[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
                  THE DECLINE IN BUSINESS FORMATION: 
           IMPLICATIONS FOR ENTREPRENEURSHIP AND THE ECONOMY

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



                                HEARING

                               before the

               SUBCOMMITTEE ON CONTRACTING AND WORKFORCE

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS

                             UNITED STATES

                        HOUSE OF REPRESENTATIVES


                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD

                           SEPTEMBER 11, 2014

                               __________

                               [GRAPHIC] [TIFF OMITTED] 
                               

            Small Business Committee Document Number 113-082

              Available via the GPO Website: www.fdsys.gov




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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                      BLAINE LUETKEMEYER, Missouri
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                   JAIME HERRERA BEUTLER, Washington
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                       DAVID SCHWEIKERT, Arizona
                       KERRY BENTIVOLIO, Michigan
                        CHRIS COLLINS, New York
                        TOM RICE, South Carolina
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                        BRAD SCHNEIDER, Illinois
                          RON BARBER, Arizona
                    ANN McLANE KUSTER, New Hampshire
                        PATRICK MURPHY, Florida

                      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

                           OPENING STATEMENTS

                                                                   Page
Hon. Richard Hanna...............................................     1
Hon. Grace Meng..................................................     2

                               WITNESSES

Mr. Jonathan Ortmans, Senior Fellow, Kauffman Foundation, 
  Washington, DC.................................................     3
Mr. John Dearie, Executive Vice President, Financial Services 
  Forum, Washington, DC..........................................     5
Mr. Chad Moutray, Chief Economist, National Association of 
  Manufacturers, Washington, DC..................................     7
Dr. John Deskins, Director and Associate Professor, Bureau of 
  Business and Economic Research, College of Business & 
  Economics, West Virginia University, Morgantown, WV............     9

                                APPENDIX

Prepared Statements:
    Mr. Jonathan Ortmans, Senior Fellow, Kauffman Foundation, 
      Washington, DC.............................................    17
    Mr. John Dearie, Executive Vice President, Financial Services 
      Forum, Washington, DC......................................    22
    Mr. Chad Moutray, Chief Economist, National Association of 
      Manufacturers, Washington, DC..............................   102
    Dr. John Deskins, Director and Associate Professor, Bureau of 
      Business and Economic Research, College of Business & 
      Economics, West Virginia University, Morgantown, WV........   109
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    None.


