[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
                       FULL COMMITTEE HEARING ON


                       MODERNIZING THE TAX CODE:


                     UPDATING THE INTERNAL REVENUE


                     CODE TO HELP SMALL BUSINESSES


                         STIMULATE THE ECONOMY

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

                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 10, 2008

                               __________

                          Serial Number 110-83

                               __________

         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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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman


HEATH SHULER, North Carolina         STEVE CHABOT, Ohio, Ranking Member
CHARLIE GONZALEZ, Texas              ROSCOE BARTLETT, Maryland
RICK LARSEN, Washington              SAM GRAVES, Missouri
RAUL GRIJALVA, Arizona               TODD AKIN, Missouri
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois               MARILYN MUSGRAVE, Colorado
HENRY CUELLAR, Texas                 STEVE KING, Iowa
DAN LIPINSKI, Illinois               JEFF FORTENBERRY, Nebraska
GWEN MOORE, Wisconsin                LYNN WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania          LOUIE GOHMERT, Texas
BRUCE BRALEY, Iowa                   DAVID DAVIS, Tennessee
YVETTE CLARKE, New York              MARY FALLIN, Oklahoma
BRAD ELLSWORTH, Indiana              VERN BUCHANAN, Florida
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
BRIAN HIGGINS, New York
MAZIE HIRONO, Hawaii

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                         STANDING SUBCOMMITTEES

                    Subcommittee on Finance and Tax

                   MELISSA BEAN, Illinois, Chairwoman


RAUL GRIJALVA, Arizona               VERN BUCHANAN, Florida, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania

                                 ______

               Subcommittee on Contracting and Technology

                      BRUCE BRALEY, IOWA, Chairman


HENRY CUELLAR, Texas                 DAVID DAVIS, Tennessee, Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              SAM GRAVES, Missouri
JOE SESTAK, Pennsylvania             TODD AKIN, Missouri
                                     MARY FALLIN, Oklahoma

        .........................................................

                                  (ii)



           Subcommittee on Regulations, Health Care and Trade

                   CHARLES GONZALEZ, Texas, Chairman


RICK LARSEN, Washington              LYNN WESTMORELAND, Georgia, 
DAN LIPINSKI, Illinois               Ranking
MELISSA BEAN, Illinois               BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin                STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania          MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania             MARY FALLIN, Oklahoma
                                     VERN BUCHANAN, Florida

                                 ______

            Subcommittee on Urban and Rural Entrepreneurship

                 HEATH SHULER, North Carolina, Chairman


RICK LARSEN, Washington              JEFF FORTENBERRY, Nebraska, 
MICHAEL MICHAUD, Maine               Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana              DAVID DAVIS, Tennessee
HANK JOHNSON, Georgia

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


CHARLIE GONZALEZ, Texas              MARY FALLIN, Oklahoma, Ranking
RAUL GRIJALVA, Arizona               LYNN WESTMORELAND, Georgia

                                 (iii)




                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Velazquez, Hon. Nydia M..........................................     1
Chabot, Hon. Steve...............................................     2

                               WITNESSES


PANEL I:
Mackey, Mr. Scott, Economist/Partner, Kimbell Sherman Ellis, LLP, 
  Montpelier, VT, On behalf of CTIA - The Wireless Association...     4
Hoops, Mr. Jeffrey R., Ernst & Young LLP, New York, NY, On behalf 
  of the American Institute of Certified Public Accountants......     6
Lyon, Dr. Andrew B., Principal, National Tax Services NTS, 
  PricewaterhouseCoopers, LLP, Washington, DC....................     8
Rosenthal, Mr. Fredrick, President, Jasper's Restaurants, 
  Beltsville, MD, On behalf of the National Restaurant 
  Association....................................................     9
Greenblatt, Mr. Drew, President, Marlin Steel Wire Products, 
  Baltimore, MD, On behalf of the National Association of 
  Manufacturers..................................................    11

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    30
Chabot, Hon. Steve...............................................    32
Altmire, Rep. Jason..............................................    33
Mackey, Mr. Scott, Economist/Partner, Kimbell Sherman Ellis, LLP, 
  Montpelier, VT, On behalf of CTIA - The Wireless Association...    34
Hoops, Mr. Jeffrey R., Ernst & Young LLP, New York, NY, On behalf 
  of the American Institute of Certified Public Accountants......    39
Lyon, Dr. Andrew B., Principal, National Tax Services NTS, 
  PricewaterhouseCoopers, LLP, Washington, DC....................    49
Rosenthal, Mr. Fredrick, President, Jasper's Restaurants, 
  Beltsville, MD, On behalf of the National Restaurant 
  Association....................................................    61
Greenblatt, Mr. Drew, President, Marlin Steel Wire Products, 
  Baltimore, MD, On behalf of the National Association of 
  Manufacturers..................................................    72

Statements for the Record:
The Telework Coalition...........................................    76

                                  (v)



                 FULL COMMITTEE HEARING ON MODERNIZING


                  THE TAX CODE: UPDATING THE INTERNAL


                 REVENUE CODE TO HELP SMALL BUSINESSES


                         STIMULATE THE ECONOMY

                              ----------                              


                        Thursday, April 10, 2008

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in Room 
1539 Longworth House Office Building, Hon. Nydia Velazquez 
[chairman of the Committee] presiding.
    Present: Representatives Velazquez, Hirono, Chabot, Akin, 
Fortenberry, Davis, Fallin, and Buchanan.

           OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    Chairwoman Velazquez. Good morning, everyone. I now call 
this hearing to order on updating the Internal Revenue Code to 
help small businesses stimulate the economy.
    As we approach April 15th, millions of Americans are 
preparing to make the tax filing deadline. Individuals and 
businesses are busy working through tax forms and schedules to 
determine what they owe the IRS.
    For entrepreneurs, however, the tax code has become an 
obstacle to success rather than a means of encouraging 
expansion of their firms. Today's hearing will look at ways 
U.S. tax policy can be improved to provide immediate relief for 
these leaders of U.S. economic activity.
    While the most recent economic stimulus package was focused 
on rebate checks which aimed to boost consumer spending, more 
can and must be done to foster sustainable economic growth. The 
tax code is often used to influence and encourage individual 
and business decisions. In fact, the Internal Revenue Code is 
filled with numerous preferences, deductions, credits or 
favorable tax rates that boost investment, savings for 
retirement, and home ownership.
    However, in numerous ways the tax code is stacked against 
the average small business owner. Despite a number of changes 
in the past ten years, there continue to be an abundance of 
inequities and unnecessary complexities in our tax laws.
    While fundamental reform may be years away, there is an 
opportunity to modernize some of the more antiquated provision 
which raise major obstacles and are particularly harmful to 
entrepreneurs.
    Today's hearing will focus on those aspects of the tax code 
that can and should be updated or simplified without delay. In 
conjunction with this hearing, the Committee will also release 
a report outlining those reforms that will aid small businesses 
during the economic downturn and put us on the path to 
recovery.
    In its review of this nation's tax laws and their impact on 
entrepreneurs, the Committee found that a number of provisions 
failed to adequately reflect the changing economy. Tax policies 
simply have not kept up with the shift to a service-based 
economy and lack adequate recognition of the role technology 
plays.
    Furthermore, home-based businesses are unnecessarily 
hampered by paperwork burdens and depreciation schedules that 
do not reflect the realities of the equipment and buildings 
that are part of today's small companies.
    Last but not least, there are provisions in existing law 
that shift investment away from small firms. The report 
outlines reform for each of these problems, while reflecting a 
need to update the tax code to spur innovation and growth.
    Given that the last major reform of the tax code took place 
in 1986, it is clear these changes are long overdue.
    Today we will hear from business owners who can provide us 
with additional insights into how the tax code is affecting 
this important sector of the economy. From what we already 
know, the facts are not encouraging. While small firms are 
America's job creators, just last week we learned that 80,000 
more jobs were lost in March. We must take action to stop these 
trends and instead of losing jobs make sure we are creating 
them.
    I believe there exists an opportunity to implement some 
reforms immediately. Doing so will have immediate benefits for 
small businesses. It will also insure the nation's long-term 
economic growth.
    I would like to thank all of the witnesses for testifying 
today, and I now yield to the Ranking Member for his opening 
statement.

