[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]






 ADDING TO UNCERTAINTY: SMALL BUSINESSES' PERSPECTIVES ON THE TAX CLIFF

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

                                HEARING

                               before the

        SUBCOMMITTEE ON ECONOMIC GROWTH, TAX, AND CAPITAL ACCESS

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                           SEPTEMBER 13, 2012

                               __________



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



            Small Business Committee Document Number 112-086
              Available via the GPO Website: www.fdsys.gov

                                _____

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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                       ROSCOE BARTLETT, Maryland
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                      CHUCK FLEISCHMANN, Tennessee
                         JEFF LANDRY, Louisiana
                   JAIME HERRERA BEUTLER, Washington
                          ALLEN WEST, Florida
                     RENEE ELLMERS, North Carolina
                          JOE WALSH, Illinois
                       LOU BARLETTA, Pennsylvania
                        RICHARD HANNA, New York
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        MARK CRITZ, Pennsylvania
                      JASON ALTMIRE, Pennsylvania
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                     DAVID CICILLINE, Rhode Island
                       CEDRIC RICHMOND, Louisiana
                         GARY PETERS, Michigan
                          BILL OWENS, New York
                      BILL KEATING, Massachusetts

                      Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director

















                            C O N T E N T S

                              ----------                              
                                                                   Page

                           OPENING STATEMENTS

Hon. Joe Walsh...................................................     1
Hon. Kurt Schrader...............................................     2

                               WITNESSES

Theresa Kern, MA Steel Erectors, Inc., Palos Heights, IL.........     3
Doug Harmon, CEO, Twin City Die Castings Co., Minneapolis, MN....     6
Scott Hodge, President, The Tax Foundation, Washington, DC.......     8
Jeffrey A. Porter, CPA, MST, Porter & Associates, CPAs, 
  Huntington, WV.................................................    10

                                APPENDIX

Prepared Statements:
    Theresa Kern, MA Steel Erectors, Inc., Palos Heights, IL.....    24
    Doug Harmon, CEO, Twin City Die Castings Co., Minneapolis, MN    29
    Scott Hodge, President, The Tax Foundation, Washington, DC...    35
    Jeffrey A. Porter, CPA, MST, Porter & Associates, CPAs, 
      Huntington, WV.............................................    43
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Materials for the Record:
    Open Mic: Does the Expiration of Tax Rates Impact Your 
      Business?..................................................    54
    Statement of the National Association of Manufacturers.......    56
    Statements from Small Businesses Submitted to the Small 
      Business Committee's Open Mic Web Forum....................    60
    Associated Builders and Contractors, Inc. Letter for the 
      Record.....................................................    67
    American Dental Association Statement for the Record.........    69
    National Small Business Network Comments for the Record......    71

 
 ADDING TO UNCERTAINTY: SMALL BUSINESSES' PERSPECTIVES ON THE TAX CLIFF

                              ----------                              


                      THURSDAY, SEPTEMBER 13, 2012

              House of Representatives,    
           Subcommittee on Economic Growth,
                            Tax and Capital Access,
                               Committee on Small Business,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:15 a.m., in 
room 2360, Rayburn House Office Building, Hon. Joe Walsh 
(chairman of the Subcommittee) presiding.
    Present: Representatives Walsh, Chabot, Mulvaney, Schrader, 
Clarke, Cicilline, and Chu.
    Chairman Walsh. Welcome, everybody. This hearing of the 
Small Business Subcommittee on Economic Growth, Tax and Capital 
Access is called to order.
    I would like to thank the witnesses for appearing today to 
discuss one of the most important issues facing small 
businesses and, for that matter, our economy: The looming 
expiration of the 2001 and 2003 tax rates.
    Despite a feeble economic recovery at home, economic 
turbulence abroad, and a series of political and policy actions 
in Washington that have left small businesses as uncertain as 
ever, many of our Nation's small firms have learned to survive 
and adapt to whatever the marketplace or Washington has thrown 
at them. Understanding the challenges they face and how we in 
Congress can foster an environment where they can succeed is a 
constant focus of this Committee.
    Most businesses in the United States are small, and unlike 
many of their large counterparts that are subject to corporate 
income taxes, the vast majority of small businesses are 
organized as pass-through entities, where the taxes are paid by 
their owners at individual rates. Acknowledging and 
understanding this distinction is important.
    While there is broad agreement that allowing all of the tax 
relief enacted in 2001 and 2003 to expire is inappropriate and 
should be avoided, there is wide disagreement on the 
composition of an extension and what it means for small 
businesses.
    The Obama administration and some of my colleagues on the 
other side propose that taxes should revert to higher rates for 
taxpayers earning more than $200,000 a year. They claim that 
this proposal would only raise taxes on 3 percent of small 
businesses. But that 3 percent figure accounts for more than 
900,000 small businesses.
    Most of my Republican colleagues and I support an across-
the-board extension of current lower tax rates. We believe that 
imposing the higher marginal rates on earners making more than 
$200,000 a year would most directly affect those small firms 
responsible for generating the majority of small business 
income and new jobs.
    We would also note that, in addition to higher marginal 
rates on these businesses, the administration's proposal could 
also result in small pass-through businesses being taxed at 
rates higher than some of our Nation's largest multibillion 
corporations. That is not my definition of tax fairness.
    Finally, in addition to the prospect of higher marginal 
income tax rates, small businesses must also contend with 
uncertainty created by the expiration of the estate tax and how 
this unresolved policy issue affects long-term business 
planning.
    The purpose of today's hearing is to examine these issues 
in more detail and to understand how policy actions in 
Washington are continuing to create uncertainty for small 
businesses.
    Before I yield to Ranking Member Schrader for his opening 
statement, I ask for unanimous consent to insert into the 
record these statements small businesses have submitted to the 
committee's open mic web forum regarding their concerns about 
higher taxes and tax uncertainty.
    Without objection, so ordered.
    Chairman Walsh. I now happily yield to Ranking Member 
Schrader for his opening statement.
    Mr. Schrader. Thank you, Mr. Chairman.
    I appreciate the committee's indulgence and apologize to 
the panel and others for being here late. I had some 
constituents come in unexpectedly, and they came a long way. I 
am from Oregon. So one does what one has to do.
    The economy has been gaining strength, largely because of 
the powerful role played by small businesses in America's 
economy. It has been a tough haul the last few years, been a 
very tough haul. It has been our history that small firms have 
been the biggest job creators in America, bolstering the 
economy in the tough times and bringing us out of the depths of 
these recessions. This has been a tough one. This has been a 
very tough one.
    When it comes to providing assistance and assuring small 
firms that they have the tools they really need, one thing has 
been clear. The Internal Revenue Code has provided a lot of 
obstacles to each and every one of us.
    As I have said in previous hearings, as a small businessman 
myself there was a time when I did my own taxes for my 
business. That has long since gone away, long since gone away.
    A lot of small firms depend on certain tax incentives to 
offset the costs of innovation and expansion, and I have 
supported those temporary tax provisions and extenders because 
it is important to give small business men and women every tool 
in the toolbox in these tough and difficult times.
    The expiration of many of these tax provisions is fast 
approaching, the so-called fiscal cliff that we all hear about; 
and small business owners have some very difficult choices to 
make and don't know which way to turn, given the uncertainty 
that has been created out there. Your input here today will be 
vital, I believe, in helping the chairman, myself, and the rest 
of the Members of Congress decide which of the extenders are of 
great value, which are of some value, and which are of less 
value.
    As many of you know, we have our own budget to deal with. 
We seem to have a great deal of trouble passing budgets these 
days, which is a shame, because you have to do that every year 
and plan in advance. We have a long way to go to catch up with 
a lot of you all.
    And right now, in my humble opinion--this is myself 
talking--there is a lot of rhetoric on both sides about taxing 
this group or not taxing that group or taxing people below 
certain income levels. I come from Oregon. $250,000, you are 
pretty darn well off if you have got $250,000. So this rhetoric 
about millionaires' tax and 250 I think misses the mark.
    What many of us are looking for in the real world is 
comprehensive tax reform and, as the chairman indicated, not 
just for corporate America, not just for C corps. Most of 
American businesses, most American small businesses are S Corps 
or LLCs or partnerships or sole proprietors. This is a group 
that we want to make sure gains through tax reform.
    A lot of proposals out there for it. It means different 
things to different people. Everyone sees it through their own 
eyes, if you will. But there are some very exciting proposals 
about just getting back to basics, eliminating maybe all tax 
breaks and reducing tax rates.
    So today I hope we have an opportunity to chat about which 
of the extenders are most important should we decide to 
continue with that policy and what effect eliminating all tax 
breaks would have on small businesses if we are able to buy 
down your tax rates dramatically like has been proposed in 
several different bipartisan proposals out there.
    So look forward to hearing from the Committee, Mr. 
Chairman, and appreciate you having this hearing.
    Chairman Walsh. Thank you, Congressman Schrader.
    If Subcommittee members have an opening statement prepared, 
I ask that they be submitted for the record.
    Chairman Walsh. Each witness will have 5 minutes to deliver 
your testimony. Try your best to adhere to that limit.
    We will begin with Theresa Kern, our first witness. She is 
the owner of MA Steel Erectors, Inc., a construction company 
located in the greater Chicago area of my home State, Illinois. 
MA Steel Erectors has been in business for more than 30 years 
and is organized as a Subchapter S business. Ms. Kern will be 
testifying today on behalf of the Women Construction Owners & 
Executives, where she recently served as that organization's 
president.
    Ms. Kern, thank you for appearing today. I look forward to 
your testimony.

