recovery. Unfortunately, they face many challenges 
today, including inequities in federal contracting health care, 
federal regulations and the U.S. Tax Code.
    Small businesses account for 44 percent of all federal 
revenue, yet they must deal with the up-front costs of taxes in 
addition to high compliant costs. With regard to tax 
compliance, there is a substantial gap between costs to large 
and small firms. The cost per employee for small businesses 
topped the cost for large firms by 114 percent.
    The tax code does not have to operate in a manner to stifle 
growth. It can be used as a tool to ensure that this nation's 
small business are able to offer quality health care and 
comprehensive retirement plans to their employees as well as 
provide incentives to reinvest their cash back into their 
businesses.
    However, the current tax code has done more to impede small 
business growth than encourage it. This stem from the 
complexity of the tax code as well as the IRS continual failure 
to address the impact its rules and regulations have on small 
businesses. As a result, small businesses are left to outsource 
their complex tax work which is extremely costly.
    Earlier this year, this Committee looked at the ways the 
IRS has consistently failed to comply with the Regulatory 
Flexibility Act. Today, we will look beyond the regulatory 
structure and examine how we can change the Internal Revenue 
Code to account for the needs of small businesses.
    Not only has the IRS failed to address the needs of small 
businesses in ensuring the rules and regulations, but Congress 
has also failed to consider the adverse effects that the tax 
code has on small businesses. Too often our laws, though well-
intended, unfairly harm small businesses because of the one-
size-fits-all approach. We must hold ourselves accountable for 
the burden that we place on small businesses and rectify these 
inequities.
    In 2001, the National Small Business United released a 
ground-breaking report entitled ``The Internal Revenue Code: 
Unequal Treatment Between Large and Small Firms.'' This report 
brings forth what small businesses have been claiming for 
years: the U.S. tax system fails them. This study showed how 
the Internal Revenue Code unfairly put small businesses at a 
disadvantage in comparison to large firms and outlined reforms 
for fixing the system.
    Whether it is deductibility of health care for the self-
employed, expensing meals and entertainment, or standard home 
office deductions, small business aren't able to reap the same 
benefits as their corporate counterparts. This tax report was a 
tremendous step forward in exposing the unfairness this system 
poses for small businesses today. I was so impressed that I 
made sure every member of Congress received a copy.
    However, to get the changes suggested in this report passed 
into law, small businesses need the support of this 
administration. In March 2002, President Bush released his 
small business agenda, promising that he will simplify the tax 
code and provide small businesses with the relief they need.
    Although the administration voiced its commitment to 
helping small businesses get the tax relief they have, long 
been asking for, recent moves have shown just the opposite. The 
2003 tax code is a perfect example.
    The President had a $350 billion pie to provide at least 
some tax relief to small businesses. Instead, the bulk of the 
bill was aimed at providing tax relief to large corporations in 
the form of a dividend tax cut. The small business relief that 
was in the tax cut was completely inadequate.
    The two provisions specifically aimed at small businesses, 
the bonus depreciation and increased expansion, both expire 
after only a few years, and not one of the proposals in the 
NSBU report was passed into law.
    Small business deserve better. Today's hearing is an 
opportunity to assess the real impact of the U.S. Tax Code on 
our nation's small businesses. The President claims that a 
reduction in the top rate is a reduction in taxes for small 
business owners. However, the 2001 cut failed to impact the 
growth of small business and the acceleration of these tax 
codes in the 2003 package will do little to enhance the 
prosperity of small business owners and their employees.
    So, Mr. Chairman, I look forward to the witnesses, and 
thank you very much for giving me this opportunity.
    Chairman Manzullo. Thank you.
    We are going to go in this order: Mr. Pitrone, Mr. Quick, 
and Ms. Poppen, because you are from out of state, and if we 
have to inconvenience anybody, I want it to be the people that 
hang around here and not the people that come to visit.
    [Laughter.]
    Chairman Manzullo. What I would suggest is I want to keep 
the testimony to four minutes, go immediately into your 
suggestions. The purpose of this is to gather suggestions, so 
you do not have to take two minutes to say how nice it is to be 
here. And then take your hottest issue. Several of you have 
several suggestions you want to make, but give us your best one 
or two so we can concentrate on that, and then, of course, we 
have all of your written testimony.
    And the first witness is Tom Pitrone. Is that Pitrone or--
--.
    Mr. Pitrone. I'm Sicilian. It's Pitrone.
    Chairman Manzullo. Oh, Pitrone. Well, I am Sicilian, we 
pronounce the vowel, and I am the Chairman.
    [Laughter.]
    Chairman Manzullo. And you need to have the microphone 
before you, Tom, and he is the principal of The Integrity Group 
on behalf of the National Small Business Association. We look 
forward to your testimony.

  STATEMENT OF THOMAS C. PITRONE, THE NATIONAL SMALL BUSINESS 
  ASSOCIATION, AND PRINCIPAL, THE INTEGRITY GROUP, CLEVELAND, 
                              OHIO