                OPENING STATEMENT OF MR. CHABOT

    Mr. Chabot. I thank the Chairwoman for yielding, and good 
morning to everyone. I thank you all for being here as we 
examine ways to simplify the tax code for small businesses.
    I want to thank you, Madam Chair, once again for 
recognizing this pressing issue and for calling this timely 
hearing.
    April 15th is right around the corner, and it is this time 
of year that we all become more attuned to the tax burden 
placed upon all of us by our federal and state governments. 
Small business owners feel this burden profoundly as the 
question how will this affect my tax bill echoes all year long 
in each decision that they make.
    The complexity and uncertainty of the tax code limits small 
business growth, slows job creation and puts a damper on our 
overall economy. In many respects the tax code makes decisions 
for entrepreneurs, and all too often those decision are to not 
upgrade equipment or offer health insurance or make other key 
investments because of the tax complications.
    According to the Nonpartisan Tax Foundation, Tax Freedom 
Day, the day that we begin to work for ourselves as opposed to 
working to pay taxes, falls on April 23rd this year. So that 
means that the average person, from January 1st through April 
23rd, all of the income that they earn goes to the government, 
either the federal government, state government, local 
governments, government in one form or another. It is not until 
after April 23rd for the rest of the year that the person is 
working for themselves or their own family. That is outrageous 
as far as I am concerned.
    That means we work 113 days of each year to pay Uncle Sam 
or the state or local versions of Uncle Sam before we earn a 
single dollar for ourselves. In 2001 and 2003, Congress passed 
legislation to cut taxes across the board on all Americans. 
Unfortunately, these tax cuts are set to expire at the end of 
2010. In other words, taxes will go up in two years unless 
Congress takes action to prevent that from happening.
    That also includes one of the most, I believe, egregious 
taxes, and that is the federal inheritance tax or the death tax 
in which the federal government can take up to 55 percent of 
what a person has when they pass away, and that is generally 
property that has already been taxed during a person's 
lifetime.
    And the two groups that are hit most acutely with this tax 
are small businesses and farmers. That is oftentimes why the 
business or farm does not make it to the next generation, 
because it has to be literally sold in order to pay for the 
federal death tax, and those employees lose their jobs 
oftentimes.
    Higher taxes, particularly on capital, cause the level of 
private investment to fall, a devastating blow to the many 
small businesses who rely on private investors for their 
livelihood.
    Before it sunsets, I want to see Congress make this tax 
relief permanent. It is not just the added benefit of paying 
lower taxes, but the certainty that comes with it. Small 
businesses are always better off when they can plan for the 
future, and having stable and predictable bills is a big part 
of that.
    The complexity of our tax code is staggering. At over 
54,000 pages or, if you stack it one on top of another, it's 
eight Bibles thick, the code is a morass of laws and 
regulations that has been bloated to an unmanageable 
proportion. For small businesses just starting out, it can be 
especially difficult to know exactly what to do and when to do 
it. Small businesses simply do not have the technical expertise 
and in many cases the financial ability to hire accountants to 
help them understand what deductions and benefits they might be 
eligible for.
    There's also a huge disparity in the way in which smaller 
firms compare with larger ones when it comes to tax compliance. 
In 2001, the Small Business Administration's Office of Advocacy 
released a report on the regulatory cost faced by small firms 
that contained an estimate of the paperwork compliance cost. 
The report showed that small businesses with fewer than 20 
employees spend over $1,200 per employee to comply with tax 
paperwork, record keeping, and reporting requirements, more 
than double their larger competitors.
    Sounder, simpler tax policies would benefit both the 
government and small business owners by improving compliance 
and lowering cost. A local veterinarian near my district in 
Cincinnati found out the hard way just how complex the tax code 
is. Last April the practice passed an employee wage threshold 
that required it to change how its 941 forms were deposited. Of 
course, the IRS didn't notify the veterinarian until August.
    She contacted her CPA and followed his advice, but the next 
letter from the IRS was a fine. After sending a letter citing 
as she put it ignorance as first time business owners--that was 
her quote--she received not guidance but a new penalty bill, 
bringing her fees to more than $2,400. That is a lot and often 
too much for a small business to absorb.
    Her biggest argument was that she used the IRS' electronic 
federal tax payment system and did not see why there wasn't a 
system built in to alert users to things like passing into a 
new threshold. Most of all, she just wanted to know why things 
could not be simpler.
    We are here today because that is a fair question that 
deserves an answer. I am looking forward to hearing from our 
panel their recommendations for simplifying and modernizing the 
tax code. Outdated provisions simply do not reflect real world 
experiences and the way business is done domestically and 
globally.
    Again, I want to thank the Chairwoman for calling this 
hearing, and I look forward to working with the Chair to help 
our colleagues on the Ways and Means Committee provide real tax 
relief, simplification, and certainty to our small businesses.
    Once again, thank you, Madam Chair, and I yield back.

    Chairwoman Velazquez. Thank you, Mr. Chabot.
    And now I recognize our first witness, Mr. Scott Mackey 
from the Wireless Association. He is with Kimbell Sherman. He 
consults to major wireless telecommunication providers, and is 
testifying on behalf of CTIA, the Wireless Association. CTIA 
represents all sectors of the wireless communication industry, 
including cellular and personal communications services.
    Gentlemen, you will have five minutes, and in front of you 
there is a timer that will let you know when your time has 
expired.
    Welcome.

   STATEMENT OF MR. SCOTT MACKEY, ECONOMIST/PARTNER, KIMBELL 
     SHERMAN ELLIS, LLP, ON BEHALF OF CTIA - THE WIRELESS 
                          ASSOCIATION

    Mr. Mackey. Thank you very much, Madam Chair, Mr. Chabot, 
members of the Committee, for holding this timely and important 
hearing.
    As you both said, tax policy is very important for small 
businesses.
    I am a partner at Kimbell Sherman Ellis in Montpelier, 
Vermont, and so I am here today wearing two hats, one as a part 
owner of a small business that has to comply with the 
regulations and provisions that you both mentioned, and also I 
have the privilege of representing CTIA, the Wireless 
Association and its many, many members that are involved in a 
very high tech and competitive business of wireless.
    The business that I am in, one of the things we do is 
provide an electronic bill tracking system for folks that are 
following what is going on in our states in terms of 
legislation that affects them in many ways, and so our business 
has been able to grow from eight employees in 2006 to 22 today, 
which that is not a lot of employees, but for us it is a lot.
    And quite simply, we could not have grown our business 
without the advances that have taken place in the last few 
years in wireless technology, communications technology, and 
information services. So when I talk to you about these 
provisions that affect the wireless industry, these are also 
indirect in our ability to be productive and make money and be 
successful in business.
    There are many issues I could be talking about today. Some 
of the other panelists will address some of these. I am only 
going to focus on three. The first one is the issue of cell 
phones as listed property. The second is extension of the 
research and development tax credit. And the third, which is 
slightly off point but very important, is a bill soon to be 
introduced which would impose a moratorium on discriminatory 
state and local taxes on the wireless industry.
    The first issue, listed property, is a very difficult 
paperwork burden that is being imposed on small business. I 
mean, basically what it says is if you provide a cell phone or 
a Blackberry for your employees, that is not deductible as a 
business expense unless those employees go through their bill 
and identify each and every call and its business purpose.
    Now, we have ten employees that have cell phones. The time 
that it would take for those employees to go through and look 
through hundreds and hundreds of calls, it is just a paperwork 
nightmare, and the issue is that if the IRS were to audit us, 
they would say that this is not a nontaxable fringe benefit. It 
is a taxable item, and therefore, we would have to collect back 
payroll taxes, Social Security and other taxes, and so this 
issue needs to be addressed.
    Small businesses, most of the folks I talk to, do not even 
know it exists, and yet on audit potentially they could be 
paying hundreds or thousands of dollars in back taxes. So this 
issue needs to be addressed, and fortunately there is a bill 
pending, H.R. 5450, by Representatives Johnson and Pomeroy that 
would fix this, and we urge this Committee to support that.
    The second issue is the research and development tax 
credit. Many folks may not view the wireless industry as small 
business because of the number of customers that subscribe to 
wireless technologies, but having just come back from the CTIA 
show in Las Vegas, there were thousands and thousands of small 
entrepreneurs that are developing little niche products and 
services that were run over wireless networks, and the R&D 
credit is very important to those small businesses that are 
really on the cutting edge of technology and innovation.
    And while our firm does not use the R&D credit, we rely on 
those innovations and technologies that are coming out of the 
industry to provide us new tools to do business and be more 
productive and profitable. So I think all small businesses 
whether they claim the credit or not benefit from the 
innovation in technology that comes from providing that credit 
to our smaller entrepreneurs and other businesses as well.
    And then the final issue is a moratorium on discriminatory 
state and local taxes on wireless service. I recently published 
a study which found that a typical wireless consumer pays 
double the rate of taxes that other taxable goods and services 
that are taxed in the states, and so this is a very important 
issue for businesses like mine and other small businesses that 
end up having to pay a lot of money in state and local taxes on 
their wireless service.
    Fortunately, Representatives Lofgren and Cannon will be 
introducing either this week or next week, I hear, a five-year 
moratorium on discriminatory taxes. So this would allow states 
to tax wireless service if they are taxing other goods and 
services under the same tax, but would present the singling out 
of wireless services and wireless consumers for taxes just 
because 20 years ago telecom was a monopoly and, therefore, 
these old taxes are still on their books.
    So this is a very important piece of legislation that, 
while not covered under the Internal Revenue Code, is something 
that members of Congress could do to help small businesses that 
rely on wireless technologies to compete.
    So in conclusion, thank you very much for the opportunity 
to testify on these issues. I look forward to any questions 
that you might have at the conclusion of the panel.
    And, again, thank you.
    [The prepared statement of Mr. Mackey may be found in the 
Appendix on page 34.]

    Chairwoman Velazquez. Thank you, Mr. Mackey.
    Our next witness is Mr. Jeffrey Hoops. He is with Ernst & 
Young in New York. He is here representing the American 
Institute of Certified Public Accountants. AICPA has served the 
accounting profession since 1887. The association has more than 
350,000 members, including CPAs in business and industry, 
public practice, government, education, and international 
associates.
    Welcome, sir.