   STATEMENT OF THERESA KERN, MA STEEL ERECTORS, INC., PALOS 
 HEIGHTS, ILLINOIS, TESTIFYING ON BEHALF OF WOMEN CONSTRUCTION 
                   OWNERS AND EXECUTIVES, USA

    Ms. Kern. Good morning, Mr. Chairman, members of the 
Subcommittee. My name is Theresa Kern, and I am the owner and 
president of MA Steel Erectors, headquartered in Palos Heights, 
Illinois. We are a union-signatory specialty trade 
subcontractor that provides labor to install reinforcing steel 
in commercial, industrial, heavy, and high-rise construction 
projects. MA Steel is incorporated as a Subchapter S pass-
through corporate entity, and I am the sole shareholder.
    I am testifying today as both a small business owner and in 
my capacity as immediate past president of Women Construction 
Owners & Executives, a 30-year-old national organization whose 
mission is to simply create contracting opportunities for our 
members, women who have chosen to build a career and a business 
in the nontraditional construction industry.
    Thank you for giving me the opportunity to testify before 
you today at this very important hearing.
    As you know, the lingering economic recession has 
significantly damaged the construction industry, and most small 
businesses in our industry have been hit disproportionately 
hard. Yet WCOE members are optimistic about the future as the 
construction industry economy begins a slow recovery.
    The future tax policy of the United States will have a 
profound effect on our members' ability to stabilize and then 
grow their businesses. MA Steel is a labor-intensive business, 
as are most construction companies, and business growth has a 
direct correlation to creating badly needed jobs to help the 
American economy grow and prosper.
    While media headlines blare ``corporations don't pay their 
fair share'', let me assure you that small business 
corporations not only pay their fair share but are a major 
contributor to the economy as well as the tax base of this 
country and have often been referred to as the lifeblood of the 
U.S. economic growth engine.
    Ernst & Young is reporting that 90 percent of all U.S. 
businesses are corporate pass-through entities and employ more 
than 50 percent of the private-sector workforce while 
representing over a third of all U.S. business receipts. Pass-
through entities are Sub S corporations, S Corps, and limited 
liability corporations, LLCs, that have specific limits as to 
the number and type of shareholders. IRS reports that there are 
over 4.5 million Subchapter S corporations alone. It is often 
said that small businesses are the cornerstone of the American 
economy and corporate pass-through entities are the cornerstone 
of America's small business community.
    Generally, entrepreneurs are advised by their CPA or 
attorney to incorporate using one of these congressionally 
chartered tools in order to separate her business from her 
household assets without the onerous paperwork and reporting 
requirements of a C Corp.
    Congress also decided in 1958 that these special privately 
held corporate entities would not be taxed as a corporation, 
but rather, because the owner-entrepreneur was investing her 
own money into the enterprise to get it started and often to 
keep it running, the income or loss generated by the Sub S or 
LLC corp would be reported by the owner on their individual tax 
returns as earned income or loss. The pass-through corporation, 
whether a Sub S or LLC, is therefore not liable for income tax, 
but the shareholder is. The business's entire profit or loss is 
passed through to the individuals who report it on their 
household tax return at the rate for their total household tax 
bracket. Conversely, profit distributions to C corp owners are 
treated as dividend income to the shareholders and currently 
taxed at up to 15 percent.
    When the media trumpets headlines like ``90 percent of 
corporations pay no taxes'', they may be statistically correct, 
but these are not corporations as the general public defines 
corporations. These are mostly small business owners who have 
been advised to protect their household assets by incorporating 
and to use an LLC or Sub S corporate structure to eliminate the 
requirement for big corporate boards of directors, annual 
meetings, elections, expensive audits, and activist 
shareholders. With the 2002 passage of Sarbanes-Oxley, which 
mandated even more rigorous reporting requirements for C corps, 
pass-through entities are even more attractive.
    What is critically important to understand is that profits 
in a business incorporated as a Sub S or LLC entity does not 
translate to cash in the pocket of the owner. But a loss in a 
business nearly always requires the owner to either forego her 
own salary or even invest more of her own money into the firm.
    There is one other thing that all corporate pass-through 
entity owners know. While the company may show a profit in the 
financial statements, there may be no cash in her corporate or 
personal bank account. Further, there is no relationship 
between the amount of profit a Sub S or LLC entity shows on a 
financial statement and the amount of money an owner has 
actually withdrawn.
    Please let me also explain one of the anomalies about the 
construction industry. Unique to construction is the issuance 
of a surety bond, which is a guarantee of performance on a 
project that an owner of a construction company must 
collateralize with the business's balance sheet and personal 
assets. Nearly all construction projects require a surety bond 
performance guarantee from all of the contractors and 
subcontractors working on a project. Because construction 
company balance sheets have taken a severe hit during the past 
4 years, banks and bonding companies are insisting that balance 
sheets be strengthened by keeping profits in the company.
    It is important to note here that the surety bond on a 
specific project cannot be released until the final retention 
is released at completion and acceptance by the owner. My 
ability to begin a new project is restricted by my balance 
sheet, which remains encumbered until those assets are released 
when the bonded work is accepted and final payment received, a 
process that often takes many, many months after project 
completion. If I want to take on another project prior to the 
release of the retention money in order to keep my crews busy, 
I need to have sufficient assets available to secure another 
bond.
    Let us assume I am lucky enough for MA Steel to make a nice 
profit this year. My bank and bonding company will require that 
I not only pay myself a minimal amount but that I leave the 
profits in the business in order to show a stronger financial 
position. As a Sub S corp, however, all of that nice profit 
will be reported as income to me, and I will have to pay tax on 
it, even though I may not have one penny of it in my personal 
checking account.
    When we are talking about an average contract value of 
$500,000 and dozens of projects a year, it is not unrealistic 
to expect annual business profits to exceed $250,000, all of 
which is reported as retained earnings in the business and as 
income to me. Yet the majority of that profit stays in the 
business and never makes it to my personal checking account for 
my own use.
    I am liable for payment of the income taxes due on this 
phantom income at the individual tax rate. Increasing the rate 
of this tax by even 10 percent will have a significant 
deleterious effect on my ability to grow my business. I have to 
keep the profits in the business per demands of the bank and 
bonding company if I want to grow, yet I have to take the 
profits out of the business to be able to pay the taxes.
    The members of WCOE fully support simplification of the Tax 
Code and closing tax loopholes that are beneficial only to the 
most sophisticated financial analysts. We also support efforts 
to decrease the Federal budget deficit, but to do it on the 
backs of America's robust entrepreneurial community will be 
counterproductive.
    I would like to give you one more relevant example of what 
the current uncertainty with the Tax Code means to small 
business owners like me.
    Chairman Walsh. Ms. Kern, thank you. I need to stop you 
right there. You are doing great. I need to stop you right 
there. Your entire testimony will be part of the record----
    Ms. Kern. Okay.
    Chairman Walsh [continuing]. But we need to move onto the 
other witnesses. But thank you very, very much.
    Ms. Kern. Okay. All right. Thank you.
    Chairman Walsh. Let's move to Doug Harmon, our next 
witness. He is CEO of Twin City Die Castings Company, a second-
generation family owned business located in Minneapolis, 
Minnesota. Twin City Die Castings is a Subchapter S business 
employing about 250 full-time workers. He is testifying today 
on behalf of the North American Die Casting Association, where 
he serves as a member of that organization's government affairs 
committee and board of governors.
    Mr. Harmon, thank you for appearing today. We look forward 
to your testimony.