    Mr. Pitrone. Thank you, Chairman Manzullo.
    Well, I just want to thank you, and Ranking Member 
Velazquez, for this opportunity to testify.
    I am with the NSBA, which was formerly the NSBU. It is 
National Small Business Association, and we representing small 
businesses in all 50 states, 65,000 in all, and as 
Representative Velazquez mentioned, we commissioned the 
Prosperity Institute to provide the study that she referenced, 
so I will not dwell on that. I will just go right into the 
issues that we have selected as our priorities from that 
report.
    There was three that our members felt were the most 
important. The first is pension parity, the second is Section 
125 cafeteria plans, and the third is the tax on the money that 
small businesses use to pay their insurance premiums, the FICA 
tax on those dollars.
    Pension parity is pretty simple. If you have a company you 
want to provide a pension, there is quite a bit of government 
regulation that impacts your ability to do that. Fixed cost as 
got to be a minimum on the simplest plan of $1,500 a year to 
$2,000. If you have 100 plus employees, that is easy to absorb. 
If you have 10 or less employees, it is almost impossible to 
absorb, and you cannot do it yourself.
    Congress recognized that problem when they same with a 
simple plan which does not really cut the cost to the small 
businesses, just simpler. You still have to make mandatory 
contributions to all your employees' accounts, which is 
probably more than the cost of the administration, but it is 
simpler.
    However, a simple plan caps out at an $8,000 annual 
contribution, a regular 401(k) plan caps out at $12,000, so 
there is a bid disparity between what a small business owner 
can put away using a simple plan and what a larger business 
using a 401(k) can put away.
    On the cafeteria plans, it allows you to pull money out of 
your pay check pre-tax and set up flexible spending accounts. 
They are great because they allow you to pay for things with 
pre-tax dollars like day care for your children, but by 
definition a small business owner is not an employee, and so 
they cannot participate.
    And if you cannot participate, you probably are not going 
to set one up, and therefore your employees are not going to be 
able to participate, which means that people lose the ability 
to provide day care with pre-tax dollars, among many other 
issues.
    And the finally, small businesses, even though they now can 
deduct the cost of their insurance premiums, it is after they 
pay Social Security and Medicare tax. So for small business who 
pay both sides of that, it is a 15 percent tax on the money 
that they use to pay for their health insurance premiums, and 
that has a disproportionate impact on small business who are 
not making a lot of money because they are closer to the social 
security cutoff of about $87,000.
    So those are the issues that we feel are the top priorities 
for correction in our tax code as being--we are not looking for 
something special, we are looking for the same treatment that 
large businesses have on these issues. And I just want to thank 
you for the opportunity to testify.
    [Mr. Pitrone's statement may be found in the appendix.]
    Mr. Schrock. [Presiding]. Thank you, Mr. Pitrone. And 
because I am only Subcommittee Chairman, you are Mr. Pitrone.
    Mr. Pitrone. Thank you.
    [Laughter.]
    Mr. Schrock. Our next witness is Roy Quick, who is part 
owner of the Quick Tax & Accounting Service, a small business 
that is headquartered in St. Louis, Missouri. And I am told 
that his very capable business partner and wife, Elizabeth 
Quick, is in the audience today, and I welcome her.
    Is she here? Welcome, it is nice to have you here.
    Mr. Quick is appearing in front of the Committee today to 
present the recommendations of the U.S. Chamber of Commerce. 
Welcome, Mr. Quick.

 STATEMENT OF ROY M. QUICK, JR., U.S. CHAMBER OF COMMERCE, AND 
 PRINCIPAL, QUICK TAX & ACCOUNTING SERVICE, ST. LOUIS, MISSOURI

    Mr. Quick. Thank you. Good afternoon, Mr. Chairman and 
Ranking Member.
    I am Roy Quick, Principal of Quick Tax & Accounting 
Service. We applaud your dedication and interest in reducing 
the tax burdens faced by the nation's 24 million small 
businesses. The following suggestions are from the written 
testimony submitted.
    In 2003, self-employed----.
    Mr. Schrock. Mr. Quick?
    Mr. Quick. Yes?
    Mr. Schrock. Could you pull the microphone closer?
    Mr. Quick. Sure.
    Mr. Schrock. Thanks. We do not have a very good system 
here.
    Mr. Quick. Okay.
    Mr. Schrock. We are trying to save tax-payer dollars, so we 
are using the old system.
    Mr. Quick. Okay. In 2003, self-employed individuals and 
partners in a partnership will finally achieve 100 percent 
deductibility of health insurance costs for federal tax 
purposes. However, these small businesses are at a definite 
disadvantage when it comes to the health care issue. They must 
pay higher premiums to insurance companies due to their small 
pool of workers. They also have the double whammy of also 
paying self-employment tax on their health insurance premiums.
    This tax fairness measure will have a collateral effect of 
encouraging access for the three million self-employed 
individuals who currently do not have health insurance. As a 
matter of equity and fairness, the Self-Employed Health Care 
Affordability Act, H.R. 1873, should be passed without delay.
    As a matter of equity with other retirement vehicles, the 
due date for the IRA contributions should be the same as the 
tax filing date, including extensions. Many times a sole 
proprietor does not have the cash to pay the balance due on his 
tax return, the first quarter estimated tax payment, and fund 
the IRA all at the same time.
    This simple change should be revenue neutral while 
benefiting small business and stimulate retirement savings as 
well.
    Also, small businesses are disadvantaged in the tax code 
when it comes to marketing and selling their products and 
services. Many large companies have on-site facilities suitable 
for presentations, negotiations, and meals that are fully 
deductible as an ordinary and necessary business expense.
    For the small business owner, the kitchen table or shop 
floor is unsuitable for marketing services or negotiating a 
contract, and the best alternative is usually a meeting over a 
meal at a local restaurant.
    Currently, a small business can conduct 50 percent of the 
meal cost. To me, there is no difference in utilizing a 
restaurant to provide a presentation to a client than an in-
house corporate dining facility. The restoration of full 
deductibility of restaurant meals as a business expense would 
help the restaurant industry, which is made up of mostly small 
businesses, and has been particularly hard hit over the last 
two years.
    We also feel that the increase in the expensing allowance 
under I.R.C. 179 should be made permanent. Other areas needing 
relief are that legislation should be enacted to treat 
computers and peripheral equipment in the same manner as off-
the-shelf software, ensuring cost recovery prior to 
obsolescence.
    Second, small business owners often invest large sums 
improving their store front's building, interiors or shop 
floors to remain competitive. The recovery period for leasehold 
improvements is 39 years is an unreasonable span of time.
    And the term ``luxury car'' is a misnomer in the tax code 
as the limitations are so narrow they restrict recovery of even 
modestly priced vehicles. These constraints are sorely need of 
updating.
    The last White House Conference on Small Business ranked 
worker classification as the number one issue facing small 
business. The existing rules are too complicated, confusing and 
subjective.
    Mr. Chairman, H.R. 1783 and the Senate companion bill 
introduced by Senator Bond in the 107th Congress contained 
objective criteria to determine who is not an employee. 
Included in this bill was anti-abuse language to avoid problems 
of wholesale reclassifications and legitimate employees as 
independent contractors.
    In order to encourage long-term growth within the American 
economy, providing continued small business tax reform must be 
a top congressional priority. The small businesses to continue 
to lead the economy additional tax reforms are warranted, and 
those already enacted must be made permanent to encourage jobs, 
savings and investment. Implementation of the recommendations 
previously set forth will go a long way towards these ends.
    And I thank you.
    [Mr. Quick's statement may be found in the appendix.]
    Mr. Schrock. Thank you very much.
    This is obviously a St. Louis, Missouri day because our 
next witness is Janet Poppen, who is the President of Poppen & 
Associates in St. Louis, and she is appearing before the 
Committee today on behalf of Women Impacting Public Policy. And 
I understand that Congressman Todd Akin is your congressman.
    Ms. Poppen. Yes, he is.
    Mr. Schrock. And I am going to turn it over to Todd for a 
more formal introduction.
    Mr. Akin. Thank you, Mr. Chairman.
    It is a pleasure to make the introduction. Janet, in fact, 
is President of Poppen & Associates. That is a CPA firm that 
she formed in 1995 with her son, Gavin, I believe. And Janet is 
not only a dedicated advocate of small businesses in St. Louis, 
but also nationally. She has received numerous awards for her 
efforts, including the Missouri Society of Certified Public 
Accountants Distinguished Service Award for the year 2000.
    Janet has over 25 years of experience providing financial 
and tax service. She is a member of the National Association of 
Women Business Owners and a member of the Regional Commerce and 
Growth Association Public Policy Council in St. Louis,
    And it is a pleasure, Janet, to welcome you here. Thank 
you.