STATEMENT OF MR. JEFFREY R. HOOPS, PARTNER, ERNST & YOUNG, LLP, 
    ON BEHALF OF THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC 
                          ACCOUNTANTS

    Mr. Hoops. Good morning. Thank you for inviting me.
    Madam Chairwoman Velazquez and Ranking Member Chabot and 
other distinguished members of the Committee, I am here on 
behalf of the American Institute of CPAs. Our 300,000 members 
represent literally millions of small businesses, and at this 
time of the year especially we see first hand both the 
staggering complexity that you mentioned and the unnecessary 
complexities that you mentioned that face small businesses when 
trying to comply with the tax laws.
    We have submitted a number of important changes that we 
think could be made to modernize the tax code and help small 
businesses be more competitive, especially in a global 
marketplace, and I would request that our previously submitted 
testimony be include in the official record of this hearing.
    Today I would like to focus on a few of those items that we 
believe could make the tax code simpler, as you suggested. Some 
of those have to do with S corporations. As you probably know, 
S corporations are a very popular vehicle for small business 
owners when it comes to forming their corporations. One 
significant hurdle that is faced by a C corporation that wants 
to convert to an S corporation is the LIFO recapture tax. This 
is a tax which is computed on the difference for inventories 
computed under the LIFO method of taxation and the FIFO method 
of taxation. And that recapture tax is paid that the date that 
the corporation elects to be taxed as an S corporation.
    We believe that this tax could be more than sufficiently 
addressed through the built in gains tax, and we believe that 
the repeal of this provision, Section 1363(d) of the Internal 
Revenue Code, would allow more small businesses such as car 
dealerships, jewelry stores and others, to participate in this 
popular form of doing business, the S corporation.
    A second corporate level tax that is paid by S corporations 
is what is known as the passive investment income tax or also 
more popularly known as the sting tax. This is paid by many 
corporations who have previously accumulated earnings as a C 
corporation, and when their gross receipts as an S corporation 
exceed more than 25 percent or royalties, rents and interest 
and dividends exceed more than 25 percent of their gross 
income.
    In addition, if this happens for three years in a row, the 
S corporation election is automatically terminated. We believe 
that the law should be changed to eliminate the termination 
provisions because we think that the penalty provision or the 
sting tax is enough and that business owners should not be 
penalized by having their S corporation status repealed.
    I would like to spend a couple minutes also focusing on 
partnerships. Many new businesses, small businesses form 
partnerships and partnerships or limited liability companies 
have become the preferred method for most new businesses that 
involve more than one person. Generally Subchapter K of the 
Internal Revenue Code, which governs the taxation of 
partnerships and partners, can be extremely complex, and yet 
there are only a limited number of de minimis rules or other 
ways for small businesses that are required to report under 
partnership rules to simplify their lives by electing out of 
Subchapter K.
    One recent enactment created what is called the qualified 
joint venture, and this was based on a noble congressional 
desire to simplify the tax life of husbands and wives operating 
businesses together and to make certain that both spouses 
receive credit for purposes of Social Security and Medicare. 
This election allows the two partnership participating spouses 
to forget about the complexities of Subchapter K and to file as 
separate sole proprietors.
    Unfortunately, a recent IRS interpretation of this new 
statute provides, if this interpretation is allowed to stand, 
it is very unclear as to which, if any, of these small 
businesses operating as husband and wives would be allowed to 
take advantage of this provision. That should be clarified.
    We agree, by the way, with Mr. Mackey with respect to the 
treating phone and personal PDAs as listed property, and we 
think that that should be repealed.
    And finally, we would like Congress to change the rules 
which currently provide that a taxpayer can take a position 
without penalty on the Internal Revenue Code that a tax 
preparer could not take without disclosure or being subject to 
penalty. We think that makes the playing field unfair, and we 
would like to see that changes as well.
    Thank you very much.
    [The prepared statement of Mr. Hoops may be found in the 
Appendix on page 39.]

    Chairwoman Velazquez. Thank you, Mr. Hoops.
    Our next witness is Dr. Andrew B. Lyon. Dr. Lyon is with 
PricewaterhouseCoopers. He is a leader in NEC's legislative and 
regulatory economic practice specializing in analyzing the 
revenue and economic effects of legislative and regulatory 
proposals. He is considered an expert in the tax field and 
contributed to the 2005 President's Advisory Panel on Tax 
Reform.
    Welcome.

   STATEMENT OF DR. ANDREW B. LYON, PRINCIPAL, NATIONAL TAX 
             SERVICES, PRICEWATERHOUSECOOPERS, LLP

    Mr. Lyon. Thank you.
    I thank the Committee for this opportunity to testify on 
the appropriate design of the tax system, especially as it 
applies to small business. My testimony is my own, and any 
opinions are not necessarily those of PricewaterhouseCoopers.
    I understand your interest is both with respect to the 
current economic environment and also a forward looking 
interest in the promotion of long-term economic growth. While 
short-run economic concerns may create deviations from the most 
desirable permanent tax structure, I believe the long-term 
growth of the U.S. economy and small businesses is best 
promoted by providing a simple, transparent tax system with the 
lowest possible tax rates.
    Small business plays a vital role within the broader 
private economy. In 2005, businesses with less than 500 
employees represented 99.7 percent of all businesses and 
accounted for half of all private employment.
    Government data also show that a relatively small number of 
large businesses also play an important role in the economy, 
and as an example, firms receiving more than $50 million in 
receipts represent just a tiny fraction of all firms, yet they 
account for about 69 percent of total business receipts.
    Given the important role of both small and large businesses 
in the economy, there is a general consensus among economists 
that the tax system should not try to favor one form of 
business over another. The basic rationale is that in the 
absence of taxes, the market economy on its own would come up 
with the best allocation of small and large businesses that 
would maximize output in the economy. So in the presence of 
taxes, you would not want to try to change the outcome that 
would occur without taxes.
    The one complication with this argument is that the very 
presence of a tax system can impose inordinate compliance 
burdens on small businesses, and while to some this might 
justify the use of special incentives to try to offset this 
compliance burden, the special incentives themselves may create 
new compliance burdens, and the cost of claiming those special 
incentives, again, the burdens, may fall disproportionately on 
small businesses.
    My written testimony touches upon several provisions in the 
tax code that create some distinctions between small and large 
businesses. Some of those differences are favorable to small 
businesses. Some are unfavorable. The point I want to emphasize 
is the inordinate compliance cost placed on small businesses 
today.
    IRS data indicate that there are both significant amounts 
of under reporting of income by small businesses and 
significant compliance costs placed on small businesses, and 
there may be a correlation between the two. While noncompliance 
is not to be condoned, it can be understandable how the heavy 
compliance burdens may generate the result of noncompliance 
with some of the rules of the tax system.
    Examining compliance costs, one IRS study found that 
businesses with less than $10,000 in annual receipts faced 
compliance costs that were twice as large as the total receipts 
of the business. Even as you expand to slightly larger small 
businesses, for example, those businesses with receipts between 
$100,000 and $500,000, compliance costs are estimated to be 
about five percent of total receipts. Again, that is measured 
relative to receipts, not income.
    Income for such firms on average is about seven and a half 
percent of total receipts. As a result, compliance costs for 
these businesses represent an additional 60 percent tax on 
their income.
    In summary then, as you think about reforming the tax 
system, it is essential to drive down the cost of complying 
with the nation's tax laws by reforming them with the goal of 
producing a clear, simple, and transparent tax system. As I 
mentioned at the beginning, I think this can best be achieved 
by creating a tax system with the lowest possible tax rates on 
business and with a minimum of special incentives. And in this 
way we can best foster entrepreneurship, innovation, and the 
long-term investment that will raise this nation's living 
standards.
    Thank you.
    [The prepared statement of Dr. Lyon may be found in the 
Appendix on page 49.]

    Chairwoman Velazquez. Thank you, Dr. Lyon.
    Our next witness is Mr. Frederick Rosenthal, National 
Restaurant Association. Mr. Rosenthal is the president of 
Jasper's Restaurants. Jasper's has been in operation for over 
25 years and has three locations in Maryland. Mr. Rosenthal is 
testifying on behalf of the National Restaurant Association, 
founded in 1919. The association is the leading advocate for 
the restaurant industry. It's 945,000 members employ 13.1 
million people.
    Welcome, sir.

   STATEMENT OF MR. FREDERICK ROSENTHAL, PRESIDENT, JASPER'S 
 RESTAURANTS, ON BEHALF OF THE NATIONAL RESTAURANT ASSOCIATION