                  THE DECLINE IN BUSINESS FORMATION: 
           IMPLICATIONS FOR ENTREPRENEURSHIP AND THE ECONOMY

                              ----------                              


                      THURSDAY, SEPTEMBER 11, 2013

                  House of Representatives,
               Committee on Small Business,
         Subcommittee on Contracting and Workforce,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2360, Rayburn House Office Building. Hon. Richard Hanna 
[chairman of the subcommittee] presiding.
    Present: Representatives Hanna, Tipton, Chu, and Meng.
    Chairman HANNA. Good morning, everybody. Thank you for 
being here, and again, I apologize. In addition to that, there 
is a classified briefing at 11 o'clock, so we will do our best. 
Certainly, everyone here will get a chance to speak on this 
important issue. And I have read all your testimony. I 
prepared, but I will kind of work this through a little bit. So 
I appreciate your indulgence.
    According to economists, the Great Recession ended in 2009, 
yet five years later we are still struggling to see any signs 
of robust lasting economic growth in our economy. The 
nonpartisan Congressional Budget Office estimates a long-term 
average annual growth rate of 2.2 percent, a substantial 
decrease from the pace that existed between 1948 and 2007, 
which averaged 3.4 percent. We have all heard various reasons 
for the causes of the United States, lackluster rebound, 
excessive regulation, complex tax code, and a workforce 
shortage to name a few. We have also heard several solutions 
and frequently have looked for small businesses to lead the way 
to greater prosperity. Small firms are the catalyst for job 
creation, creating more than half of the net new jobs between 
1993 and 2013. Even more noteworthy are the contribution of new 
firms which offer the best opportunity for growth. However, as 
economists have examined America's stagnant economy, a 
disturbing new trend has emerged. Fewer new businesses are 
being created each year than the year before. According to a 
recent report from the Federal Reserve Bank of Cleveland in 
1978, Americans created 12 new firms for every existing firm, 
but in 2011, this dropped to almost half, to 6.2 new firms per 
existing businesses. Even more starting, economic research 
suggests that while the Great Recession exacerbated this drop, 
the decline has actually been occurring for over 30 years. This 
downturn not only has a dramatic negative impact on our 
economy, but also signals that entrepreneurship may not be as 
strong and vibrant in America as it has historically been or 
certainly how we would like it to be.
    Today we are here to learn more about what this decline in 
new business creation means for the American economy and what 
we might do to reverse this trend.
    I would like to thank all of our witnesses for being here 
today, and I yield to Ranking Member Meng for her opening 
statement.
    Ms. MENG. Thank you, Mr. Chairman. Thank you to our 
witnesses for all being here today.
    In this Committee, we frequently talk about how small 
businesses are central to job creation. A more accurate 
assessment might be that new small businesses are vital to job 
growth. It is indisputable that small businesses are a big 
employer in the U.S. However, it is a subset of these companies 
that create the bulk of new jobs. Several analyses that while 
90 percent of companies employ less than 19 workers, the 
strongest correlation to job creation is not size so much as 
age. Forty percent of small business job creation stems from 
new businesses, even though new firms represent only 10 percent 
of small firm employment. Likewise, older, more established 
forms account for two-thirds of small business employment, but 
they create less than one-third of new jobs.
    In short, as this Committee looks to accelerate economic 
growth and job creation, we would be wise to focus on newer 
firms that are seeking to grow quickly. Not only do these firms 
create employment opportunities, but they often innovate the 
new products and services that keep our economy competitive 
internationally. Given the outsized importance new enterprises 
play in job growth and competitiveness, it is disturbing to see 
long-term reductions in the rate of new business creation. Last 
year, we saw 38,000 fewer business owners per month than in 
2012. This reduction remained constant throughout all 
demographic groups, from women to minorities, veterans and 
immigrants. There was a decided drop in new business formation.
    Certainly, some of this recent reduction can be attributed 
to job market improvements. When Americans are able to secure 
well-paying jobs elsewhere, there is less incentive to pursue 
the relatively risky path of entrepreneurship. Nonetheless, we 
would be shortsighted to ignore longer term trends that suggest 
a reduction in new business formation. In the three decades 
between 1978 and 2011, the percentage of firms less than one 
year old fell by half, suggesting that reductions in business 
creation are not a short-term anomaly. If our nation is to 
remain an economic leader, we must maintain the entrepreneurial 
spirit that has long defined us. From a public policy 
perspective, this means pursuing a number of strategies that 
can help more Americans launch new enterprises.
    Access to capital is a perennial challenge for most 
startups. Traditional debt financing remains difficult for 
small firms to secure. I hope this Committee can work together 
to ensure government guaranteed loans backed by the SBA, 
including micro financing, are widely available. Likewise, 
equity financing must remain an option, whether it is through 
crowdfunding, private venture capital, or the Small Business 
Investment Company Program.
    Just as capital is critical for a new enterprise, so, too, 
is knowledge and know-how. In that regard, technical assistance 
and entrepreneurial development programs can provide valuable 
help to fledgling businesses. It is incumbent on this Committee 
and all of Congress to provide adequate resources for SBA 
initiatives that provide this type of counseling.
    Mr. Chairman, one of the pillars of the American economy 
has always been a robust, thriving sense of entrepreneurship. 
As long as our nation continues creating new businesses, we can 
expect future job growth and greater economic opportunity for 
all Americans. In that regard, I look forward to hearing from 
our witnesses about the state of new business creation and what 
can be done to help more Americans launch their own 
enterprises.
    Thank you, and I yield back.
    Chairman HANNA. Thank you. If Committee Members have an 
opening statement prepared, I ask that they submit it for the 
record. You all have five minutes. Relax, we will be flexible 
about that. The yellow light means what every other yellow 
light in the world means.
    Our first witness today is Jonathan Ortmans, who serves as 
a senior fellow at the Kauffman Foundation. In his capacity, he 
advises the Foundation on global entrepreneurship and brings 
important research findings to the attention of policymakers.
    Mr. Ortmans, you may begin. And thank you.