  STATEMENT OF DOUG HARMON, CEO, TWIN CITY DIE CASTINGS CO., 
MINNEAPOLIS, MINNESOTA, TESTIFYING ON BEHALF OF NORTH AMERICAN 
                    DIE CASTING ASSOCIATION

    Mr. Harmon. Good morning, Chairman Walsh, Ranking Member 
Schrader, and members of the Committee. Thank you for the 
opportunity to testify today.
    I am here to discuss the severe economic consequences that 
small manufacturers will face due to the so-called fiscal cliff 
as it relates to taxes that will occur in January, 2013, unless 
Congress intervenes. Failure to act on the looming year-end tax 
increases would yield the largest tax increases in American 
history.
    My name is Doug Harmon. I am the CEO and owner of Twin City 
Die Castings Company, a second-generation family owned business 
employing 250 employees. We manufacture hundreds of different 
types of precision aluminum and magnesium die castings for the 
automotive, recreational, industrial equipment, defense, 
aerospace, computer, and medical industries.
    I am testifying today on behalf of the North American Die 
Casting Association, where I serve as a member of the 
Government Affairs Committee and on the board. NADCA is the 
sole trade and technical association representing over 300 
U.S.-based companies and industry suppliers that produce and 
sell castings essential to the manufacturing process.
    Twin City Die Castings is one of the oldest die casting 
companies in North America. It was founded in 1919. My father 
took a gamble and purchased the small business in 1974 with 
family savings. After college, my brothers and I joined the 
business. My dad taught us not only how to produce quality 
castings but the need to invest in our employees and the shop.
    On the table in front of me are just a few examples of the 
wide variety of castings we have produced. This happens to be a 
military application, a hospital application, and an automotive 
application.
    We operate three die casting facilities in the U.S., and we 
are exporting 22 percent of our total castings in eight 
different countries around the world. In all our operations we 
provide good-paying blue collar jobs, health reimbursement 
accounts, and other benefits to our employees, whom we consider 
as members of our extended family.
    The recession hit our industry and my company hard. A 
number of die casters that had been in business for more than 
25 years were forced to shut their doors. We were faced with 
downsizing our workforce to 155 workers from 250 when millions 
of dollars of orders simply dried up. Fortunately, orders have 
been slowly coming back, and we were able to rehire many of our 
employees, but we are still not back to pre-recession 
production and sales levels.
    In 2012, we have been much more cautious in our hiring and 
the types of capital improvements that we have undertaken, 
given the uncertainty of our taxes and the fragile economy. For 
manufacturers like me, this tax cliff is a serious threat.
    Not knowing whether or not Congress will renew the Bush-era 
tax cuts and the pro-business tax extenders, which expired at 
the end of 2011, is keeping many die casters and, for that 
matter, most manufacturers from investing as much as they could 
to grow their business, purchase new equipment, and hire more 
employees. In order for die casters to prosper in this country, 
we need two things: stability with a pro-growth approach and 
transparency in our Tax Code.
    How die casters are organized and the way we pay taxes has 
the single greatest impact on our industry. Our company is 
structured as a Subchapter S corporation, where the individual 
owners pay the taxes. More than 70 percent of manufacturers are 
structured as S corporations or other flow-through entities, 
meaning they pay taxes at the individual rate. Since we are put 
in the top tax bracket, we could see our rates jump to 39.6 
percent from 35 percent. We could also face a 3.8 percent tax 
on certain types of investment income passed in the Affordable 
Care Act effective in 2013.
    On top of these increases, small businesses like mine will 
also have to deal with a .9 percent surtax on wage income 
earned above $200,000 for individuals and $250,000 for couples.
    Bottom line for Twin City Die Castings Company is that if 
the current tax rates are not renewed by January 1, 2013, and 
individual rates increase by nearly 5 percent, we will face a 
hefty increase in our tax bill. We will not be able to 
reinstate the 401(k) match for our employees' retirement, nor 
will we have the extra funds to increase our workers' health 
reimbursement accounts.
    Unlike larger corporations, small manufacturers like us are 
required to provide a personal guarantee for most loans when 
purchasing capital equipment or expanding our facilities. This 
means as a small business owner I put my family's home on the 
line and take significant risks if I want to grow the business 
and compete in the global economy. This is where tax deductions 
and credits come in as the only tool we have to reduce our 
effective tax rate unless Washington can finally act on a 
comprehensive tax reform.
    Several key business tax breaks currently available are set 
to change or expire entirely after December 31, 2011. In 
particular, we urge lawmakers to renew tax extenders widely 
used by manufacturing companies such as the R&D credit, bonus 
depreciation, and section 179 expensing. These historic capital 
investment incentives have had a positive impact and 
incentivized manufacturing, purchasing, and job creation in 
recent years.
    In conclusion, small manufacturers cannot compete globally 
or even survive domestically if we do not continually invest in 
equipment and our people. This is why tax reform is so 
important to manufacturing companies across the country, to 
free up capital for investing in people and equipment, to 
provide more certainty so we can plan for future years. We 
cannot afford to fix our Nation's problems on the backs of 
small businesses and their employees.
    Thank you for the opportunity to testify before the 
Committee today, and I look forward to answering your 
questions.
    Chairman Walsh. Thank you, Mr. Harmon.
    I now would like to introduce Scott Hodge, president of the 
Tax Foundation, a nonpartisan tax research group based right 
here in Washington, DC.
    Mr. Hodge, welcome. I look forward to your testimony.