    Mr. Rosenthal. Thank you.
    I would like to thank the members of the Committee for 
giving me this opportunity to offer testimony on behalf of the 
National Restaurant Association about ways to update the tax 
code and help stimulate the economy.
    I have been an entrepreneur in the restaurant business for 
over 40 years, building catering halls first in Baltimore, and 
restaurants since 1981 in Prince George's, Montgomery, Anne 
Arundel, and Calvert Counties in Maryland.
    I am proud to be a part of an industry that plays such a 
critical role in this nation's economy. The restaurant industry 
is the second largest private sector employer outside of the 
federal government, with more than 13 million employees, 
representing more than nine percent of the job base. The first 
is the health care industry, but we are a close second.
    The restaurant industry sales for this year are projected 
at $558 billion equaling four percent of the U.S. gross 
domestic product. Nationwide there are 945,000 restaurant and 
food service outlets. More than seven out of ten of these are 
small businesses, more than seven out of ten! We are truly a 
small business industry becoming an economic powerhouse more 
and more so each year.
    I am here today to discuss the need for reforms in 
depreciation schedules, specifically to shorten the write-off 
for restaurant buildings and improvements to 15 years. This 
change would create immediate economic activity within the 
industry, which in turn would reverberate throughout the 
economy.
    There is currently legislation pending in the 110th 
Congress which addresses the accelerated restaurant 
depreciation for new construction and improvements. H.R. 3622 
championed by Congressman Kendrick Meek from Florida and 
Patrick Tiberi from Ohio would make permanent a 15-year 
depreciation schedule for newly constructed restaurants, as 
well as restaurant improvements.
    The bill currently enjoys bipartisan support with 113 
sponsors, including ten members of this Committee. There is no 
question that restaurant depreciation schedules are outdated. 
According to the tax code, restaurant buildings have a life of 
39 and a half years in which they are written off. To suggest 
that a restaurant building's actual life is 39 and a half years 
is ludicrous. In fact, I wonder how many of you have know a 
restaurant that has even been in existence 39 and a half years.
    Would any of you eat in a restaurant that had not been 
updated 40 years? I cannot even imagine the condition of the 
bathrooms and the carpeting in the building.
    One hundred and thirty-three million individuals patronize 
this industry on a daily basis. Restaurants must constantly 
make changes to keep up with the daily assault of traffic in 
their buildings. In fact, most restaurants remodel and update 
their buildings every six to eight years, a much shorter time 
frame than is reflected in the current depreciation schedule.
    Over the years Congress has made numerous changes in the 
depreciation schedules. They have granted specific benefits to 
gas stations and convenience stores, recognizing the need in 
those industries, and there have been other changes that create 
faster write-offs creating economic advantages.
    The tax code should not pick winners and losers in the 
restaurant industry. It should allow a level playing field on 
which all can play. In today's environment with high commodity 
costs, restaurants and small businesses are now yielding bottom 
lines of three to four percent, down from ten percent in the 
1980s. Most of these small businesses are unable to remodel 
their buildings. It is a spiraling effect, downturn of sales, 
increasing costs, and in many ways forcing small businesses to 
close when the patronage drops below an economic level of 
sustainability.
    All of these changes are addressed in my written testimony 
as well as a detailed explanation of the issue, and in respect 
for everyone's time, I will just hit a few points.
    The restaurant industry is projected to spend $70 billion 
over the next ten years for building construction and 
renovation. Finally, there is no question as to whether or not 
this provision would immediately spur economic activity. Look 
what happened when Congress enacted a provision to provide 
restaurants a 15-year schedule for improvements to restaurant 
structures in 2004. In 2005, that provision was in effect. The 
restaurant industry spent more than $7.5 billion on 
improvements, a 42 percent increase over the previous year 
before enacted.
    We urge the members of this Committee to consider the 
information as evidence to keep a strong restaurant industry in 
order to help this nation's overall economy.
    In conclusion, on behalf of the National Restaurant 
Association, thank you for allowing me to testify, and thank 
you to those members of the Committee who have co-sponsored and 
championed this important legislation.
    I will be happy to answer any questions when my turn comes.
    [The prepared statement of Mr. Rosenthal may be found in 
the Appendix on page 61.]

    Chairwoman Velazquez. Thank you, Mr. Rosenthal.
    Our next witness is Mr. Drew Greenblatt, National 
Association of Manufacturers. He is the president of Marlin 
Steel Wire Products, established in 1968 in Baltimore. He is 
testifying today on behalf of the National Association of 
Manufacturers.
    NAM has advocated for small manufacturers since 1895. 
Founded in Cincinnati, Ohio, it has 14,000 member companies in 
all industry sectors located throughout the nation.
    Welcome.

STATEMENT OF MR. DREW GREENBLATT, PRESIDENT, MARLIN STEEL WIRE 
PRODUCTS ON BEHALF OF THE NATIONAL ASSOCIATION OF MANUFACTURERS

    Mr. Greenblatt. Thank you.
    Good morning, Chairwoman Velazquez, Ranking Member Chabot, 
and members of the Committee. My name is Drew Greenblatt. I am 
the president and owner of Marlin Steel Wire Products in 
Baltimore, Maryland.
    Marlin was founded in 1968. We manufacture wire baskets, 
hooks, and wire forms. We have the capability to produce a wide 
range of custom products for our customers. Our products are 
used in industrial, aerospace, medical and automotive, 
factories and industries. We have clients like Caterpillar, 
Toyota, Boeing.
    Thank you for the opportunity to let us appear today and on 
behalf of the National Association of Manufacturers, we 
appreciate it.
    The NAM is the nation's largest industrial trade 
association, and we represent small and large manufacturers in 
every industrial sector in all 50 states. I am pleased that you 
have addressed this subject of updating the Internal Revenue 
Code. It will help small businesses stimulate the economy.
    The NAM's tax policy agenda is designed to promote U.S. 
jobs and competitiveness and insure continued economic growth. 
I would like to touch on a few of these specific concerns that 
we have, and they include making the income tax cuts permanent, 
providing a strengthened R&D credit, and repealing the three 
percent withholding requirement on all government contracts.
    Because Marlin Steel is an S corporation, we pay taxes at 
an individual rate. Many manufacturers like us are in the same 
boat. In fact, about half of all NAM members are similarly 
organized as flow-through companies, meaning they pay 
individual rates.
    For us, the legislation passed in 2001 and 2003 lowered the 
top individual tax rates. This has been very good for us. Lower 
tax rates mean more money after taxes to expand our operations 
and create new jobs. When enough manufacturers expand, we fuel 
economic growth. This translates into more money for the 
government to spend and lower deficits.
    It is paradoxical but true that lower rates mean higher tax 
revenues. Conversely, letting the Bush tax cuts expire 
effectively raises taxes in 2011. This will mean that we will 
be thinking about cutbacks right in the middle of an economic 
downturn.
    There has been a lot of talk recently about raising taxes 
only on the upper brackets, but many folks in Congress think 
this means that they are only raising it on the super wealthy, 
but I am here today to remind you that these rates will strike 
at the heart of small business. My tax return includes all of 
my business income, even though we have never paid a dividend. 
We pour every penny of profit back into the company to let it 
grow. This so-called profit that the IRS is taxing me on is not 
cash in my pocket. It is money that I keep in my company so we 
can buy another welding machine to make a basket like this 
right here.
    If my taxes go up, I will have to have less money to buy 
that welding machine or less money to hire a welder in 
Baltimore. The toll will not only be paid by manufacturers like 
myself, but it is also going to be one less machine that the 
welding machine company sells, and it is also going to be 
another unemployed person in Baltimore City.
    Wouldn't it be better off if I was buying new equipment? 
Wouldn't it be better off for me to be hiring new people an the 
unemployment rolls to be smaller?
    The R&D tax credit is also instrumental in maintaining our 
competitive edge. We are the primary innovator in the United 
States. Manufacturers understand that R&D drives new 
productivity. R&D is how we stay fresh, how we stay 
competitive. I cannot compete with other countries when it 
comes to wages. So I have to win on innovation.
    Chairman Velazquez, let me give you a concrete example. 
Travers Tool is one of the excellent companies in your 
congressional district. They buy this basket right here from 
me. They resell it worldwide. No one is going to get rich from 
just this one basket model. Travers needs a steady flow of new, 
fresh ideas, new products that are competitive, that are 
different.
    We use this R&D tax credit to do our Thomas Edison 
imitation so that we can be different, innovative, and fresh. 
This tax credit helps Marlin stay innovative and contributes to 
jobs in our district, in your district. Unfortunately, because 
it is a temporary nature, this R&D tax credit, on again, off 
again, the fact that we are never certain whether it is going 
to be extended, it is very hard for me to decide whether or not 
we should continue plowing ahead reinvesting into the company.
    As of right now, the tax credit has expired. Because 
Congress failed to act, we are going to get hit with a big tax 
increase. Making this credit permanent would end the years of 
speculation, and it would give the business the certainty we 
need to plan ahead.
    In conclusion, the tax relief enacted in 2001 for families 
and businesses have played an important role in stimulating 
economic growth and job creation. Making this tax relief 
permanent would be an insurance policy for continued economic 
growth. Lowering tax rates, doing the permanent R&D credit are 
critical.
    Simplifying the tax code by repealing the three percent 
withholding, consolidating the AMT and the existing tax 
structure, and repealing the estate tax would go a long way 
towards helping the small business community.
    I want to thank you again, the Committee, for the 
opportunity to be here today and talking about the tax code and 
its impact on Marlin Steel Wire. I am happy to answer any 
questions.
    [The prepared statement of Mr. Greenblatt may be found in 
the Appendix on page 76.]