    STATEMENTS OF JONATHAN ORTMANS, SENIOR FELLOW, KAUFFMAN 
 FOUNDATION; JOHN DEARIE, EXECUTIVE VICE PRESIDENT, FINANCIAL 
    SERVICES FORUM; CHAD MOUTRAY, CHIEF ECONOMIST, NATIONAL 
   ASSOCIATION OF MANUFACTURERS; JOHN DESKINS, DIRECTOR AND 
ASSOCIATE PROFESSOR, BUREAU OF BUSINESS AND ECONOMIC RESEARCH, 
        COLLEGE OF BUSINESS AND ECONOMICS, WEST VIRGINIA

                 STATEMENT OF JONATHAN ORTMANS

    Mr. ORTMANS. Chairman Hanna and Ranking Member Meng, thank 
you so much. And Members of the Committee, thank you for this 
opportunity to testify about a troublesome trend in 
entrepreneurship, indeed the declining rate of new business 
creation.
    As the world's largest private foundation focused on the 
study and promotion of entrepreneurship, the Ewing Mary 
Kauffman Foundation has been at the center of this issue for 
some time. Our financial commitments to data collection helped 
to uncover this trend, and our research has illuminated not 
only some possible explanations for the decline, but also ways 
in which public policy can create an environment more conducive 
to business formation and growth.
    New business creation is crucial to a healthy, vibrant 
economy for two primary reasons. Obviously job creation, but 
also innovation. Contrary to popular rhetoric, it is not small 
businesses but rather new and young businesses that drive new 
job creation. Nearly all net new jobs are created by new and 
young companies. Similarly, startups are responsible for a 
disproportionate share of innovative activity, which creates 
not just wealth for the entrepreneur, but I think more 
importantly, rising standards of living for all.
    These twin functions of entrepreneurship comprise the core 
of the United States' economic preeminence. It is therefore why 
we should be concerned that we are witnesses this declining 
business creation rate, which threatens that position. In the 
late 1970s, about 15 percent of businesses were new. In 2011, 
that number hovered around 8 percent. And since 2000, even high 
growth entrepreneurship has been in decline, surprising us all, 
as epitomized by a slowdown in the technology industry.
    Although some of the declining share is natural as the 
economy ages, the trend has been accelerated by lower entry 
rates of new firms coupled with higher exit rates of young 
firms. This declining business dynamism has been taking place 
for decades across all sectors, raising serious concerns with 
regards to unemployment and lackluster wage growth.
    Despite this discouraging picture, there are reasons that 
we could be more optimistic. Although the best data on 
entrepreneurship is presently only available through 2011, 
early indicators point toward a full recovery of the business 
startup rate from the effects of the Great Recession.
    I should also note that it is only recent that in 
Washington, D.C., we have been articulating that it is going to 
require a different policy toolbox to deal with accelerating 
rates of new firm formation as opposed to the more generic 
broader question we faced in years past as to how do we support 
small businesses more broadly.
    And looking more long term, there are some other reasons 
for us to be optimistic. The demographic winds are changing. 
Over the next 20 years, we will have more people than ever in 
their 30s and 40s. This is really important. The average age of 
U.S.-born tech entrepreneurs is 39 years old. The peak age for 
entrepreneurship and this new generation of new entrepreneurs 
will also have unprecedented numbers and types of education and 
training resources available to them, which should make for a 
stronger entrepreneurial ecosystem.
    We are also seeing an explosion of other kinds of programs 
and efforts, especially at the state and local level. There is 
an enormous amount of work going on to create more healthy 
entrepreneurial ecosystems that is relatively new and something 
that we cannot yet measure the effect and impact that they are 
having on the ability and the willingness of individual 
Americans to take a risk and form new firms.
    Finally, entrepreneurs of every stripe will have access to 
new forms of finance. As was mentioned in the opening 
statements, crowdfunding remains in its infancy, but several 
platforms have shown both strong growth and potential for the 
future. These developments hold promise in reversing the long-
term decline of business creation, but the extent of their 
impact will depend upon good public policy.
    While more Americans will be entering the peak age for 
entrepreneurship, this same age group is increasingly burdened 
by student loan debt, which may discourage potential 
entrepreneurs from starting a business. Debt and delayed work 
opportunities must be addressed so that younger Americans are 
financially able to engage in entrepreneurship.
    Other policy tools also exist. First among them, the 
creation of visa for immigrant entrepreneurs that allows 
foreign job creators to start and operate businesses in 
America. As we know, immigrants are more likely to found 
businesses than natives, and these businesses have generally 
more innovations than the average native-founded business.
    The creation of a startup visa would have an immediate 
impact on business creation and growth.
    Congress should also examine the role of regulatory 
accumulation and the role it may play in depressing 
entrepreneurial activity. We should be looking at new says of 
avoiding the, for example, superfluous licensing regulations 
that can unnecessarily reduce competition. The declining 
business creation rate is deserving of policymakers' attention 
because of new and young firms disproportionate role in job 
creation and innovation.
    We, at the Kauffman Foundation, will continue to do our 
part in terms of exploring the reasons for this decline, and 
ways in which it might be mitigated and reversed. And, in fact, 
I am pleased to tell you that in early 2016, we plan to unveil 
a new entrepreneurial growth agenda which will identify ways 
the United States can attain a new faster growing and more 
broad-based entrepreneurial economy.
    While there are reasons to be optimistic about the future 
business creation, rates are unlikely to rebound without the 
support of good public policy, and therefore, I greatly 
appreciate the opportunity today to testify before you. Thank 
you.
    Chairman HANNA. Thank you, Mr. Ortmans.
    Our second witness today is John Dearie, who serves as 
Executive Vice President for Policy at the Financial Services 
Forum. Prior to joining the Forum in 2001, he spent nine years 
at the Federal Reserve Bank in New York. Recently, he 
coauthored a book, Where the Jobs Are, a book that examines the 
very issues we are talking about today.
    Thank you for being here, Mr. Dearie. You may begin.