 STATEMENT OF JANET K. POPPEN, WOMEN IMPACTING PUBLIC POLICY, 
       AND CEO, POPPEN & ASSOCIATES, ST. LOUIS, MISSOURI

    Ms. Poppen. Thank you, Representative Akin. I appreciate 
your introduction.
    Mr. Chairman, it is a pleasure to be here, and I am going 
to talk really fast. I want to commend what you are doing here 
today. It is so important to us, and there is a specific bill, 
H.R. 1873, it is in my testimony. It allows the self-employed 
individuals to deduct their health insurance expenses from 
self-employment tax, before the calculate self-employment tax, 
and this is so long overdue. It is an gross inequity; 15.3 
percent tax right now is paid on the health insurance premiums.
    Again, there are the inequities in the pension system and 
the deductions that are available.
    I guess our message from WIPP, Women Impacting Public 
Policy, is that fringe benefits treatment in the tax code 
should be the same no matter how you are organized. Whether you 
are a C corp, an S corp, and LLC, a partnership or a sole 
proprietorship, the amount of complexity that is in the tax 
code based on form of doing business is outrageous. You know, 
if you want to do something for small business, give us one set 
of rules and let us stick to them, and a start is 1873.
    Automobile expense is the next biggest boondoggle I think 
most of us have ever seen, and this impacts small businesses 
much more than the larger businesses, particularly in the 
automobile leasing area. The rules are again extremely complex.
    But what we want to bring to the table today is something 
that we are going to call the simplified employee benefits 
plan. The Section 125 plans that were talked about are very 
expensive in terms of administration for small businesses, and 
we would like to take this proposal using similar to a SEP 
plan. You know, the government has an SEP prototype plan.
    If there were for small businesses such a plan as the 
simplified benefits plan, we could roll those benefits--the 
child care expense that my employees have that I cannot afford 
a special 125 plan and the monthly maintenance fees for that, 
plus the--you know, long-term care insurance someone else wants 
to purchase, or any other health costs that they may have, 
their deductibles, this type of thing.
    In a larger business, they can absorb the costs of the 
various benefits administrators for all those types of plans, 
but this is plan that has not been suggested before, and we 
would like to put it before you and see if there is not 
something that you could do for small business, and our 
employees.
    We employ over a third of the people in the--a third of the 
employees belong to small businesses, and these people 
typically do not have access to these tax-deferred salary 
plans. We would like to see you do something for them, and it 
could be done fairly simply.
    We do have a benefits advisor in WIPP, and she would be 
happy to work with you on details in fleshing this out a little 
bit.
    I would also like to talk about the MSAs and the HRAs and 
the flexible spending accounts. We want to encourage you to 
allow greater contributions by both employees and employees. 
You know, one of the problems in lumping the plans together 
under the simplified benefit plan is that we have only employer 
contributions allowed. We need to have employee using a salary 
tax deferred plan as well as the employer being able to put 
tax-deductible monies into these plans for employees. It would 
certainly open the benefits field for small businesses.
    And I thank the Committee for taking its time and bringing 
us to D.C. so that we can present this to you. Again, 
Representative Akin, thank you for the kind introduction, and I 
am out of time.
    Mr. Schrock. You are and you did it right on time. That is 
great. We thank you.
    Ms. Poppen. Thank you.
    Mr. Schrock. Thank you very much for coming.
    Ms. Poppen. Thank you.
    [Ms. Poppen's statement may be found in the appendix.]
    Mr. Schrock. Now we are going to go back to the local 
folks, or when I was growing up what we called the ``townies.'' 
And we are going to start with Tom Sullivan, who is the Chief 
Counsel for Advocacy at the U.S. Small Business Administration.
    Tom is no stranger to this Committee, having appeared 
before us on several occasions during the past year and a half, 
and he will briefly review the tax benefits for small 
businesses contained in H.R. 2, the Jobs and Growth Act enacted 
into law just two months ago. He will also provide us with his 
recommendations for further assisting small business through 
the tax code.
    Maybe my colleagues can correct me here, but this is the 
third day in a row we have been with Tom Sullivan, and I think 
House rules say that he if he appears one more day, I am 
allowed to claim him as a dependent.
    [Laughter.]
    Mr. Schrock. So we are going to look into that, and if that 
is the case you belong to me after tomorrow. We are glad to 
have you here, Tom. Thanks.