   STATEMENT OF SCOTT HODGE, PRESIDENT, THE TAX FOUNDATION, 
                         WASHINGTON, DC

    Mr. Hodge. Well, thank you, Mr. Chairman, Mr. Schrader, and 
members of the Committee. I appreciate the opportunity to talk 
about this really important issue.
    As we have heard, American entrepreneurs are facing a lot 
of uncertainty right now not only with the stalled economy but 
obviously the fiscal cliff that we are facing at the end of the 
year. And, unfortunately, there is many in Washington who say, 
well, we shouldn't worry about the economic impact of allowing 
these top tax rates to expire because only 2 percent of pass-
through businesses will be impacted.
    Now, I think this view is badly mistaken. I think it is 
like saying that, well, we shouldn't worry about the economic 
impact of cancer because NIH tells us that only .5 percent of 
Americans will be diagnosed with cancer this year. Well, as you 
know, we spend tens of billions of dollars each year on cancer 
research, testing, and treatment because we understand how much 
it costs the economy each year in lost productivity, not to 
mention about a half a million of us that are expected to die 
of cancer this year.
    And it is the same with the impact of higher taxes on 
business. The issue is not how few businesses will be impacted. 
The relevant economic question is how much business income will 
be hit with higher taxes. And no matter how you parse the data, 
the evidence is very clear that the vast majority of pass-
through business income is earned by high-income taxpayers, and 
they would be disproportionately harmed by a such a tax 
increase.
    In fact, Tax Foundation research has determined that nearly 
40 percent of any new revenue raised by boosting these top tax 
rates would come from the most successful businesses; and based 
on the most recent revenue estimates, we expect this could 
amount to a tax increase of $377 billion over the next 10 years 
on these pass-through businesses. And by all accounts, that 
would amount to a success tax on our best and brightest 
entrepreneurs and probably the largest tax increase on small 
business in American history.
    To understand the impact of this, we need to understand 
some basic facts.
    First, there are more than 30 million pass-through 
businesses today, compared to less than 2 million traditional 
corporations. And there is now more business income that is 
taxed under the individual Tax Code than under the traditional 
C code. And Treasury estimates that as much as 40 percent of 
all business taxes are now paid on individual tax forms, and 
high-income individuals earn the vast majority of this business 
income.
    The Joint Committee on Taxation now estimates that if the 
Bush-era tax rates were to expire 53 percent of net business 
income will be reported on returns that will have a marginal 
tax rate of either 36 percent or 39.6 percent. IRS data shows 
that 72 percent of all pass-through income is earned by 
taxpayers earning over $200,000 a year, and 36 percent of all 
that pass-through income is earned by people with a million 
dollars or more on their tax returns.
    The economic evidence is very clear, and it suggests that 
increasing top marginal income tax rates on individuals would 
be very detrimental to America's long-term economic growth. 
Economists at the OECD have determined that high personal 
income taxes are second only to corporate income taxes in their 
harmful effects on long-term economic growth.
    It is well known that the U.S. has the highest corporate 
tax rate in the world today, but I bet few of you realize that 
America has the most progressive personal income tax system in 
the industrialized world. What that means is the top 10 percent 
of taxpayers pays a larger share of the income tax burden than 
their counterparts in high tax countries such as France and 
Sweden.
    The economic research is quite clear that there is a big 
trade-off between tax policies that enhance growth and tax 
policies that are aimed at equity. Meaning the more we try to 
make the income tax system more progressive, the more we 
undermine the factors that lead to economic growth such as 
investment, risk taking, entrepreneurship, and productivity.
    Our economists estimate that cutting the top personal 
income tax rate by 10 percentage points could lead to an 
increase in total GDP growth of 7.5 percentage points over a 
10-year period of time. We would see even greater economic 
growth by cutting the corporate rate by 10 percentage points.
    Let me conclude, Mr. Chairman, by saying, you know, they 
say when you tax something you get less of it. So why would we 
want fewer small businesses, lower wages, and less economic 
growth? Because those are the consequences of allowing the top 
tax rates to expire on January 1. But by reforming the Tax Code 
and cutting tax rates on businesses, we would see higher 
economic growth, higher wages, and better living standards for 
all Americans, and that should be priority number one for all 
public policies.
    Thank you very much, Mr. Chairman.
    Chairman Walsh. Thank you, Mr. Hodge.
    I now yield to Ranking Member Schrader so he may introduce 
our next witness.
    Mr. Schrader. Thank you very much, Mr. Chairman.
    It is my pleasure to introduce Jeffrey Porter, founder and 
owner of Porter & Associates in Huntington, West Virginia. His 
firm concentrates on providing tax planning and business advice 
for small and medium businesses and high net worth individuals. 
Mr. Porter has been active in the American Institute of 
Certified Public Accountants, a group we should probably take 
advice from more often, for over 20 years and currently serves 
as the vice chair of the Tax Division Tax Executive Committee.
    Welcome, Mr. Porter.

STATEMENT OF JEFFREY A. PORTER, CPA, MST, PORTER & ASSOCIATES, 
 CPAS, HUNTINGTON, WEST VIRGINIA, TESTIFYING ON BEHALF OF THE 
       AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