    Chairwoman Velazquez. Thank you, Mr. Greenblatt.
    There is going to be a series of votes. So what I am going 
to do is I am going to ask the first question, and then defer 
to the minority members. Then when we come back after those 
series of votes we will continue the hearing.
    I would like to address my first question to Mr. Rosenthal.
    In your written testimony, you spoke about the connection 
between your industry and the construction trade. Obviously, 
because of the housing crisis, construction is one sector of 
the economy that is particular struggling. Can you discuss in 
greater detail how do you think that tax benefits that help 
restaurants will stimulate growth in your industry and in 
others?
    Mr. Rosenthal. That is a very good point. To give you an 
example, right now we have one of our restaurants is overdue 
for remodeling and refurbishing. We have plans on the drawing 
board to redo our first floor, redo the exterior, redo the roof 
and ceiling line at a cost of approximately $175,000.
    We are looking as to whether or not we can do this this 
year, and part of the problem is our bottom line at that store 
has dropped to about three percent. We are facing a perfect 
storm right now. Usually when we see economic dips like we are 
seeing right now, we find that demand drops and, therefore, our 
cost of doing business, supplies and food costs drop.
    But with the weak dollar and extremely high commodity 
costs, our costs, the food costs and products, have exceeded a 
five percent increase over the last year, with high labor costs 
dropping our bottom line to under three percent.
    Candidly, in an environment where we are only at a three 
percent profit line, we do not know if we can take the risk to 
make that investment. If we knew that we had the ability to 
look at getting accelerated depreciation, which would mean that 
approximately double our deduction next year, we would then be 
more likely to make that.
    As far as the building is concerned, yes, all of the 
construction companies are eager to do business. Three years 
ago we could not find a company to remodel and today we have 20 
biting at the bit to do the job because they are hurting.
    Chairwoman Velazquez. Thank you.
    Mr. Chabot.
    Mr. Chabot. Madam Chair, I am going to reserve my 
questions.
    Before I yield to my colleagues here, I just want to thank 
the panel, and I think their testimony was really excellent. I 
certainly agree that we need, rather than more special 
incentives complicating the tax code, to simplify it is the 
best thing that we could do and make the tax cuts that we 
already passed permanent so that businesses know what they are 
going to be dealing with down into the future and can plan for 
that now. I think that is the best thing that we could do for 
the economy, and hiring more people.
    But I will yield my time to the gentleman from Tennessee, 
Mr. Davis.
    Mr. Davis. Thank you so much. I appreciate each of you 
being here today. Thank you for what you do in our economy.
    You know, as I look around northeast Tennessee where I 
represent, I have been a small business owner myself before 
coming to Congress about 20 years. So I know what it is to make 
a payroll and have to pay taxes and hire accountants to make 
sure that I do everything the way I am supposed to.
    And I appreciate the opportunity, Madam Chairman, to have 
this hearing on taxes because I honestly believe that you 
cannot tax and regulate yourself into prosperity, and I think 
we are seeing that now especially with energy costs that are 
going up. As energy costs go up, commodity costs go up, and you 
are starting to see that.
    I signed onto a piece of legislation that several members 
of the House have signed onto called an economic growth 
package. I voted for the economic stimulus package. I think we 
actually need a growth package, and the best economic growth 
package is a good paying job. It is not higher taxes and more 
regulations.
    That legislation does basically three things, and I would 
like for you to talk to me about how you see this working in 
the economy. It would lower the top corporate rate from 35 
percent to 25 percent. That would bring us in line with the 
European Union nations. That would bring jobs back to America 
that have actually left America in my mind.
    The second thing it would do is allow for immediate 
indexing for new equipment and buildings.
    And finally, the third thing it would do is decrease the 
top corporate capital gains rates to 15 percent bringing it in 
line with individual capital gains rates, putting more money 
back into small businesses so that they can go out and create 
those jobs, the ultimate best economic stimulus package.
    If each of you or some of you could talk about an economic 
growth package with those fundamental principles and what it 
would do to our economy, I would appreciate hearing your 
thoughts.
    Thank you.
    Mr. Hoops. Thank you.
    I think that any package that reduces taxes will improve 
the economy. You certainly put more money into the pockets of 
small business owners. I think it is a fruitful debate and 
discussion to take into account whether those provisions will 
simplify the code or make them more complex. I appreciate the 
fact that the title of this hearing is modernizing the code, 
not simplifying it, and in an economic downturn, I suppose that 
modernizing is more important than simplifying.
    So I would say in general although your stimulus package 
will undoubtedly make the code more complex, it could very well 
have the effect of stimulating the economy by putting more 
money in the pockets of small business owners.
    Mr. Lyon. Let me address the corporate rate reduction. If 
you look back prior to 1986, the United States had one of the 
highest corporate tax rates in the world. The 1986 Tax Reform 
Act reduced the corporate rate from 46 percent to 34 percent, 
and at that time did give the U.S. an advantage over most of 
our trading partners.
    However, what happened since 1986 in the 20-plus years is 
that all of our trading partners reduced their rates, and so as 
you mentioned, today the average combined federal and local 
corporate tax rate in the European Union is less than 25 
percent. It is about 24 and a half percent. So the U.S. 
corporate rate, by not changing on its own, became out of line 
with our trading partners and in many cases creates a 
competitive disadvantage for U.S. companies.
    And even at a 25 percent federal rate, companies would 
still be liable for state and local taxes, which on average 
would add close to four or five percentage points on top of 
that 25. So many companies might say that that is not even 
going far enough.
    Mr. Rosenthal. I think it was said here before that most of 
us in small business are taking the money from our, quote, 
unquote, profits and putting them back into our businesses. 
What this does, to lower the tax rate it enables us to invest 
and expand at a greater rate when we are burdened with higher 
taxes.
    Most people do not realize that our industry, the 
restaurant industry, today is a highly professional industry. 
We are not providing the stereotype of minimum wage jobs. We 
are providing major jobs for folks who have growth 
opportunities in executive positions, many of whom are in six 
figures or more, running restaurants, and in order to expand 
that, getting a great job, we need to expand our business. And 
at a time when taxes are high and we are unable to use that 
money to plow back into our business, then they obviously are 
not going to provide those jobs.
    Mr. Greenblatt. this is a wonderful idea. We need you to 
win. We need more jobs to grow. We need to invest more back 
into the company. We need all of our other factories to invest 
back in.
    We are not competitive. Right now our structure is not 
competitive against France. It is not competitive against our 
major trading partners. This is crazy. We should be a low tax 
environment so that we can fight the French, so that we can 
fight the Germans, so that we can fight the Canadians and be 
more competitive.
    And by you leading the charge on this, we encourage you to 
do that because we really need the relief, and now is the time. 
Thank you for doing what you are doing.
    Chairwoman Velazquez. Your time has expired. Ms. Hirono.
    Ms. Hirono. Thank you, Madam Chair.
    I know that the tax code has not been revised substantially 
since 1986, and so what we have had to add to the complexities 
is basically piecemeal legislation. So I commend the testifiers 
for focusing on those things that can modernize the tax code, 
and thank you for the specific bills that have been introduced.
    I do have one question for Mr. Greenblatt. You mentioned in 
your testimony that the impact of sunsetting the Bush tax cuts 
will have a terrible impact, negative impact, on small 
businesses like yours. Do you have any information or data to 
support your contention and the extent of that kind of a 
negative impact on small businesses?
    Mr. Greenblatt. Thank you for the question.
    It will be the biggest tax increase in American history, 
and that is the wrong thing you want to do when the economy is 
on shaky grounds, number one.
    Number two, we pay on a flow-through level. So the money 
that is coming into us is money that we are reinvesting 
everything back into the company. So mean you cream off 35 
percent at the top rate, that is a lot of money.
    Ms. Hirono. Well, I understand that. What I was asking was 
whether you have information from a much more industry-wide 
basis what the impact would be. Because these tax cuts are due 
to sunset, and if they do not get sunsetted, we are going to 
need to apply pay-go rules, and there are going to be massive 
cuts in many other programs in order to pay for the extension 
of the tax cuts that were supposed to be sunsetted.
    So, you know, I am interested in the adverse impact of the 
sunsetting on small businesses. So if you can direct me and 
this Committee to information that would allow us perhaps to 
look at the impact on small businesses as a separate matter, 
then I think that would be very helpful.
    Mr. Greenblatt. I would be delighted to send you the 
information. The bottom line is we are the ones that create 
jobs, and our people pay the taxes that make this all work. And 
if we are scared because the money is going to go away, then we 
are not going to hire as many people, and that is going to 
impact how much the tax receipts are in the future.
    Ms. Hirono. Dr. Lyon.
    Mr. Lyon. I could mention again there are a huge number of 
small businesses, I believe something on the order of 21 
million businesses, and the income they earn is taxed at 
individual rates largely. I believe Treasury has produced data 
showing that about 70 percent of the income in the top two 
individual tax brackets derive from flow-through businesses. So 
most of the income in those top brackets is essentially 
business income that would be impacted by a tax increase.
    Ms. Hirono. Thank you. Thank you, Madam Chair. I yield 
back.
    Chairwoman Velazquez. Mr. Buchanan.
    Mr. Buchanan. Mr. Rosenthal, I want to mention my 
background has been 30 years self-employed. So I share your 
experience as an entrepreneur. I was chairman of the state 
Chamber last year in Florida a couple of years ago, but let 
mention I hear what you are saying. I would like to extend that 
to 15 years from 39 for all businesses.
    But what about component depreciation and leasehold? We 
write off over five years' component over five years. When you 
took your position on the improvements for 175,000, how much of 
that could go in the one category over the other one? I would 
like to get it all to 15, but I would like to see us get 15, 
not just in restaurants but other businesses as well.
    But I would like to just have your thoughts on that. When I 
open a business or something, we put it in two categories, the 
land at zero, 39 on the building, and five years. Most of it is 
whatever we can component or leasehold. So I would just be 
interested in your thoughts.
    Mr. Rosenthal. Well, we play that juggling game, you know, 
in small business, small business entrepreneurs. We spend as 