 STATEMENT OF THE HONORABLE THOMAS M. SULLIVAN, CHIEF COUNSEL 
         FOR ADVOCACY, U.S. SMALL BUSINESS ASSOCIATION

    Mr. Sullivan. Thank you, Mr. Chairman. Actually, I am here 
because new rules allow for us to keep frequent flyer miles. I 
was told that if I appeared here enough that those miles will 
accumulate.
    [Laughter.]
    Mr. Schrock. He works two blocks away, so I do not know.
    Mr. Sullivan. Mr. Chairman, Congressman Velazquez, Members 
of the Committee, thank you for allowing me to testify this 
afternoon.
    The Office of Advocacy is an independent office within SBA, 
so the views expressed here do not necessarily reflect the 
views of the administration or the SBA. My statement was not 
circulated within the administration for comment or clearance.
    Advocacy promoted a number of the provisions in the 
President's jobs and growth package, and we were pleased with 
the bill's emphasis on small business. Many of the provisions 
in the law received widespread support from small business 
during congressional consideration. These provisions will have 
a significant positive impact on small business.
    First and foremost, the Jobs and Growth Act provided useful 
changes in Section 179 expense and have been long sought by 
advocacy, many of you, and the small business community.
    Section 179 has been useful for small businesses. Using 
1999 tax data, 69 percent of the businesses that elected to 
expense their purchase were sole proprietors and individual 
farmers. Expensing simplifies capital purchase and has the 
effect of reducing the cost of purchasing capital goods.
    Last night, I spoke with Paul Cunningham, who owns the 
Schreiner's Restaurant, they are a National Restaurant 
Association member in Fond du Lac, Wisconsin. Schreiner's is a 
destination restaurant where, because of its tradition of home-
cooked meals, seven different pies baked every day, reasonable 
prices and a friendly, family atmosphere, customers drive for 
hours--often making the three-hour drive from Chicago--to eat 
there.
    Paul and his general manager, Michael, told me that the 
average distance his customers travel to eat at Schreiner's is 
60 miles, and he talked about--last night when we talked, he 
talked about his long-term desire to update equipment. The 
restaurant first opened in 1938 and Paul bought the restaurant 
from Bernie and Regina Schreiner 10 years ago, and according to 
Paul, in our conversation, the Jobs and Growth Act that just 
passed two months ago comes at a perfect time because he can 
now spend the amount necessary to buy new equipment, replacing 
things that are 30 years old.
    The Office of Advocacy study on the federal regulatory 
burden in 2001 showed the tax compliance costs for small firms 
was roughly twice as much as their larger counterparts. Tax 
compliance costs are $1200 per employee for very small firms 
versus $562 for larger firms. That is a significant handicap 
for small business. Anything Congress can do to further 
simplify tax compliance would provide relief to small 
businesses from the burden of this disadvantage.
    Research by my office that goes into greater detail in my 
written statement shows that providing certainty in the tax 
code gives small businesses the confidence to make decisions 
for the long-term viability and growth. Giving small business 
the ability to invest with confidence in their future is good 
for business and good for our economy.
    The specific recommendations that are in great detail in my 
written statement are making increased expensing permanent, 
permanently repealing the death tax and repealing the 
alternative minimum tax.
    I do apologize to the Committee that the example I used of 
Schreiner's Restaurant was not in my written statement. I was 
not able to reach Paul, the owner, until last night which was 
after the deadline to submit it to the Committee.
    Thank you.
    [Mr. Sullivan's statement may be found in the appendix.]
    Mr. Schrock. Next time bring him with his pies. That would 
be most welcome, believe me.
    [Laughter.]
    Mr. Schrock. Our next witness this afternoon is--is it Nina 
or Nina?
    Ms. Olson. Nina.
    Mr. Schrock. Nina. I had an Aunt Nina, so I thought I had 
better ask. And since I am only the Subcommittee Chair, I will 
do as you wish.
    Ms. Olson. Thank you, sir.
    Mr. Schrock. Ms. Olson is the National Taxpayer Advocate at 
the IRS, and as the National Taxpayer Advocate Ms. Olson serves 
as an advocate for taxpayers to the IRS and Congress. A number 
of the recommendations included in past national tax payer 
advocate reports to the Congress concern small businesses, and 
we look forward to hearing your recommendations for assisting 
small business through a very cumbersome tax code. Thank you.

  STATEMENT OF THE HONORABLE NINA E. OLSON, NATIONAL TAXPAYER 
               ADVOCATE, INTERNAL REVENUE SERVICE

    Ms. Olson. Thank you, Mr. Chairman, for inviting me here 
today.
    As you know, each December the National Taxpayer Advocate 
submits a report directly to Congress in which I identify the 
20 most serious problems facing taxpayers and make 
administrative and legislative recommendation to mitigate those 
problems.
    One of our recommendations addresses a common problem 
facing a husband and wife who co-own an unincorporated 
business, such as a family farm. Under current tax law, this 
couple must file a partnership return for the business which 
can require very complex recordkeeping and reporting.
    In practice, most of these businesses take a short cut. The 
file a single sole proprietorship schedule reporting all income 
to one spouse. Unfortunately, this results in only one spouse 
accruing social security quarters and being eligible for Social 
Security, disability, survivor or Medicare benefits. This 
disparity can have devastating effects on the small business of 
the ineligible spouse is disabled or dies. The couple does not 
have the income to replace that spouse's labor.
    We propose that married couple who co-own and operate an 
unincorporated business be permitted to file a single sole 
proprietorship or farm schedule, and then allocate the profit 
or loss between them. That way each can pay self-employment tax 
on his or her share.
    Because this election would be only available to couples 
who file joint income tax returns, it will not affect the 
amount of income tax due, and for most taxpayers it should have 
no impact on the amount of self-employment tax payable since 
the vast majority of these businesses report income below the 
social security wage cap.
    We believe this proposal is a win/win situation. It 
simplifies the tax laws, reduces burden on small taxpayers, it 
eliminates an area of noncompliance that is completely 
inadvertent, and helps protect small businesses from 
potentially devastating losses.
    We are pleased that the House of Representatives passed 
this proposal as part of H.R. 1528 in mid-June of this year.
    Our other proposals for what I call tax sanity for small 
business take the same common sense approach. For example, we 
believe that the current due date for electing subchapter S 
corporation status is counterintuitive and leads to taxpayer 
confusion and missed deadlines.
    Our proposal aligns the active making the S election with a 
significant due date of filing the first corporate income tax 
return, and thus significantly reduces the changes of botching 
the election.
    Other proposals include permitting self-employed 
individuals to deduct the cost of health insurance in computing 
the net earnings of a sole proprietor from self-employment, 
creating a de minimis threshold for applying passive loss 
limitations, permitting income averaging for commercial 
fishermen to the same extent it is available to farmers under 
current law, repealing the AMT, and my personal favorite, the 
one-time stupid act penalty waiver for the failure to pay and 
failure to file penalties when the taxpayer is a first-time 
filer or has a history of compliance.
    My office is open to suggestions for improving the tax 
system. We now have an e-mail address available at our web page 
at IRS.gov for taxpayers, including members of Congress, to 
submit proposals to improve the tax system.
    Thank you for the opportunity to appear here today to 
discuss these recommendations. I am please to answer any 
questions you may have.
    [Ms. Olson's statement may be found in the appendix.]
    Mr. Schrock. Where have you been all my life?
    [Laughter.]
    Mr. Schrock. Gosh, a lot of people at the panel at the 
table were shaking their heads yes, so obviously you struck a 
responsive cord there. Thank you very much.
    Our next witness is Dan Mastromarco who recently authored a 
lengthy study for the National Small Business Association on 
the unequal treatment in the tax code between large and small 
businesses, and we are very much looking forward to having you 
summarize the findings of what I am told is a very fascinating 
study.
    Thank you for being here.