    Mr. Porter. Thank you.
    Good morning, Chairman Walsh, Ranking Member Schrader, and 
members of the Subcommittee. I am Jeffrey Porter, vice chair of 
the American Institute of CPAs' Tax Executive Committee and a 
sole practitioner at Porter & Associates in Huntington, West 
Virginia. I consider myself a small business, and I provide tax 
planning and business advisory services for small- to medium-
sized businesses and their owners. On behalf of the AICPA, I am 
pleased to have the opportunity to testify today on the topic 
of the small business perspectives on the tax cliff.
    This year has been an extraordinary year for uncertainty in 
taxes as well as the macro economy, making it difficult for 
small businesses and their owners to make informed business and 
financial decisions. Unfortunately, this uncertainty is not 
limited to one or two provisions but instead affects many areas 
of the Internal Revenue Code. The uncertainty becomes even more 
unsettling when you look at the potential changes in tax 
treatment for some of these items.
    For example, qualified dividends are currently taxed at a 
maximum rate of 15 percent. However, beginning next year, the 
same dividends might be subject to an income tax rate of 39.6.
    Multiyear planning and the ability to predict or at least 
to estimate business profits and taxes are critical in 
operating a business. It is also essential to know the future 
income tax rates in structuring major business transactions, 
such as in the sale of a business or of its assets. In order to 
determine a sales price acceptable to both the buyer and 
seller, both parties need to understand their potential tax 
liability for the current year as well as any future year. 
Without this information, it is extremely difficult for either 
party to make an informed decision.
    Tax considerations are even more substantial if the sale is 
structured as an installment sale and the seller will report 
income or capital gains over a number of years. This situation 
happens frequently, since banks are hesitant to lend money in 
many types of these transactions.
    Next, I would like to discuss the tax extenders, which in 
the last several years have repeatedly created uncertainty and 
confusion. The on-again, off-again nature of extenders, coupled 
with retroactive tax law changes, make long-term planning 
difficult. They result in the filing of amended returns and 
significantly increase the overall complexity.
    Two of the most significant tax incentives for businesses 
to invest in machinery and equipment, the section 179 election 
and bonus depreciation, are both part of these extenders. These 
areas have a substantial impact on businesses, as the ability 
to write off a substantial capital expenditure at one time may 
determine whether a business owner purchases an asset this 
year, next year, or perhaps not at all. Although income taxes 
are not the only factor in making most business decisions, 
prudent business owners want to understand the tax consequences 
of a transaction.
    We also urge you to address the AMT rules. The AMT tax 
rates and exemption levels are not indexed for inflation; and, 
as a result, the AMT exemption has become an annual problem. 
For example, there is currently no AMT patch for 2012. As a 
result, estimated tax planning for small businesses has to take 
into account the lower AMT exemption amount. This means that 
many small businesses will essentially provide the government 
with an interest-free loan or risk paying an underpayment 
penalty if the AMT patch is not passed retroactively. It is a 
no-win situation for these taxpayers.
    It is important for Congress to reach an agreement with 
regard to the expiring tax provisions as soon as possible. The 
uncertainty of the tax law unnecessarily impedes long-term 
planning for businesses and prevents owners from making 
informed decisions.
    I also strongly urge you not to underestimate the effect 
the tax cliff has on tax administration. If Congress waits 
until late in the year or even into next year to enact tax law 
changes, the IRS and commercial software vendors must scramble 
to revise tax forms and update software. As we experienced just 
a couple years ago, this process would likely delay the initial 
date when many taxpayers, including small business owners, can 
file their income tax returns. As a result, affected taxpayers 
would receive their refund checks later than usual, which is 
particularly concerning for businesses operating under a tight 
cash flow.
    Last-minute changes are also very problematic for CPAs. Our 
members, a vast majority of whom are small businesses 
themselves, would face an increasingly compressed and perhaps 
hectic busy season. They would need to educate clients on the 
changes in the rules, advise owners on the tax consequences of 
business transactions, assist small businesses with tax and 
cash flow planning, and prepare income tax returns, all in a 
relatively short period of time.
    Thank you again for the opportunity to testify, and I would 
be pleased to answer any questions you may have.
    Chairman Walsh. Thank you, Mr. Porter.
    Thank you to all the witnesses.
    I just have one quick question, because I want to hear from 
my colleagues, Congressman Schrader, and everyone else.
    Mr. Hodge, the Joint Tax Committee estimates that the 
administration's proposal for higher marginal rates will apply 
to more than 50 percent of small business income. You focused 
on income in your testimony, as opposed to the aggregate number 
of small businesses affected. Why is that emphasis more 
important, focusing on income as opposed to the number of small 
businesses that might be affected?
    Mr. Hodge. Mr. Chairman, it really has do with the economic 
power or success of these businesses, as opposed to just their 
sheer number.
    As you mentioned in your opening remarks, these are over 
900,000 small businesses. But these are really the most 
successful, dynamic, and hopefully growing businesses; and, 
thus, they will bear the disproportionate share of any tax 
increase.
    Chairman Walsh. One quick follow-up on another topic. I 
suppose then that wouldn't be, by definition, a follow-up. So a 
quick question on another topic.
    Undoubtedly, when I am home talking to small business 
owners every single day, the estate tax comes up----
    Mr. Hodge. Oh, yes.
    Chairman Walsh [continuing]. Again hitting us at the end of 
the year. How does this tax inhibit small business decision-
making?
    Mr. Hodge. Well, there is the uncertainty that Mr. Porter 
talked about. And I don't know any small business person today 
who can plan around what is going to happen with the estate 
tax. But there is an awful lot of money spent, I think 
needlessly, on preparing for the estate tax. And there are some 
economic estimates that say the compliance costs and economic 
burden of the estate tax actually exceeds the amount of revenue 
that it generates for the Federal Government.
    The real people getting rich here today off the estate tax, 
maybe to a small degree the Federal Treasury, but are really 
the insurance companies, Mr. Porter and his colleagues that are 
helping people try to minimize their estate tax burden, plan 
for it, and avoid having their company sold or undermined as a 
result of those higher taxes.
    Chairman Walsh. Quickly, in terms of promoting economic 
growth, what is the appropriate estate tax exemption and rate? 
Is there one?
    Mr. Hodge. There should be no estate tax. The estate tax is 
double, triple taxation, in some cases, even more. It is really 
an abomination. And, unfortunately, it is sold as a way of 
controlling long-term wealth or the concentration of wealth. It 
really does not have that impact.
    In many respects for many small businesses, it is an 
accidental tax, because they weren't thinking about it. And all 
of a sudden the owner passes away, the family now is left to 
sell the business, and, to me, that is a crushing effect on the 
economy.
    Chairman Walsh. Thank you. Thank you, Mr. Hodge.
    Congressman Schrader.
    Mr. Schrader. Thank you, Mr. Chairman.
    Good testimony. I am worried about our small business men 
and women, how we get out of this at the end of the day, and a 
lot of different competing proposals.
    As I alluded to in my opening remarks, unfortunately, we 
have to balance our budget, too. So while we would love to be 
Santa Claus to everybody, we have to make some very tough 
decisions. Hopefully, we will get around to making some tough 
decisions one of these days in Congress. But it is important 
for us to have information, and that is why we have you guys 
here.
    A couple quick things. I don't care who takes this 
particularly, but I was interested in explaining for folks, I 
think the panel has some pretty good understanding, but, you 
know, the profit. Everyone says $250,000--I said it in my 
remarks--is a lot of money for an individual. But when you are 
a heavily capitalized business, a lot of that can be taken up 
and you don't ever see that income on your balance sheet. There 
is two or three things that come to my mind, but it would be 
more powerful hearing from you.
    In a business, making big investments either in equipment 
or in personnel, how does that show up on your income tax 
statement and how might it affect how much you actually take 
home at the end of the day?
    Ms. Kern. Well, the $250,000 that may show up on your 
financial statement reverts to your personal tax return. But 
the problem is it never leaves the business because your bank, 
your bonding company, they require those assets to remain in 
the business so that the business is qualified to be extended a 
line of credit or purchase equipment. You know, it is 
collateral. So, in some cases, you don't even see that 
$250,000. It just sits in your business and has to stay there. 
It depends on what your bank requires of you to extend their 
line of credit to you if you need one.
    Mr. Schrader. And your principal payments?
    Ms. Kern. The principal payments on what?
    Mr. Schrader. Say your big piece of machinery, big piece of 
equipment.
    Ms. Kern. Oh, absolutely.
    Mr. Schrader. You don't take home that either, and yet that 
would appear potentially on your tax statements----
    Ms. Kern. Right.
    Mr. Schrader. [continuing]. As money that you would have.
    Ms. Kern. Right.
    Mr. Harmon. We are a very capital-intensive business, as is 
the die casting industry as a whole. And I know if you go back 
and look at our investments in our business, we have averaged 