much time trying to figure out how we are going to categorize 
things to maximize our depreciation.
    However, as you know, there are restrictions on what we can 
use for components. For example, if we put a kitchen in, the 
only thing we can accelerate to the five-year level is actual 
equipment that is used for cooking. So we have tried to expand 
that to say, well, is the duct work over the stove part of 
that? And we have been rejected often by the IRS saying, no, 
that is not. It is very literally interpreted.
    So we wind up with a minimum amount that we are able to put 
into a five-year category, and we wind up with most of our 
leasehold improvements carrying the full term of full 39 and a 
half year depreciation.
    If you look at most restaurant expansions today, 15 years 
ago a kitchen cost $150,000 to equip a casual dining 7,500 
square foot restaurant, and today we are looking at a half a 
million dollars for that same kitchen, the majority of which 
has to be depreciated over 39 and a half years. so the answer 
to your question is there is not enough in that lower category 
to offset the 39 and a half year category, and that is why I 
think it is important to get the accelerated depreciation.
    Mr. Buchanan. Yes, I support you on that.
    I wanted to mention, Mr. Greenblatt, on your comment one of 
the things I think a lot of people do no understand up here 
because they are not in business, a lot of small businesses 
pass through income, and what that means, and someone said, 
well, that puts more money in the small business person's 
pocket. It really do not. I mean, it does, but it does not, I 
mean, with net worth.
    But the reality of it is if you make 300, you pay 150 in 
taxes. You buy some more inventory. By the end of the day I 
have seen so many business people say, ``Where is my cash?'' So 
not much of it really flows through to the owner, and then you 
need that money.
    So when they look at raising taxes from 35 to 45 or add 
four and a half percent on taxes over 150,000, some of the 
surtax up here, that mentality, a lot of that goes right to the 
heart of small business. And I know a lot of people that make 
500, 700, 800, but it flows back into their businesses to 
create jobs, buy equipment, expand. You have got to have it for 
the banks if you want to try to grow your business.
    Has that been your experience?
    Mr. Greenblatt. Absolutely. That is the key. That is the 
thing that is critical that we must understand, that we are 
reinvesting everything back to stay competitive. We are 
righting China. We are fighting Japan. We are fighting Mexico. 
And the only way we can be competitive is by reinvesting, 
reinvesting.
    You know, it is critical that we stay competitive, and that 
is only going to happen because we keep the tax rates low and 
we plow more money into the company.
    Mr. Buchanan. Thank you.
    That is it, Madam Chair, for me.
    Chairwoman Velazquez. Mr. Fortenberry.
    Mr. Fortenberry. Thank you, Madam Chair.
    Thank you, gentlemen, for coming today.
    Just a side comment regarding Mr. Greenblatt; is that 
right? I am sorry. I cannot see your sign. You were talking 
about manufacturing. Just an anecdotal story.
    A businessman I was speaking to recently was talking about 
the cost of manufacturing a particular item in the United 
States $13; in Mexico $3; in China 28 cents. And that is the 
disparity of what we are facing and the incentives to shift 
more and more manufacturing out of this country are very real 
because of differences of currency, because of differences of 
labor and environmental standards and perhaps tax code 
differentials as well that discourage manufacturing investment 
here.
    And this is a very serious problem. That is not my 
question. My question is I like to participate in these 
hearings in order to try to discuss big ideas. Now, all of you 
have generously given of your time to come today, but we are 
still kind of in the framework of discussing on the margins 
what already is. You know, tweak this area of the tax code, 
simplify this, depreciate that.
    I just walked out of the room to talk to a group of people 
who have a very legitimate concern that their depreciation 
schedule is not consistent with the actual life of the 
equipment, very legitimate.
    But what are the big ideas that are out there that can 
start to fundamentally address the earlier problem that I 
talked about, encouraging a new spirit of innovation and 
entrepreneurship?
    We have a new philosophical direction that is coming in to 
work for us. Mr. Rosenthal, you have got employees that are 
working for you right now and are looking for learning as to 
how to potentially get into business to compete with you one 
day, and do you know what? We accept that as a way of doing 
business in this country, and that is the spirit of innovation 
and entrepreneurship that I think we do need to encourage 
because this is where most new jobs that help families come 
from in the country.
    Let's reframe the question. What are the big ideas out 
there that can further draw an entrepreneurial spirit beyond 
what we traditionally think about, which is access to capital 
and proper education and less regulatory barriers?
    One of which, and we have held many hearings in this 
Committee, is the problem of health care. We have tethered 
health care benefits generally to business because of the way 
the 60-year history of this has been, and it is the way it is 
written into the tax code. That is a possibility of untethering 
that linkage so that people have portability, and yet at the 
same time can afford to insure themselves from vulnerable 
circumstances.
    The other is have we structured the tax code, and Dr. Lyon, 
perhaps you can address this, in a way that facilitates the 
congregation of people in one place because we depreciate real 
estate a particular way or assets a particular way versus 
allowing people to be dispersed and entering in new types of 
contractual arrangements from home or by telecommuting and 
giving incentives to do that, which is much more consistent in 
many ways with a lot of the new workplace philosophical 
paradigms that we are seeing in terms of this entrepreneurial 
spirit.
    That may not work in all businesses where you have to have 
certain economies of scale, either restaurant or manufacturing, 
but in a lot it may, and are we impeding that progress because 
of certain structures that we have in the tax code?
    These are the kinds of ideas that I want to try to get 
under and use you as experts in this field to help think 
constructively through, all with the vision toward enlivening 
and animating the spirit of entrepreneurship in this country, 
which we all agree is for the benefit and well-being of 
American families.
    So who wants to take that on?
    Mr. Lyon. I will start, and the others can be more 
creative.
    You ask some very challenging questions. If you look at the 
compliance costs facing small businesses, you certainly want to 
do everything possible to minimize the paper work that they are 
required to do in order to claim tax benefits. One of the 
virtues of a system like expensing is they do not have to worry 
about depreciation schedules.
    Mr. Fortenberry. I read your comments on expensing right 
before I came.
    Mr. Lyon. But short of trying to eliminate burdens in that 
way by just allowing complete write-offs, I would say that the 
next best thing you can do is strive for the lowest possible 
rates on business income, and by doing that, it becomes less 
important whether something has a 15-year life or a 20-year 
life. The return to the business is being taxed at a lower 
rate. Entrepreneurs can spend their time generating income 
instead of trying to comply with the tax law.
    Mr. Fortenberry. My time is done, but, gentlemen, if you 
will ruminate on these broad questions, we are available for 
input and ideas. I would appreciate your input because of your 
expertise.
    Thank you.
    Chairwoman Velazquez. Your time has expired.
    Ms. Fallin. You do not have questions?
    Mr. Akin.
    Mr. Akin. Just kind of piggybacking on the last question, 
it would appear from even the experience of the last, say, six 
years that if you take a look at 2000, we are coming into a 
recession. In 2001 and 2002, we did some sort of feel good tax 
cuts, and then the first quarter of 2003, we did dividend and 
capital gains, and almost instantly you go from a barely over 
one percent GDP jump to about four. Unemployment reverses 
almost overnight to losing 140,000 jobs a month to gaining 
about 160,000 within a period of a couple of months, and you 
have got five or six years of a very strong economy.
    And most interestingly enough to people in government, 
particularly the people that like to spend government money, 
the government revenues go up significantly. So here you have a 
situation where we have actually cut taxes on businesses or at 
least made money available to businesses through the dividends/
capital gains tax cut, and it appears to be paralleling what is 
going on in Ireland.
    You know, the Irish about 15 years, 20 years ago decided to 
cut their taxes on business to be some of the lowest in the 
entire European Union, and now everybody in Europe is trying to 
copy Ireland because the economy is just going like mad.
    It would seem like what we are talking about here is not 
that complicated. What we need to do is get capital working in 
small businesses. That seems to be the basic principle, and 
instead the Fed. keeps cutting interest rates and creating 
liquidity. The dollar is just going down like a submarine. It 
seems like we have got our hand on the wrong lever and what we 
should be doing is, even though it is not very popular, is to 
just cut the dividends and capital gains, get the taxes off of 
business.
    Somebody said it is better to tax the people than to tax 
the peach tree. It seems like we are just doing it the wrong 
way. Does anybody want to comment?
    Mr. Mackey. To comment on your question and the last 
gentleman's question together, I mean, I agree we need a lower 
compliance cost. We need to lower rates, but more importantly, 
I think, when you look at the global economy, we need to do 
whatever we can to make sure that dollars are invested in the 
United States of America because there are a lot of places for 
investors to put dollars right now, and we are truly in a 
global economy when it comes to investment.
    There are very few barriers to investment flowing to China, 
to Europe, to other countries. And so we need to look at 
everything we can do to make sure that investment happens here, 
the research and development, the things that give us a 
competitive advantage.
    If that money is not spent here, we are going to lose that 
competitive advantage, and unfortunately the industry that I 
work with closely, the wireless and telecommunications, we are 
saddled with a lot of tax provisions that still date back to 
the 1980s when computers depreciated over 30 years, and we have 
many, many problems with depreciation schedules with outdated 
federal, state and local tax provisions that increase the cost 
of investing.
    When I look at my business and when I look at the data on 
productivity and what is creating wealth in the United States, 
it is investments in information technology and communications 
that are not just helping those industries, but all of the 
other small and large businesses that rely on that innovation, 
like in my business, to be able to make money, to be able to 
create jobs, to be able to provide the kind of health insurance 
and other benefits that we provide for our workers.
    So I do not know if that necessarily qualifies as thinking 
outside the box in the way that you were doing, sir, and I 
appreciate your question, but we have got to get a tax code 
that, number one, makes sure that investment is here and stays 
here so that our businesses will benefit.
    Mr. Akin. That was my only question, Madam Chair. If 
somebody else wants to respond, you can.
    Mr. Greenblatt. If I may, I think the two idea that you are 
trying to create is wonderful. If we could create a one-page 