  STATEMENT OF DAN R. MASTROMARCO, PRINCIPAL, THE ARGUS GROUP

    Mr. Mastromarco. Thank you. As you know, I authored the 
study. I will try to keep this to four minutes because I know 
that following somebody by the name of Quick and WIPP, you 
know, helps keep your attention focused on that.
    But let me ask just one small favor. I believe the 
Committee hearing could more properly be named ``Removing 
Penalties Against Small Businesses.'' Because if one were to 
review the debates over the 10,000 code sections in the code, 
one would find that each was haled as a victory by its 
sponsors.
    But in the 90 years since Teddy Roosevelt filed his two-
page return tax rules span 40,000 pages of interminable 
sentence of very small type that when strung together occupy 
five volumes of translucently thin paper that requires a lawyer 
with an exceptionally high tolerance for boredom to read.
    Albert Einstein said preparing his return was too difficult 
for a mathematician. It takes a philosopher.
    [Laughter.]
    Yet the code grows. The greatest assistance, Mr. Chairman, 
you can provide is repeal the misguided assistance of the past 
100 congresses.
    Free market economists----.
    Mr. Schrock. We may be good, but we are not that good.
    [Laughter.]
    Mr. Mastromarco [continuing]. Should have but one 
directive. This is the directive: Inflict the least amount of 
harm.
    Now, I will leave the reflections of past successes to 
others, only to say really that the Jobs and Growth Act begins 
the very long process of removing penalties that I refer to in 
my study. Rather than listing all the inequities in the study, 
causing the panel to miss the next vote, probably the rest of 
the legislative year, I will mention just a few.
    Consider the dysfunctional operation of the 
nondiscrimination rules. Who could be against 
nondiscrimination? It's kind of like the Patriot Act. Everybody 
should be for it. But consider, for example, that Code Section 
79 provides an employee may exclude group life insurance from 
income. That is worth a lot. $50,000, that is worth if you 
qualify. However, 85 percent of the plan participants--this the 
law--must be other than key employees, which are employees who 
own at least five percent of the employer.
    Well, I have got a simplification proposal for the code. 
Why not just take Section 79 and rewrite it to say that small 
firms cannot provide life insurance until they have at least 10 
employees, because that is precisely what that proposal says. 
And it also says that cafeteria plans, dependent care 
assistance plans, educational plans are not available if you 
own two percent of the business.
    Well, one might ask with all these nondiscrimination rules 
who is being discriminated against? In this case, it is small 
firms subsidizing tax breaks for their large firm competitors.
    Let me skip to my recommendations, and I offer several 
suggestions.
    First, introduce a small business penalty relief act. Few 
elected officials pass up the opportunity to criticize the 
Internal Revenue Service, even though they are simply a 
bureaucracy to implement the rules that Congress has passed. 
The key to assisting small firms is to help tax writers see a 
small business penalty relief act as a way of transforming 
their rhetoric into action.
    Second, look towards a systemic solution. One idea would be 
to pass a law requiring members of Congress to actually own a 
small business for five years. I am not sure that you would do 
that.
    Mr. Schrock. Stepping over the line a little bit.
    [Laughter.]
    Mr. Mastromarco. Well, another probably less problematic 
suggestion might be to require Finance Ways and Means Committee 
members to actually file their own tax returns.
    But barring that, another way of doing it would be to 
require the Joint Tax Committee, when they provide the revenue 
estimates, to analyze the distribution of those benefits by the 
size of firm.
    And lastly, I will just add this because I am over my time, 
consider fundamental tax reform. Look to fundamental tax 
reform, and analyze it. Do not reject it because it is 
politically risky. Consider the effects of what it would do to 
for small business because, in my view, the income tax will 
only be truly simplified when it resides in a paragraph in an 
American tax book on history.
    [Mr. Mastromarco's statement may be found in the appendix.]
    Mr. Schrock. Thank you very much.
    Well, our last witness, certainly not the least, you have 
sat in the middle. You probably thought you would be done by 
now I am sure, is Dena Battle, the Manager of Legislative 
Affairs for the NFIB, the National Federation of Independent 
Business, and the nation's largest small business group.
    Ms. Battle is no stranger to this Committee, and we are 
looking forward to hearing what she has to tell us for tax 
priorities for small business advocated by NFIB.
    Thanks for coming.