close to $3 million a year in investments, new equipment, new 
CNC machines, different technologies.
    We are in a global economy. We have to compete with the 
Chinese. And to do that we have to be more productive. We have 
to hire young kids that have technical abilities in 
programming, these machine cells. This is where we have a 
machine, a robot, and a trim press. But it takes a heavy 
investment.
    We are over $40 million in sales, between $40 and $50 
million in sales, and $250,000 of profit is nothing. That is 
less than a percentage point of profit on sales. We need those 
funds to invest in equipment.
    But even more so, it is the people. We have a lot of 
training needs and technology seminars, things like that. We 
need to invest in our people and equipment.
    Quite honestly, since the recession, we have had to cut 
back on benefits. In 2009, we had to pull benefits back, cut 
hours, cut salaried people's wages. We are now just starting to 
get back to where we can get some of those back in place.
    And now all of a sudden to have a 15 percent tax increase--
I mean, from 35 percent to 39.5 percent, besides some of the 
other taxes that come into play, it could be a 15, 20 percent 
increase in our tax burden. So it is just critical for 
manufacturing companies that are capital-intensive to have that 
money available.
    The other thing is covenants with the bank. We owe millions 
of dollars to the bank because we have had to borrow over the 
years to build our company up. And so there are covenants on 
what an executive can get such as what I can get for a pay 
increase, and what I can pull out of the company in a dividend. 
So I am under the control of the bank that we borrow money 
with.
    It is so important to have those funds available, again, 
for the training and giving our employees' benefits back and 
also for the equipment expansion. These are good blue collar 
paying jobs. I had our IT manager run an analysis of last year 
on what our average wage was, and it was over $50,000. These 
are good paying middle-class jobs that are being impacted here.
    Mr. Schrader. Mr. Porter, real quick, as an accountant, you 
must be pulling your hair out, the fact that we don't have 
anything closely resembling certainty in terms of what to 
advise your clients to do at the end of the tax season here. 
And you lived through this nightmare 2 years ago.
    Mr. Porter. Absolutely.
    Mr. Schrader. And curious if it is different this time and 
how you try and advise people. And, frankly, it is pretty 
obvious, I think to everybody at least here in Washington, DC, 
we are going to do absolutely nothing until after the election. 
And then, frankly, it depends a lot on who wins the Presidency 
as to whether or not we do anything in the lame duck session. 
What impact is that going to have on our economy and small 
business men and women?
    Mr. Porter. Well, we did live through it 2 years ago. And I 
think it is probably a little more severe this time, just again 
because we have got the whole election cycle that we are into, 
and it makes it a little harder to even handicap what we think 
is going to happen.
    You know, many times you are telling your clients you don't 
know. You know, you will try to sit down and you will say, 
well, we think if this happens then this may happen. And if we 
think this happens, then this may happen. And that certainly 
doesn't bring any consistency or continuity for the clients to 
make business decisions about what they are wanting to do and 
invest moneys.
    Mr. Schrader. And I guess one of the concerns I have would 
be that while we sit here in Washington assuming, well, geez, 
the deadline isn't until--taxes aren't--you know, we have got 
time. It is not January 1, April 15. But maybe some of you 
could talk about the timeline that businesses have to have to 
make decisions. There is a certain lead time you need between 
your decision--you have to assume certain things if you are 
going to make investments in this economy. Particularly if you 
are a tool and die manufacturer, are you going to depreciate 
off this equipment? Do you buy it now? Assuming the tax breaks 
go away. If they continue, what do you do? I think there is a 
timeline I think that businesses have to make decisions by that 
we don't take into account here in Washington, DC.
    Mr. Porter. I mentioned in my written testimony that I have 
a client that is wanting to buy a $2 million press, but I can't 
tell him what the depreciation schedules are going to be for 
that. Because if he orders it today it is 6 or 8 months before 
he actually gets that press and can place it into service. How 
can he decide if he wants to buy that if he is not going to be 
able to determine the after-tax costs? At this point, we can't 
tell him with any certainty what that is.
    Mr. Schrader. Mr. Hodge?
    Mr. Hodge. I would also say that probably one of the 
reasons the economy is as slow as it is is because of the 
temporary nature of some of the fixes that we try to enact. 
Expensing bonus depreciation are key to that. Had that been a 
permanent law, then you could have businesses make those long-
term decisions which they can't now. And so I think that the 
benefits--the economic benefits of expensing were completely 
undermined by its temporary nature.
    If Mr. Harmon wants to build a new factory, that is 
probably a multiyear process. So he can't make that decision if 
expensing is only in effect for 2 years. So it is really, I 
think, important for lawmakers to understand that these 
provisions need to be made permanent.
    The R&D credit is another one which, as you I am sure have 
heard from many constituents, is really ineffective because it 
is simply on this temporary schedule. Half the Tax Code now is 
on sort of a month-to-month or year-to-year lease. And that is 
no way to run a tax system.
    Mr. Schrader. So last question, just quick answer from each 
of you because I am probably over my time, but there has been a 
lot of discussion about tax reform. This is one of the few 
times probably in my lifetime where we actually have a 
confluence of horrific events and budgetary needs here in 
Washington, DC, as well as at home, that comprehensive tax 
reform has some buzz. And we have got a lot of big 
corporations, probably mostly C Corps, come in and talk to us 
about they would be willing to give up all of their tax breaks, 
all of their tax extenders, R&D, bonus depreciation, oil 
depletion allowances, you name it, in exchange for significant 
rate reduction.
    Mr. Hodge, you testified in that 8 to 10 percent rate 
reduction, where we have the highest tax rates in the world as 
of this past summer and stuff. Would it be advantageous--we 
will go down this way, because I want to hear Mr. Porter's 
summing up, given his background.
    But would it be advantageous, do you think, for America and 
maybe for your business, maybe think beyond your own personal 
business, to get rid of all--almost all these tax breaks, maybe 
a cadre of some, but almost all, which means you would have to 
give up yours--let's assume that in this discussion--in order 
to get a significant rate reduction, you know, from 36 down to 
somewhere between 26 and 28, but down from 24 to about 15--if 
you are really low income, hopefully, you are making a little 
more than that, although in this economy, who knows--from 15 
down to about 10 percent?
    Ms. Kern, would you lead off with that?
    Ms. Kern. I think everybody in this country is willing to 
do their fair share. And I also do feel that if we had some 
sort of a reduced tax rate that was commensurate with where we 
are kind of at, or could be at now, I would be willing to do 
that if in fact those tax loopholes were--or deductions--were 
stopped for everybody.
    You know, if it was a unilateral tax cut, reducing 
people's, you know, deductions or whatever and if it was a good 
tax rate that you could decide upon, I would be willing to do 
that. And I am willing to pay my fair share if I make money.
    Mr. Schrader. The bottom line.
    Mr. Harmon. It would be nice--if the high tax rates that 
American manufacturers pay would be reduced a little bit. I 
would be willing to just keep the tax rate neutral. Why I am 
here today is I just don't want to see these tax rates go up. 
Again, in a capital-intensive business you need that money to 
reinvest. That is my concern, if all of a sudden these rates go 
up. I don't know how the calculations would be as far as 
getting the tax rates neutral or maybe reducing it a bit. But 
it is the increase that is my concern.
    Mr. Schrader. Sure.
    Mr. Hodge. We cannot separate corporate and individual tax 
reform, unfortunately. Because if we broaden the corporate 
base, we are going to be hitting the S Corps and the LLCs just 
as hard. And, really, there is only about a hundred billion 
dollars--I say only a hundred billion--worth of tax 
expenditures in the corporate code, and those are shared 
between the C Corps and the S Corps. So we have to be very 
careful.
    And not every loophole should be eliminated. Expensing, for 
instance, is not--I would not consider a loophole.
    And we have to be very, very careful about having 
differential rates. This is the first time in the history of 
the Tax Code that the top corporate rate and the top individual 
rate are exactly the same at 35 percent. And we ought to keep 
that parity so we don't have arbitraging between the business 
forms. There are already various reasons, double taxation, and 
so forth, to do so, but I don't think the rates should be part 
of that. And I think we ought to keep that parity.
    Yeah, there is a lot of provisions that ought to be 
eliminated from the Code. But let's not throw out also the baby 
with the bath water, such as expensing the R&D credit and so 
forth.
    Mr. Schrader. Mr. Porter.
    Mr. Porter. I can tell you that many of my clients 
regularly tell me they would like tax reform, and they 
regularly suggest percentages that they think would be 
appropriate. Many times I am not sure they know what they are 
saying when they say that.
    But as the AICPA, we are on record as supporting Congress 
and encouraging Congress to do fundamental tax reform. We 
believe that we need good, clear tax policy, we need 
consistency so that businesses can plan, but we have not stated 
a desire or a particular position for any rate. But we do 
encourage Congress, and we have some principles that we think 
you ought to consider, called the principles of good tax 