tax code, one page, we would save so much money in compliance 
costs and being nervous that the IRS is going to do something 
to us and hiring accountants. Right now I could hire a full 
person that would make 40-something thousand dollars a year to 
weld or to design or to engineer as opposed to paying it to an 
accountant. It is insane that I am spending it that way.
    In China they do not do that. In France they do not do 
that. So we should have a one-page document for our taxes.
     Chairwoman Velazquez. The time is expired, but, Mr. 
Greenblatt, before we recess, I just would like to comment on 
Mr. Mackey's assertion that we should have tax policies that 
should be rewarding companies that are creating jobs in 
America, not companies that are creating jobs abroad.
    What are your comments on that?
    Mr. Greenblatt. I make 100 percent of everything in 
Baltimore City and we import nothing from China. We import 
nothing from the Orient. So we are 100 percent American made.
    We believe that if you make the environment so good for 
Americans, they will never think about, you know, putting a 
factory in Mexico or putting a factory in Canada. So what we 
need to do is make it so that we are such a competitive 
environment that you would not consider going elsewhere.
    Chairwoman Velazquez. Okay. The Committee will stand in 
recess until we vote on the floor. We are going to have three 
votes. So it will be like 30 minutes.
    [Recess.]
    Chairwoman Velazquez. Mr. Chabot.
    Mr. Chabot. Thank you.
    Mr. Mackey, I will begin with you if I can.
    Chairwoman Velazquez. It was fixed by a Democrat.
    [Laughter.]
    Mr. Chabot. Well, since the Democrats broke it, they ought 
to fix it.
    [Laughter.]
    Mr. Chabot. Just kidding. We actually get along very well, 
as most people know that follow this Committee.
    Mr. Mackey, you mentioned before H.R. 5450, and I happen to 
be a co-sponsor of that, which would deal with your problem of 
wireless phones and the reporting requirements, personal versus 
business and that sort of thing. Could you tell us how much 
time is wasted in having to comply with the existing law?
    And how often in the final analysis is it really enforced 
in any event? So are people just spinning their wheels?
    Mr. Mackey. That is a great question. I think not a lot of 
time is spent enforcing it or complying with it, quite frankly, 
because I do not think most businesses even know they are 
supposed to be complying with it, and I think that the entities 
that have received audit notices from the IRS have spent a lot 
of time trying to figure out, gee, should we just basically do 
away with providing our employees with cell phones because the 
prospect of having to comply with this is so onerous that it 
just not worth it, which of course means that employees then 
lose the productivity benefit from having these hand-held 
devices and phones that are so critical, you know, to their 
ability to do their jobs.
    I think if nothing is done about it and information about 
the provision and enforcement starts to be more widespread, 
then I think you are going to see a huge amount of time and 
effort spent by small businesses, first, to figuring out what 
to do and what the exposure is and trying to hire folks, you 
know, to calculate the back tax liability, and then secondly, 
sort of deciding what to do about it.
    And then if they do decide to continue to provide it, I can 
see, you know, just for myself when I travel around the 
country, you know, everybody is going to have to have a policy 
about whether you can call your husband or wife and talk to 
your family when you are on the road. I mean, there is just an 
endless amount of time, so much time I think that companies are 
going to really have to rethink whether to provide the benefit 
at all.
    So it is a very onerous burden, and should it be more 
enforced, it is just going to grow exponentially.
    Mr. Chabot. Okay. Thank you.
    Yes, Mr. Hoops.
    Mr. Hoops. You know, when cell phones were first made 
listed property, they first of all weren't nearly as common as 
they are today, and they were much more expensive on a per unit 
basis. So there was probably a good reason for treating them as 
listed property, but now the cost of using a cell phone is so 
inexpensive. You do not pay by the minute anymore. You buy as 
many minutes as you need, and it is one flat rate so that, you 
know, the cost benefit of treating this as listed property is 
not even close to being a cost benefit in terms of the revenue 
generation.
    So we really fully support eliminating this as listed 
property.
    Mr. Chabot. Mr. Hoops, let me follow up with you on a 
different question at this time. Yesterday, and, again, to show 
the bipartisan cooperation on this Committee, the Chairwoman 
and I together met with and addressed the Association of 
Equipment Distributors who were here from all over the country 
in this room yesterday, and we both gave a little talk, and 
then we answered questions.
    And one of the first questions that we got was relative to 
LIFO that you referred to. Could you go into a little more 
depth relative to what the problem is and what you believe that 
Congress should do to address that problem?
    Mr. Hoops. Well, sure. I would be happy to. You are talking 
about the LIFO provision for S corporations?
    Mr. Chabot. Yes.
    Mr. Hoops. Okay. Many businesses adopt the LIFO method of 
computing their inventory and cost of goods sold, and just 
briefly the way the LIFO method works is that the costs 
associated with a particular sale, you match up the cost of the 
last inventory that you purchased with a particular sale. So if 
I sell something tomorrow, I would match up my cost with a 
product that I purchased today or the day before, not with a 
product that I purchased some time ago.
    So for a business that has been in existence for a long 
period of time, what typically happens is that the inventory on 
their balance sheet is reported at something significantly less 
than fair market value because that inventory has accumulated 
over many years, and as costs rise the cost of replacing that 
inventory is much more.
    The benefit of that, of course, is lower cost of goods sold 
and lower taxes by corporations. When a corporation goes from 
being a C corporation to an S corporation, the corporation no 
longer pays a corporate tax, but the shareholders pay an 
individual tax on the profits, as Mr. Greenblatt alluded to 
before.
    The provision states that when you elect S status, that 
built-in gain in the inventory that had accumulated when you 
were C corporation has to be reported in income before you 
elect that status. So it's a tax on the C corporation at 
conversion.
    That is a very expensive tax for a small business, and the 
truth of the matter is that if they had remained as a C 
corporation, they probably would never have paid that tax or 
they would only really pay the tax if they reduced their levels 
of inventory significantly.
    So our suggestion is that you do not penalize a corporation 
that wants to elect S status by making them report that income 
immediately. Rather, they would report it at the time a C 
corporation would report it, when the inventories were reduced.
    Mr. Chabot. Thank you very much.
    Dr. Lyon, you had mentioned in your testimony that it is 
your belief that what we should have is as clear, simple, 
transparent a tax system as we possibly can at the lowest 
possible rates and should, if possible, stay away from special 
incentives. I assume what you mean basically, one thing you do 
with that is you are further complicating the code. We are 
trying to help, but we are adjusting things and new forms and 
figuring it all out.
    Could you again tell us why you believe that that is 
important and that is the better route to take?
    Mr. Lyon. Well, there are a number of reasons. One is just 
to question whether the special incentives themselves really 
make our economy more productive on the whole. It is a little 
like industrial planning where we think certain activities are 
more meritorious than others, and as we observed Japan at one 
time engaged in that a great deal, their economy has not done 
very well over the past decade. So there is a question of 
whether we can really outguess the market in terms of what the 
best activities are.
    But the other point is that simply to claim these benefits 
requires a lot of time spent in understanding how the rules 
work, showing that you are in compliance, documenting it, and 
especially for small businesses the cost of going through that 
paperwork can eat up much, if not all, of the benefit that was 
intended from the provision. If instead we had simply channeled 
that reduced tax collection through lower rates, businesses 
would have incentives simply to go out there and earn income in 
the best way that they see to do it.
    Chairwoman Velazquez. Would the gentleman yield?
    Mr. Chabot. Yes, I would be happy to yield.
    Chairwoman Velazquez. Would you say the same is true with 
179 expensing and bonus depreciation?
    Mr. Lyon. It is a difficult angle. There are some clear 
benefits of Section 179 that businesses do not have to keep 
paper track of depreciation of the property. They write it off 
all at once. That is a big simplification advantage.
    However, not all property qualifies for Section 179. 
Investment in structures or inventory do not, and so again, we 
are doing a bit of industrial planning in rewarding investment 
in equipment that does qualify for it over other investments.
    Chairwoman Velazquez. Thank you for yielding.
    Mr. Chabot. Absolutely, and reclaiming my time, Mr. 
Rosenthal, you are next if I can. One of the kind of common 
things you hear about the restaurant industry is that when new 
restaurants are started there is a fairly good chance that they 
are not going to make it, that only so many make it beyond a 
certain year, and that sort of thing. How much of the challenge 
that a new restaurateur or perhaps even somebody that has been 
in business for a number of years, how much of a challenge is 
the dealing with the paperwork that is involved, the red tape, 
an outside force telling you what wages you have to charge when 
we say minimum wage is going to be this, that, or the other 
thing?
    And various governmental involvement in your business, how 
significant is that in the whole success or failure of a 
restaurant?
    Mr. Rosenthal. Well, we are in a business that the 
mortality rate for restaurants unfortunately is very high, and 
there are many reasons for that, but over the last decade, and 
I have been doing this for over four decades, so over the last 
decade, the paperwork, the administrative level of trying to 
maintain compliance has gotten so out of hand.
    I will give you an example. We have an employee, a very 
qualified employee who does nothing but work on I-9s, handles 
our I-9 compliance issues because this is a major issue today. 
And we pay about $50,000 a year individually in benefits for 
someone to do nothing but handle our I-9s. We have about 600 
employees, and we like most restaurants are turning about twice 
a year. So we have a ton of this coming through, and we have 
begged for a better system, a system where we can get on line 
and qualify people without us having to do all of these 
paperwork faxing, re-faxing. This is the best example.
    Additionally, you are right. All of the paperwork utilized 
for compliance with tip reporting has become onerous to a point 
that we have had to actually invest in a computer system that 
will insure that tips are declared properly and spread 
properly, and we have a human resources person that handles 
basically our tip employee wages, and that is all they do. So 
the administrative level of handling not only the paper work 
but the people in there and the qualified people to do these 
jobs.
    Additionally, we are faced with and all of our businesses 
are operated as separate corporations for many reasons. They 
may have another investor or someone else in there. So they are 
set up separately, which means we now operate seven businesses 
including the property, which means we have seven federal and 