   STATEMENT OF DENA BATTLE, MANAGER OF LEGISLATIVE AFFAIRS, 
          NATIONAL FEDERATION OF INDEPENDENT BUSINESS

    Ms. Battle. Thank you very much. Thank you, Mr. Chairman, 
Distinguished Members of the Committee, I am happy to be here 
testifying on behalf of NFIB.
    I would like to highlight a few of the improvements that 
NFIB would like to see made in the tax code.
    First and foremost, we would like to see finishing the job 
of providing full deductibility of health care costs for the 
self-employed. We are part of a coalition that is advocating on 
behalf of H.R. 1873, the Self-Employed Health Care 
Affordability Act sponsored by Chairman Manzullo, and I would 
just echo what has already been said; that the self-employed 
should not have to pay----.
    Ms. Velazquez. Excuse me. And Congresswoman Velazquez.
    Ms. Battle. I am very sorry.
    Ms. Velazquez. Thank you.
    Ms. Battle. Absolutely, and thank you for your work on 
behalf of that legislation.
    And I would just say that self-employed should not have to 
pay Medicare and FICA taxes on health care costs.
    The second change to the tax code that Congress should make 
is establishing a standard home office deduction. If a small 
business owner rents space in an office building, then the 
owner simply deducts the rent and utilities from their taxes. 
However, if the small business owner has an office in their own 
home, the process is much more complicated.
    In the case of a home-based office, the small business 
owner has to depreciate the actual room in their home. Because 
of the complicated process, many business owners never take 
these legitimate deductions.
    The third change to the tax code that we believe would 
dramatically impact small business owners is updating 
automobile expensing. Many of you might have heard during the 
recent debate on the tax plan the SUV loophole.
    Congress never intended to create an incentive for small 
business owners to buy larger cars. However, changes in the tax 
code sometimes come with unintended consequences.
    Under the current law small business owners are allowed to 
expense up to $100,000 of equipment in a taxable year. However, 
Congress does not allow small business owners to expense 
automobiles. There is one notable exception. Congress did allow 
for the expensing of vehicles that were over 6,000 pounds for 
farmers and construction equipment. Cars or vehicles under 
6,000 pounds still have to be depreciated.
    Not only are small business owners required to depreciate 
vehicles under 6,000 pounds, Congress also decided to impose 
further limitations to prevent the purchase of luxury vehicles. 
This might seem reasonable until you realize that Congress 
defines a luxury vehicle as any car over $15,300. The result of 
this law is that there is a disincentive in the tax code for 
small business owners to buy cars under 6,000 pounds. The NFIB 
believes that Congress should allow all vehicles regardless of 
weight to be expensed.
    These are just a few examples of tax code improvements that 
would have a significant impact on small businesses. There is 
still much work that needs to be done. Our members are 
constantly frustrated with the complexity of our tax code, and 
they pay millions of dollars annually for accountants and tax 
advisers. More and more of them face the nightmare of the 
alternative minimum tax every year, and they are still paying 
costly fees to attorneys and accountants to avoid losing their 
business to the death tax.
    But this hearing is a sign of the progress being made. Mr. 
Chairman, Members of the Committee, Ranking Member Velazquez, 
thank you for your efforts on behalf of small businesses.
    [Ms. Battle's statement may be found in the appendix.]
    Mr. Schrock. Thank you very much, and thank you all for 
being here and for your statements today.
    And yes, we do mean business, and you have the main 
Chairman--who says Pitrone instead of Pitrone--who is very keen 
on solving some of these problems, and I think there are many 
members on this Committee on both sides of the aisle who want 
very much to fix this problem. It is a huge problem and it 
needs to be fixed.
    I would like all of you to prioritize your recommendations, 
and in your opinion what is the single most important 
initiative for assisting small business owners through the tax 
code, the one thing that you think would help the most?
    We will start with Mr. Pitrone.
    Mr. Pitrone. I would have to say the parity for pension 
plans would be a big benefit for small businesses.
    Mr. Schrock. Mr. Quick.
    Mr. Quick. Mr. Chairman, I would say the ability to make 
the health insurance premiums deductible for self-employed 
from--eliminate them from payroll tax.
    Mr. Schrock. Ms. Poppen.
    Ms. Poppen. I would say the simplified benefits plan would 
be our priority.
    Mr. Schrock. Tom, do you have any thoughts on that?
    Mr. Sullivan. yes, I would agree with Congresswoman 
Velazquez, and urge for permanence, permanence in the types of 
deductions that are available under the Jobs and Growth Act.
    Mr. Schrock. Okay. Ms. Olson.
    Ms. Olson. I would say clarification of the worker 
classification rules.
    Mr. Schrock. Mr. Mastromarco.
    Mr. Mastromarco. All of the above.
    Mr. Schrock. All of the above. You are too politically 
correct, are you not?
    Ms. Battle?
    Ms. Battle. It seems to me that many of the issues that 
were brought up today are merely examples of simplifying the 
code.
    Mr. Schrock. Yes.
    Ms. Battle. And making the tax code simpler for small 
businesses is really what we need to do.
    Mr. Schrock. Okay. I think in the interest of time I am 
going to defer to Ms. Velazquez and see if she has any 
comments.
    Ms. Velazquez. Sure. I want to thank all the witnesses. 
This is an important hearing that will help us, well, discuss 
and work hard to make sure that those issues that are important 
to small businesses will--that we here in Congress and the 
White House, also the administration will pay the kind of 
attention that we put into some other issues, because I have to 
tell you that when it comes to promoting economic recovery in 
our nation and having the opportunity to pass a tax cut that 
was supposed to create and stimulate the economy, what I saw 
out of the $350 billion tax cut that we passed was that big 
businesses were the winner.
    And so that is my first question, and it will go to Mr. 
Sullivan. As part of the President's small business agenda, he 
promised small businesses that he will provide them with a 
permanent tax relief that they needed. And one of the things 
that he promised was increased expensing. And while the 2003 
tax cut did increase the expensing limit, the administration 
and the Republican leadership decided to sunset this provision 
in 2005, to make room for the dividend tax cut.
    So I am interested to see what is your opinion about that. 
I know that you said that that is one of the issues that we 
should make--you know, that you agree with me.
    Mr. Sullivan. I agree with you in making the provision 
permanent. I disagree with you that the President's small 
business agenda implementation has been opposite of his March 
statement in 2002.
    Ms. Velazquez. Well, you know, last year the President 
released his small business agenda in March. A year and a half 
later we could go throughout the five important items that he 
put into that agenda, and I could tell you that none of those 
items has been addressed.
    But I would like to hear from NFIB because I know that you 
were quite active in making sure that small businesses were not 
left behind, out of the $350 billion, and you are outraged that 
instead of giving small businesses a permanent relief on 
expensing, that at the end it was sunsetted.
    Ms. Battle. Well, we certainly were very happy when the 
President initially put out his plan that called for a 
permanent Section 179 increases. And we would have liked to see 
that pass through Congress.
    We are sort of used to taxes sometimes sunsetting in 
Congress. It happens because of rules in the Senate.
    Ms. Velazquez. Especially for small businesses.
    Ms. Battle. Well, that has certainly been the case with tax 
repeal and also with Section 179, and with other things. But 