policy, and it goes out and lays out what we think are 
fundamentals in terms of similarly situated taxpayers being 
treated the same so you can't game the system a lot.
    But there is a lot of those, and we encourage you to take a 
look at those, and we would be happy to assist in tax reform in 
any way that we could.
    Mr. Schrader. Thank you very much; and thank you, Mr. 
Chairman.
    Chairman Walsh. Thank you.
    Maybe we all agree to something permanent. How about 
permanency?
    Congressman Chabot from Ohio.
    Mr. Chabot. Thank you, Mr. Chairman.
    Relative to the permanency of the tax cuts and the fact 
that these were only for 10 years, the 2001 and 2003 cuts, I 
was here at that time, and I think a little reflection on what 
actually happened might be in order. In the then-Republican-
controlled House, we wanted to make these tax cuts permanent. 
That was our goal.
    Unfortunately, it doesn't become law unless it passes the 
other body; and over in the Senate, they didn't have 60 votes 
to make them permanent. In fact, the colleagues--our colleagues 
on the other side of the aisle didn't want to cut taxes at all. 
And so there was a compromise, and the compromise was, well, we 
will make it for 10 years. And what we were hoping is we would 
ultimately get the votes and be able to make these permanent.
    Same thing with the death tax. The fact that you can--the 
Federal Government can take up to 55 percent of what a person 
has paid taxes on throughout their life when they die is just 
abhorrent, as far as I am concerned. And the same compromise 
happened there, where it scaled down year after year after year 
and then went back up if we couldn't get our act together up 
here in Congress.
    But that was why the tax cuts weren't permanent, and I 
would just like to have a response relative to how much better 
would it be if the tax cuts were permanent for your businesses 
and, if you think so, for the overall economy?
    And I would be happy to hear from anybody who would like to 
comment.
    Ms. Kern. I think anytime that a business owner can have 
permanency of ideas and guidelines it makes their business 
prosper--at least try to prosper. And it is very difficult if 
you have to keep changing your method of operation every few 
years or every--whatever. I mean, we need to have some sort of 
normalcy going forward. We have enough things that are hitting 
us from every other possible place in the universe. If we could 
have at least some guidelines in the tax law or in the estate 
tax, we would know where to go from here to retirement, 
hopefully, which is going to be a lot longer now than it was 5 
years ago.
    Mr. Chabot. Mr. Harmon, would you like to comment?
    Mr. Harmon. Yes, permanency would be a wonderful thing in 
the Tax Code. There is the R&D credit and there is bonus 
depreciation. Some of these provisions that are out there would 
have a significant impact on what you do year after year.
    In manufacturing, we face global competition; and we have 
got to continue to invest in the equipment, the technology that 
is out there, training for our workforce, and the new research 
and development that our country participates in and our 
industry participates in.
    Mr. Chabot. Thank you.
    Mr. Hodge.
    Mr. Hodge. Nothing undermines economic growth more than 
uncertainty. And there is--as you know, there has been at least 
5,000 changes to the Tax Code in the last 10 years. And I think 
the economic benefits of these tax provisions, such as 
expensing, such as the lower rates, have been undermined by the 
uncertainty, by their temporary nature. And so the Tax 
Foundation has always stood by the principle of certainty in 
the tax system, that there shouldn't be wild changes, because 
it really does undermine the economic impact of them. And I 
think the more that we can set aside these arbitrary budget 
rules and scoring rules and start thinking about sound policy 
and the longevity of these things the more we are going to see 
the economic benefits. But it is really because we adhere to 
these really arbitrary and sometimes really silly budget rules 
we undermine sound tax policy, and the economy is the big 
loser.
    Mr. Chabot. Thank you.
    Mr. Porter, I have only got 1 minute left, so I wanted to 
get to one final question, and I would be happy if anybody 
wants to respond here.
    You all, as small business folks, how would you respond to 
this allegation that has been made far too frequently--I guess 
because it is a campaign year, political year more than 
others--but this allegation that business folks--and yourselves 
included in that area--relative to taxes, you just don't want 
to pay your fair share of taxes? You are these 1 percenters 
that are trying to take advantage of the rest of our citizenry.
    Any response to that? I assume you have probably heard this 
before.
    I see you nodding in affirmation, Ms. Kern. Would you like 
to comment?
    Ms. Kern. Well, as I mentioned before, I am not opposed to 
paying my fair share and have been paying my fair share of 
taxes for the past 31 years. It is when the tax structure is 
out of whack that it kind of I think upsets people. But I don't 
think that is a fair statement to make about small business.
    As Mr. Harmon has mentioned, we provide health care, we 
provide 401(k)s, or we try to do everything that we can for our 
employees. I don't have 250 employees. I have 30 to 40 
employees. And, again, they are mostly union--or they are 
union-signatory except for the office people. So, I mean, their 
health and welfare is, you know, $14 an hour. Their benefits 
are $35 an hour on top of their pay scale.
    So, you know, we do pay a lot of things to keep our people 
employed; and that is the cost of doing business.
    But I really take offense to the fact that we are trying to 
scam anybody and not pay what we have to pay. If I make money, 
I am more than happy to pay taxes and have in the past.
    Mr. Chabot. Mr. Harmon?
    Mr. Harmon. I think that is an offensive statement. I think 
that small businesses and small----
    Mr. Chabot. Just to be clear now, it is not my point of 
view.
    Mr. Harmon. No, no, no, I understand.
    But the idea that we want to scam the system or not pay our 
fair share, we want to pay our fair share. We want permanency 
and stability in the Tax Code.
    We are small businesses, small manufacturers. I read the 
paper and see what some of the multinational companies pay. And 
I can tell you we had a tough year last year, and we paid a lot 
more taxes than GE did.
    Mr. Hodge. Here are the actual facts: About 50 percent of 
all American households pay no income taxes, and many of those 
people get refundable tax credits even though they owe no 
income taxes. And there is about $100 billion a year in 
refundable tax credits coming out of the IRS. Actually, more in 
refundable credits than what is available in the corporate code 
for tax expenditures. But the top 1 percent of tax filers pays 
a greater share of the income tax burden than the bottom 90 
percent combined.
    Mr. Chabot. Could you repeat that?
    Mr. Hodge. Yes. The top 1 percent of tax filers pays a 
greater share of the income tax burden than the bottom 90 
percent combined. So that top 1 percent, which is comprised of 
about 1.4 million tax filers, pays close to 40 percent of the 
income taxes today. And that is a greater share of the burden 
than is paid collectively by everyone earning under about 
$120,000 a year combined.
    Those are the facts from the IRS.
    Mr. Chabot. Mr. Porter?
    Mr. Porter. We certainly hope, as a profession, we are out 
there helping everybody pay their fair share of taxes and do it 
properly and report it in the way it should be reported.
    Mr. Chabot. Very diplomatic answer. Thank you.
    I yield back, Mr. Chairman.
    Chairman Walsh. Thank you.
    Congresswoman Chu.
    Ms. Chu. Well, I certainly was impressed with your stories, 
Mr. Harmon and Ms. Kern. Mr. Harmon, the success of your die 
casting business, it being a second-generation family owned 
business, and Ms. Kern, as a woman-owned business of a steel 
erectors company, that is really impressive.
    And I noted with interest, Ms. Kern, that you wanted to 
partake of SBA's 504 loan program approved to small businesses 
with long-term fixed rate financing for expansion or 
modernization; and, also, Mr. Harmon, that you want to continue 
your contracts with the defense industry. That is, of course, 
critical to your company.
    But I do have great concerns. Because if we extend all the 
Bush tax cuts, it will increase our debt by $3.3 trillion over 
the next 10 years; and in order to rein in our excessive 
spending, the government would be forced to make cuts to 
critical programs, such as small business loan programs, such 
as the 504 loan program, as well as in the defense industry. 
That is why I am concerned about extending those Bush-era tax 
cuts, and that is why I support President Obama's tax plan. 
Because we have to have an overall view of our budget here in 
Washington, DC.
    Mr. Hodge, you gave a passionate argument about not hurting 
small businesses who are the entrepreneurs in this country, and 
I certainly agree with that. I just want to make sure that 
small businesses are truly the ones that are the beneficiaries 
of our policy, and I want to ask you about what is really a 
small business and whether the pass-throughs are really all 
small businesses.
    And, in fact, I have a suspicion that some of the pass-
throughs are not necessarily small business owners. They 
include law firms, doctor offices, hedge funds, and lobbying 
firms whose businesses are structured as partnerships for tax 
purposes. They also include passive investors, such as those in 
real estate partnerships. Passive investors don't participate 
in any of the risky business decisions yet receive all the 
benefits of the pass-throughs.
    In addition, many S corporations that are defined as a 
pass-through entity are not small. In 2009, only 0.3 percent of 
S corporations had incomes exceeding $50 million, yet they 
accounted for 35 percent of all S corporation incomes.
    Isn't it overreaching to say that these are all struggling 
small business owners? Should these very high-income earners be 
in a different tax category? And how can we make sure that the 
truly small business owners get the help they need?
    Mr. Hodge. Well, we tend to think of these things in 
monolithic terms. And while the official definition of a small 
business may be ``firms under 500,'' according to the SBA, 