state tax returns, and our accounting bills have gotten to a 
point that we do not have a general manager making what our 
accountants get paid a year to handle our taxes.
    So a long answer to a short question, but the answer is it 
has become very onerous and getting worse every day as new regs 
come in, health department regs, trans-fat bands, menu 
labeling. It goes on and on and on to a point in a narrow 
margin business you begin to wonder, as many operators begin to 
wonder, is it really worth it. Is it worth expanding?
    Mr. Chabot. Thank you very much.
    And finally, Mr. Greenblatt, I think one of the main points 
that you emphasized was the importance of making the tax cuts 
that were already passed, the capital gains tax relief, the 
marginal rates across the board, all of the above, make them 
permanent. That is one of the main things that we could do.
    You also talked about how many business owners are not 
really taking a whole lot out of the company. They are plowing 
it back in the business. So whereas it may look like they are 
rich people, wealthy people who some would argue deserve to be 
taxed more, in reality by plowing it back into the business, 
they are growing that business and hiring a whole lot of other 
folks, giving them a job.
    Is that a fairly accurate portrayal that I just made, and 
would you like to expound up that?
    Mr. Greenblatt. I think you summarized it wonderfully. We 
are the job machine. The small business manufacturer, the small 
business in general is the job machine, and we are going to get 
us out of the recession, and as you give us more impediments, 
it is going to take us longer to get out of the recession.
    When you tax us, we are less prone to reinvest back into 
the company. We are going to be less competitive, and we are 
going to lose more jobs to China. We are going to lose more 
jobs to some of these other countries.
    So the way for us to get motivated and to start hiring 
again is to let us reinvest back into the company and grow the 
company, and that is our future.
    Mr. Chabot. Thank you very much.
    Madam Chair, I yield back my time.
    Chairwoman Velazquez. Thank you.
    Mr. Hoops, we have talked about cell phones as listed 
properties. Are there any other listed properties, like 
automobiles, that are out of date and need to be updated?
    Mr. Hoops. I would eliminate all of the listed property 
rules, to be honest. That is one way to simplify the code, make 
life easier for small businesses and really eliminate a 
disparity that really should not exist.
    Chairwoman Velazquez. Okay. And my question is to you. On 
the first day of the 110th Congress I introduced H.R. 46, the 
Small Business Tax Flexibility Act. One of the provisions in 
that bill would give small start-ups the ability to choose the 
fiscal year that best fits their business cycle.
    This hearing is all about modernizing the tax code to make 
it more small business friendly. With that in mind, why is it 
important for our tax code to be flexible with regards to small 
businesses that are in the start-up stage?
    Mr. Hoops. Well, first of all, thank you very much for 
introducing that bill. It is something that the AICPA has 
supported and believes is necessary and has really thought that 
for a long time. So thank you very much.
    Mr. Rosenthal mentioned that most of the businesses in his 
industry and, in fact, most small businesses, many small 
businesses, too many small businesses fail in their first year 
of existence. Right now almost all small businesses are 
required to adopt a calendar year. There are a couple of 
problems with that.
    First of all, that may not match up against the 
corporation's natural business year.
    Second, if a new business starts up in October or November, 
after being in business in those first critical months, it has 
to stop, close its books and prepare a tax return. This would 
give small businesses an opportunity to have a fiscal year that 
matched up with their business cycle and for a new business to 
have an opportunity to operate for a full 12 months before it 
has to close its books.
    As an aside, both Mr. Rosenthal and Mr. Greenblatt 
mentioned the fees that they are paying to accounting firms. I 
would personally like to thank you for that.
    [Laughter.]
    Mr. Hoops. But because most of our small business clients 
are on a calendar year basis, there is an enormous amount of 
work that CPA firms have to compress in terms of serving their 
clients into a very short period of time.
    I think that having fiscal year flexibility would allow 
CPAs to devote more time to smaller, new businesses at a time 
of year when they are not so incredibly busy. So that is 
another important part of this provision.
    Chairwoman Velazquez. Thank you.
    Mr. Rosenthal, I know that Jasper's has been business for 
over 25 years, and I wanted to get your thoughts on the recent 
stimulus package that includes tax rebate. In 2001, Congress 
passed similar legislation that sent out tax rebate checks to 
millions of Americans. At that time, did your industry or 
restaurants see a significant boost in revenues?
    And do you anticipate higher volumes of business when the 
checks start arriving in May?
    Mr. Rosenthal. Well, we are all hopeful, but that is a 
question which we have been pondering because the last time 
that happened, we did not face some of the issues we are facing 
today, and that is at the current rate it probably would fill 
up someone's tank maybe two or three times, and I do not know 
if they are going to have any money left to spend in 
restaurants.
    So I am not overly optimistic that we are going to see that 
trickle down. The real problem--
    Chairwoman Velazquez. But in 2001, you did see that?
    Mr. Rosenthal. It did help. It did help at that time.
    Chairwoman Velazquez. Mr. Mackey, the R&D tax credit 
obviously is of great importance to your industry. 
Traditionally, that credit has been mainly utilized by larger 
companies.
    How, in your view, could the credit be modernized or 
simplified to make it more attractive for small businesses or 
more friendly?
    Mr. Mackey. Well, as I mentioned before, I mean, when you 
think about the wireless industry, you are thinking about big 
businesses, but I do think there are a lot of smaller companies 
that are able to use the R&D credit. My firm, for instance, we 
do not use it because we end up outsourcing a lot of the 
development of software and things like that to other companies 
which I assume are using the credit. So we benefit indirectly.
    I do think that perhaps more small businesses are able to 
take advantage of the credit than some people may generally 
realize, and even if they do not take advantage of it directly, 
indirectly they are able to benefit from the new products that 
are being developed by small businesses that do take advantage 
of the credit.
    Chairwoman Velazquez. Thank you.
    Mr. Hoops, how would the changes that you discuss make 
small businesses more competitive? And do you believe that 
these reforms could encourage greater small business formation?
    Mr. Hoops. Yes, I do believe it would encourage greater 
small business formation. I think the changes that we 
discussed, most of which are relatively minor and simple to 
fix, would go an enormous way, would make enormous strides 
towards making it easier for small businesses to comply with 
the tax law and to put their time and efforts to earning more 
profits.
    One of the other members was looking for the big idea. I 
have been in this business now for over 30 years, and in those 
30 years everyone is always looking for the big idea, but my 
experience and judgment tells me that there really is no big 
idea and that we would make a lot more progress, especially in 
a down economy, by focusing on fixing the hundreds of things 
that could be fixed relatively simply in the current tax code 
to make it more efficient and easier to comply with for small 
businesses.
    Chairwoman Velazquez. Thank you.
    Dr. Lyon, in light of the budget deficit, the tax gap is a 
major concern for the federal government and has received a lot 
of increased attention, given the budget deficit. One of the 
drivers of the gap is the increasing complexity. How would 
updating the tax code potentially reduce the tax gap?
    Mr. Lyon. Thank you, Madam Chairwoman.
    The actual studies have not been able to determine whether 
complexity drives noncompliance. I think there is a lot of 
common sense that when it takes more time to compute your 
taxes, businesses that have many other valuable things to do 
with their scarce time and resources may find it more valuable 
to generate income instead of devoting resources to the 
compliance costs.
    And so I do think as we simplify the tax laws and 
especially lower rates, it makes it much easier, less painful 
to report income and the tax gap would go down.
    Chairwoman Velazquez. Thank you.
    Yes, Mr. Hoops.
    Mr. Hoops. I think that there is no tax code simplification 
that could ever cure the tax gap when it comes to simply not 
reporting the income that everyone knows should be reported, 
and sadly for the small business owners, sadly the evidence is 
irrefutable that when you have increased reporting, you have 
increased compliance.
    But also I would say based upon my experience and practice 
and just dealing with my neighbors is that when there is a 
perception that the tax code is extraordinarily complex and 
unfairly favors some groups over the other, that people are 
even less enthused about paying the taxes that they should pay.
    So I think that that tax code in some cases contributes 
directly to the tax gap with its complexity and certainly in 
other cases indirectly to the tax gap.
    Chairwoman Velazquez. Thank you.
    Mr. Chabot. Would the gentle lady yield?
    Chairwoman Velazquez. Sure.
    Mr. Chabot. Yes I thank the gentle lady for yielding.
    The term ``the tax gap'' was one that sort of came up a few 
years ago, and some--certainly not the Chairwoman because she 
does everything right--but some people have used that term--
    Chairwoman Velazquez. Make sure that is reflected in the 
record.
    Mr. Chabot. That is right.
    [Laughter.]
    Mr. Chabot. But some people, I think, have used that term 
because they think that the problem is Congress has been 
spending this much and we have been taxing this much. So we are 
spending more than we in. So there is sort of this idea out 
there that there is a gap between what we spend and what we 
bring in in taxes, and some people are not paying their fair 
share of their taxes. If we can just get them, we can keep 
spending this extraordinary amount of money that we are 
spending up here.
    And the bottom line is we just spend too much in Congress. 
That has been true under Democratic control now and it was true 
certainly when Republicans were in control as well.
    So it is just a term that sort of has political 
implications. Certainly those that are not paying their taxes 
are not being fair to those that are, but I think the IRS and 
others try as hard as they can to make people comply with the 
tax code, and I just would not want to leave that impression 
out there that all we have to do is try harder or simplify the 
code, which I do think we ought to simplify, but then we will 
have more money. Then we can keep spending all of this 
exorbitant money, you know.
    We need to get control of spending.
    Chairwoman Velazquez. Yes, it really grew during this last 
eight years.
    Anyway, any more questions?
    [Laughter.]
    Mr. Chabot. Including this eighth year, too. So I have no 
other questions.
    Chairwoman Velazquez. Okay. So let me take this opportunity 
again to thank all of you for your participation and insights, 
and we will continue to work.
    Today we release this report that I will encourage you to 
read and to make any comments that you might want, and I ask 
unanimous consent that members will have five days to submit a 
statement and supporting materials for the record. Without 
objection, so ordered.
    This hearing is now adjourned. Thank you.
    [Whereupon, at 12:36 p.m., the Committee meeting was 
adjourned.]
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