ultimately we do feel that what passed in H.R. 2 will be very 
beneficial to our members. The accelerated rate cuts were a top 
priority for our members, and we are very hopeful that the 
Section 179 expensing limits will be made permanent by 
Congress.
    Ms. Velazquez. I love your optimism.
    I have a question for Mr. Mastromarco. I am an original co-
sponsor of H.R. 1873, the Self-Employed Health Care 
Affordability Act of 2003. This bill is designed to remedy only 
one of the many inequities in the tax code as described in Mr. 
Mastromarco's report that unfairly impact the self-employed and 
small businesses.
    Although those solutions seem simple enough, my question is 
this. How did this inequity ever make its way into the tax code 
as well as many of the other provisions mentioned in your 
report?
    Mr. Mastromarco. It is a good question, Congresswoman. My 
view is that they made it in there, and I do not want to answer 
this in a philosophical way, but it is important to understand, 
because in many cases in tax policy debates the interests of 
small business are just after thoughts, and that was the reason 
for my view and recommendation that the Committee really look 
to speak with Chairman Thomas and others about systemic 
solutions to the problem.
    For example, go right into the Committee, that tax writing 
Committees and ask the Joint Tax Committee to analyze the 
disproportionate distribution of tax expenditures that exist.
    For example, you will find that the R&E tax cut is taken by 
the nation's largest pharmaceuticals, although the light bulb, 
the six-axis robot arm, the large capacity computer, the 
personal computer, and just about any innovation that we 
cherish today was invented by small firms.
    Ms. Velazquez. Thank you. My time is up.
    Who is in charge?
    Mr. Beauprez. [Presiding] Mr. Akin.
    Mr. Akin. Thank you. I would just like to just thank the 
entire panel. We see a lot of panels of witnesses and I do not 
think that I have ever seen a big a one as you are and yet 
people being more specific and very helpful in your comments. I 
just wish that somehow I could wave a wand and let you go to 
work on the tax code and see what you could come up with. I 
think together you would come up with good stuff, and probably 
a lot of simplification.
    Some of the bills you have made reference to, we have 
passed out of the House. We have some difficulty getting them 
through the whole process, but certainly the couple that you 
have mentioned we have gotten through the House. But thank you 
all for coming. Thank you.
    Mr. Beauprez. Thank you, Mr. Akin.
    I am not really sure who I want to direct this question to, 
but I guess I will ask a general question, and see who has got 
an answer.
    Does anybody among the panel have an estimate of the cost 
of--you have all talked about the complexity of the tax code. 
Anybody got an idea of what especially business pays to comply 
with tax?
    Mr. Mastromarco. There are many estimates out there, and 
they range anywhere from $100 billion, from Joel Slemrod at the 
University of Michigan, all the way to $400 billion on the top 
end. If you take the estimate somewhere in the middle, it's 
going to about 250 billion or so, the median estimate for the 
entire compliance costs.
    But it is important to understand, Mr. Chairman, that 
compliance costs are fixed costs. That is, when small 
businesses incur them, they cost more per employee in small 
firms, more than they do in large firms. So when you have an 
economy that contains many small firms, vertically integrated 
businesses have a great advantage because compliance costs 
cascade from one business to the next.
    Mr. Beauprez. Yes, I am somewhat familiar with that. I am 
actually one of the members of both Congress and this Committee 
that has run a small business before, so I am quite familiar 
with that.
    Mr. Mastromarco. So you like my legislative idea?
    Mr. Beauprez. Well, I would perhaps go--it is attractive.
    Mr. Mastromarco. You would increase it to 10 years.
    Mr. Beauprez. Let me follow that line of thinking so I do 
not spend the entire afternoon here.
    How many businesses, roughly, out there in America that are 
burdened with this quarter of a trillion dollars?
    Mr. Mastromarco. Well, depending on who you ask--and that 
is because there are establishments and others----.
    Mr. Beauprez. Sure. Wild guess.
    Mr. Mastromarco. And Tom would probably answer that 
question better----
    Mr. Sullivan. There are approximately 23 million----
    Mr. Mastromarco [continuing]. But, about 23 million----.
    Mr. Sullivan [continuing]. Small businesses.
    Mr. Beauprez. Okay, so we have got 23 and a half million 
small businesses expending somewhere around $250 billion a year 
to comply with the tax code that we wrote, and before I came to 
Congress, frankly, still after I came to Congress, I consider 
that essentially tax. It is an expense imposed on businesses by 
the government, cost of compliance.
    One question, and then I have got another one to follow up 
with you, why do we not maybe consider a deduction for that 
burden that we have imposed on them?
    Mr. Mastromarco. I think that is a very good idea. If you 
look at some of the fundamental tax reform ideas, for example, 
the fair tax, national sales tax plan, that is exactly what 
they do.
    Mr. Beauprez. What is the fatal flaw? There is a couple, is 
there something that is unfair or inappropriate or?
    Ms. Poppen. Well, in terms of tax compliance at the 
individual level, the cost of tax compliance is subject to the 
two percent of adjusted gross income flow before it is 
deductible. And so that would hit the small entrepreneur.
    However, as a business expense, it is 100 percent 
deductible, so in effect what you are charging them to comply 
they are deducting for the most part.
    Mr. Beauprez. Deducting the direct expense.
    Ms. Poppen. Direct expense from business income.
    Mr. Beauprez. But still there is a marginal--the marginal 
effect of that.
    Ms. Poppen. There could be a marginal effect when it is 
reported at the individual level.
    Mr. Beauprez. Right.
    Ms. Poppen. And the expenses taken there.
    Mr. Beauprez. Mr. Pitrone?
    Mr. Pitrone. I think that that is not the whole picture. I 
for one, I deduct the cost of taking my taxes to an accountant 
for preparing, but I have, you know, probably close to 100 
hours in the course of a year that I am doing other things that 
go into being able to deliver----.
    Mr. Beauprez. Yes, the last small business I ran, and my 
wife runs, a little community bank, we had a whole department 
that took care of stuff for the taxman; you know, a fairly 
significant expense. And another one that we have not even 
talked about is regulation, but we will do that another time.
    Ms. Olson. Sir, the----
    Mr. Beauprez. Go ahead.
    Ms. Olson [continuing]. Fatal flaw in that is that if you 
allow that for small businesses, as the taxpayer advocate I 
would say you would need to allow that for individuals when you 
look at the paperwork----.
    Mr. Beauprez. And that would be okay with me too.
    Ms. Olson. Okay. All right. You know, just figuring out 
whether a child is your dependent----
    Mr. Beauprez. You bet.
    Ms. Olson [continuing]. Or entitled to head of household 
deduction or whatever you----.
    Mr. Beauprez. Which leads me to the place I really want to 
go. You have all kind of talked around the complexity and I 
think we all accept that. It is nightmarish on this side of the 
tax code or that side of the tax code. I think we would all 
concur.
    Other than Mr. Mastromarco, have I pronounced it right?
    Mr. Mastromarco. That is correct.
    Mr. Beauprez. I did not hear anybody talk about kind of the 
mega tax reform. There is two proposals out there; the so-
called fair tax, which is really a national sales tax and a 
flat tax. And since my red light is on, if you have got an 
opinion on that, I would be very curious as to what it might 
be, and why do we not just go from my left to right real 
quickly.
    Ms. Poppen. I am not familiar with the fair proposal, but 
the flat tax proposal still lacks some equity, and there would 
still be the requisite amount of recordkeeping necessary. So I 
do not see that it is a big savings, and perhaps some of the 