small businesses--hopefully--become larger businesses, become 
successful businesses. And raising taxes on these businesses as 
they try to go through the stages of business life is 
counterproductive to them becoming successful.
    We all want these businesses, whether they start out as a 
couple of college graduates with tremendous computer skills 
becoming the next Bill Gates or Steven Jobs or Steve Wozniak, 
they have to get there from here to there. And increasing their 
taxes as they go along the way and simply drawing some 
arbitrary line in the sand saying, oh, well, then at this 
point, they become a big business, I think is simply arbitrary.
    And there is no economic rationale for this. There is no 
economic rationale to say that only 500 businesses is a small 
business.
    And the real problem here is that we have all of these 
different business forms. It does treat some businesses 
differently. And we need to maybe make sense out of it. But the 
real point here is that higher taxes on these businesses is 
counterproductive. It does have economic impacts, no matter how 
you define what that business is.
    Ms. Chu. Well, let me ask this: Of course, in the past 4 
years, the administration had the Small Business Jobs Act. It 
helped relieve small business tax burdens. It permanently 
allowed qualified small businesses to carry back their general 
business credits to offset 5 years of taxes. It put in place 
the elimination of all capital gains taxes for those who invest 
in small business and extended the 50 percent bonus 
depreciation.
    You made quite an argument of saying these are just 
temporary provisions, that they are counterproductive. Are you 
saying that we shouldn't have had these at all?
    Mr. Hodge. Well, number one, in order to take advantage of 
all of those, you need to have positive profits. You need to be 
able to have income for which to deduct or make some of those 
deductions from. So for a lot of those businesses, bonus 
depreciation wasn't helpful because they simply did not have 
enough income to take advantage of that.
    I would prefer, rather than seeing these sort of targeted, 
in a way, like pork barrel tax policy, see broader reform where 
we absolutely lower tax rates across the board for all 
individuals, all businesses, rather than try these sort of 
shotgun approaches to specific constituencies.
    Ms. Chu. So you wouldn't have had any of these provisions?
    Mr. Hodge. I would have lowered rates across the board, 
rather than try this sort of shotgun, as I say, targeted 
approach.
    Ms. Chu. Thank you.
    I yield back.
    Chairman Walsh. Thank you.
    Congresswoman Clarke.
    Ms. Clarke. Thank you very much, Mr. Chairman.
    I want to also add my voice to both Mr. Harmon and Ms. 
Kern. The success of your businesses and the growth and 
development of them, the fact that you are operating a second-
generation company, Mr. Harmon, begs to ask the question--and, 
Ms. Kern, having been in business for over 30 years now--that 
you have had the experience of operating your businesses at 
pre-2001 levels prior to the Bush tax cuts going into effect.
    And so my question is, it seems to me that, prior to the 
Bush tax cuts, your companies were successful. What the Bush 
tax cuts have enabled you to do, I am assuming, is to bring 
more capital into your companies. So when we talk about the 
extension of the Bush tax cuts, I am wondering whether the 
uncertainty is one of companies that may have started or have 
been in a growth period during the Bush tax cut era versus 
those companies that have been in existence prior to that. And 
I wanted to know, what do you think is the best course of 
action, given that we haven't done or addressed comprehensive 
tax reform? And which is worse, the uncertainty of 
reauthorizing Bush tax cuts or the stability of knowing one way 
or another where you stand in terms of your companies and a 
comprehensive Tax Code that meets the needs of your companies?
    Mr. Harmon. That is a good question.
    Again, our business has been around for 93 years. These tax 
cuts took effect in 2001, 2003, the Bush-era tax cuts.
    Around that time, if I am not mistaken, we were in a 
recession. I think that might have been some of the stimulus 
for some of these tax cuts.
    But the other thing is that in manufacturing, and in our 
business, we started facing global competition back in the 
1980s. Japan came onboard with their manufacturing, so American 
manufacturers had to really gear up for that. China came into 
play in the mid-'90s, Mexico for a little bit in the early 
1990s.
    We didn't have this type of global competition. Before 
1995, it wasn't a huge global-type economy and the competition 
that we have today. Since China has come onboard, it has been 
just extremely difficult. We have got to be investing in new 
technologies, in new equipment, faster equipment to compete 
with the Chinese products that come over to America.
    So that is why these cuts that are in place help. It would 
be nice to get them permanent, but the bonus depreciation and 
the research and development credit are two that we can utilize 
to help make us more competitive in the world market.
    Ms. Clarke. And you would say that that applies to your 
type of company as well?
    Ms. Kern. It does but in a different way. I am primarily a 
labor-intensive company, but I am also subject to the Fortune 
500 companies that want to build a plant or want to relocate. 
That impacts my work. We have had a really, really tough 4 
years. The past 4 years have been awful.
    But the other thing is the heavy and highway. We try to 
supplement our work with roadwork. But, again, the 
transportation bill hasn't been funded, and that is another 
issue.
    But, yes, it does. I was in business prior to the tax cuts, 
but that was a different economy. We had more work then. So I 
shudder to think of what we would have been like since 2001 if 
those tax cuts weren't in place, because maybe a lot of us 
wouldn't be here.
    Ms. Clarke. The tax cuts, in and of themselves, are not the 
end-all to be-all. Because, on the one hand, we are looking at 
the overall national budget. And, as you stated, if we don't 
have funding and transportation bills, which are a significant 
part of what helps make your company robust, then there is 
still a shortfall.
    So it is truly a balancing act, just from what I have heard 
from you both. And I think that we need to give a greater 
degree of scrutiny beyond the expiration or the tax cliff as to 
where the balance is. Because, right now, we are not striking 
that balance in our rhetoric. We are not being as balanced as 
we should be in really looking at the nuts and bolts of the 
companies that fall within the small business arena. And you 
two are examples of that.
    However, there may be companies that don't face this same 
type of global competition as does Mr. Harmon's company, and 
there may be other companies that are much more reliant on a 
domestic base clientele. So we really have to take a look at 
that.
    Because I am not convinced that these tax cuts are the end-
all to be-all. And that is some of what I hear the debate being 
framed as, and I don't think that that is a healthy way of 
looking at a 21st century economy and how we support our 
entrepreneurs and small business, because there are so many 
other variables that are bearing on it.
    Did anyone else want to add anything there?
    Mr. Hodge, you look like you have a light bulb going off.
    Mr. Hodge. Well, Mr. Harmon's comments I think were very 
illuminating, because he is dealing in the global economy. And, 
as I mentioned, not only does the U.S. now have the highest 
corporate tax rate in the world, at 35 percent, but the 35 
percent individual rate that affects S corporations is also the 
highest business tax rate in the world, by definition. So he is 
now competing against a global economy with much, much lower 
tax rates.
    Actually, 75 countries have cut their corporate tax rates 
in the last 5 years to be more competitive and to attract 
business jobs and investment away from high-tax countries like 
the United States. So it is incredibly important that not only 
we cut our corporate rates so that we can be more competitive 
but cut our individual rates so that these types of businesses 
can also be competitive globally. And it is the expansion of 
Mr. Harmon's company that can help Ms. Kern's company because 
she would be doing the metalwork on his factory. So that 
domestic investment is benefited by someone who can compete 
globally.
    Ms. Clarke. Clearly--and, Mr. Chairman, I am wrapping up. I 
just wanted to say that when we look at the domestic budget 
that helps to really provide a catalyst for their companies, 
notwithstanding the tax cuts. If we are cutting defense 
contracts, if we are cutting and are unable to put out a robust 
transportation bill, then, notwithstanding that, the 
competitiveness still is undercut by our inability to strike 
that balance.
    So I just wanted to make sure that we sort of give a much 
more comprehensive look at what we are facing here and do our 
very best to bear that in mind as we go forward.
    And I thank you, Mr. Chairman.
    Thank you very much for your testimony here today.
    Chairman Walsh. Thank you.
    A quick 10-second answer from each Ms. Kern and Mr. Harmon. 
Directly, how would letting all these tax rates expire at the 
end of the year impact your ability to hire more employees?
    Mr. Harmon, quickly.
    Mr. Harmon. Significant influence and impact by having the 
tax rates expire. We would have to go back in a constriction 
mode, I mean a survival mode.
    Chairman Walsh. Ms. Kern, quickly.
    Ms. Kern. We are surviving on just razor-thin margins right 
now that are very difficult to maintain. And if they undo these 
tax cuts, then that is definitely not going to help us survive.
    Chairman Walsh. Thank you. I want to thank everybody for 
your testimony. You have all provided important insight into 
how actions and inactions in Washington affect what you all do 
out in the real economy; and I, along with Congressman Schrader 
and the whole Committee, wish you success in your current and 
future endeavors.
    I ask unanimous consent that Members have 5 legislative 
days to submit any additional comments and material for the 
record.
    Without objection, so ordered.
    Chairman Walsh. The hearing is now adjourned. Thanks. 
[Whereupon, at 11:30 a.m., the Subcommittee was adjourned.]


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