other benefits in the tax code such as home ownership and so 
forth would be--you know, the mortgage interest deduction, that 
kind of thing--yes, go around.
    Mr. Beauprez. Let us go real quickly if we could because I 
do not want to monopolize.
    Mr. Quick. Okay, on the flat tax or the fair tax, you have 
to be very careful of unintended consequences because our whole 
country's economic system is based on the current tax code. And 
if you start telling people they cannot deduct their charitable 
contributions, how is that going to affect not-for-profit 
agencies?
    You still have the same amount of recordkeeping no matter 
what kind of tax you have.
    Mr. Pitrone. National Small Business Association has 
formally endorsed the fair tax, and I personally endorse the 
fair tax, and have worked to get the Ohio Chamber of Commerce 
to endorse it.
    Mr. Beauprez. Okay.
    Ms. Battle. Our members certainly support tax 
simplification, but if you poll them on the methodology of it, 
they are definitely split, so I think the jury is still out, 
but we support overall tax simplification.
    Mr. Beauprez. Okay. Mr. Mastromarco?
    Mr. Mastromarco. You know, perhaps there could be another 
hearing at this Committee, and a good one, but there are many 
groups, including NSBA, state groups, American Farm Bureau and 
others that support the fair tax, but nothing really could be 
simpler than having small business pay zero tax and individuals 
file absolutely no returns and exempting purchases up to the 
poverty line, which makes it the fair tax.
    So as a tax lawyer practicing for 15 years, I have come to 
the conclusion that the only way the system can be resurrected, 
and by the way, the economy is not based on the income tax, it 
is based on entrepreneurship and business, is to eliminate 
entirely the income tax from the face of this planet.
    Mr. Beauprez. You are so subtle.
    [Laughter.]
    Mr. Beauprez. Ms. Olson.
    Ms. Olson. Well, I get to dodge this because I am very 
practical, and no matter what tax system you enact I will have 
a job solving taxpayer problems.
    [Laughter.]
    Mr. Beauprez. What a nice dodge.
    Mr. Sullivan.
    Mr. Sullivan. Mr. Chairman, actually, the Office of 
Advocacy is unique in the federal government in that we serve 
as a channel for small business views up to the President and 
to Congress, and so when Ms. Battle puts it the jury is still 
out, we would try to work with the Committee and work with 
small business groups to get more of a definitive finding, and 
then we will pursue it aggressively.
    Mr. Beauprez. I would encourage you to continue to pursue 
it because it is at least my opinion that all of the 
suggestions that you have raised, which I think have merit, 
differing degrees of merit perhaps, but merit, kind of 
underscore how we got where we are. We nibble here, and we poke 
there, and the tax code continues to morph and create job 
security for some people, but tremendous expense, confusion, 
and complexity for others. And you said serious reform, that is 
where we are at.
    Ms. Majette.
    Ms. Majette. Thank you, Mr. Chairman, and thank all of you 
for being here today.
    I would certainly agree with you that it would be very 
helpful if we had more members of Congress who have been small 
business owners. I happen to be one of those, although I did 
not do it for five years, but at least for three, and my 
husband continues to be a small business owner, but it 
certainly has given me a very different perspective than the 
one I had before I had that experience.
    And I would also agree with all of you that the tax code 
does need to be simplified, and certainly perhaps we will be 
able to have another hearing on that issue.
    I do have a couple of questions, one for Mr. Quick. You 
talked about the increasing the amounts that small businesses 
can deduct for meals and expenses, entertainment expenses, and 
that whole issue does come up against some opposition.
    Is there a way that you think that we can increase the 
percentage that businesses can deduct for those expenses but 
prevent the kind of fraud and abuse that sometimes is raised in 
the context of giving that kind of a deduction?
    Mr. Quick. Well, I feel that there is a lot of rhetoric on 
that subject, but people raised the objection of the three 
martini lunch talking about fraud.
    To me, any small business owner that has a three-martini 
lunch will not have a small business for long.
    [Laughter.]
    Mr. Quick. I personally feel that small businesses' 
marketing expenses over a meal are no different than a 
corporate dining room, and I am from St. Louis and Anheuser-
Busch billboard along the highway.
    Ms. Majette. All right.
    Mr. Beauprez. We have got 15 minutes, so if you want to 
continue, go right ahead.
    Ms. Majette. All right. Thank you for that.
    And on the issue of the expensing provision, I think it is 
a little bit frustrating that we did have some adjustments made 
but that that is not a permanent situation. I think that makes 
it difficult for businesses to plan.
    What do you see as being a way that we can address that 
issue, and are there particular industries or companies or 
businesses that you think would gain the most from having a 
permanent increase in the expensing levels?
    Mr. Quick. All small business will benefit from the 
permanent increase in the expensing levels. What they need is 
the ability to plan so that they can have certainty when they 
hire people, create jobs, invest in equipment which in turn 
creates more jobs, I think, across the board. I do not think 
there is any specific industry. Your technology industries and 
your small manufacturers probably would benefit the most from 
it, but all small business buys equipment. Thank you.
    Ms. Majette. Thank you.
    And with respect to the worker classification, Ms. Poppen, 
you had address that issue, what do you think--if we can get 
some of that done, some of that reclassification done, where do 
you think we could focus those efforts so that we maximize the 
benefit of that?
    Ms. Poppen. There was a bill that did not make it out of 
the Senate last year. It had a more objective standard to it. 
And I think the viewpoint is when small businesses pair up to 
do something, whether those are individual, sole 
proprietorships, or two partnerships or two S corporations to 
accomplish a contract, we end up in a position where we are 
trying to blend those two companies into one, one must employ 
the other, and this is a problem when it comes to the small, 
particularly technology businesses where they may have one or 
two employees in a particular thing pairing with another, 
technology business, and one of them has to become an employee, 
and this is not right because then we are dealing about benefit 
plans, and we are taking everything away from those two 
individual companies that they have developed, and forcing them 
into one hat, if you will.
    So that is why we need to get some good objective 
definition so that these pairing arrangements can happen; that 
someone can work for me five days or three days, and someone 
else two days, that kind of thing. And it gets lost in the 
whole big business kind of concept, you know, where there have 
been abuses in the past.
    Ms. Majette. Thank you. I see my time is up. Thank you.
    Mr. Beauprez. Ms. Velazquez, do you want to recognize the 
group that just entered the room? I think you know them.
    Ms. Velazquez. Sure. These are students from my district, 
lower Manhattan, and I want to thank them for being here today. 
They are asking for the administration not to eliminate 
resources for youth program, and that is the only way that we 
can keep crime down in our nation. So I want to thank them for 
being here.
    [Applause.]
    Mr. Beauprez. I want to thank all the panelists. I think 
this too has been an exceptional panel, and you participated 
with us or cooperated with us in getting a good hearing in, in 
between our calls to vote. And you just heard what the Chairman 
refers to as the bells of tyranny go off, so we will be on our 
way.
    I will declare this hearing adjourned. Thank you very much 
for you input.
    [Whereupon, at 4:17 p.m., the Committee was adjourned.]

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