                    STATEMENT OF JOHN DEARIE

    Mr. DEARIE. Thank you, Mr. Chairman, and Ranking Member 
Meng.
    In the interest of our limited time, and because your 
opening statements and Mr. Ortmans' statement I think makes 
clear that we all understand the nature of the problem, I am 
going to dispense with my written script and just tell you a 
bit in just a couple of minutes about the project that that was 
the basis of the book and that I think will be very helpful to 
you as you consider policy solutions to this very, very 
important problem.
    I should say that my background, as you just indicated, is 
in financial and economic policy. The importance of new 
businesses, both to job creation and as Mr. Ortmans made clear 
very importantly to innovation. And the reason why that is 
important is, of course, innovation drives productivity, which 
drives economic growth.
    So from the standpoint of both job creation and economic 
growth, new businesses are really where the action is and is 
why this hearing and your work is so important.
    A colleague of mine and I at the Financial Services Forum 
learned about the importance of new businesses and the secular 
decline in new businesses and entrepreneurship in the spring of 
2011, we were terribly concerned about this in the context and 
the weak recovery, and wanted to figure out why is this 
happening? The obvious question is why is this happening?
    After considering a number of investigative alternatives, 
we decided in the end that perhaps the best way to figure out 
what was going on with the nation's entrepreneurs was to get 
out of Washington, D.C. and go talk to them.
    So with that in mind, we organized roundtables with 
entrepreneurs in 12 cities across the United States. We picked 
those cities very carefully, not only to cover the geographic 
expense of the country--obviously, you do not want to do all 
the roundtables east of the Mississippi--and also, to cover the 
industrial diversity of the economy. As you are aware, certain 
cities and regions tend to be associated with certain industry 
sectors, and so we picked our cities very carefully to get a 
really good cross section of both the geographic expanse of the 
country as well as the industrial diversity of the economy.
    As you can imagine, those roundtables were absolutely 
fascinating, and I would say that perhaps the most remarkable 
takeaway for us, and certainly from the standpoint of potential 
policy solutions for you all to consider--and we were quite 
surprised by this because it was our expectation that we would 
hear different things at the different roundtables. It is a 
very big country after all, a very industrially diverse 
economy. The startup scene in, say, Cambridge, Massachusetts is 
really different than the startup scene in Columbus, Ohio, or 
Orlando, Florida, or Seattle, all these other places we went, 
and yet, we realized that we were hearing, you know, with some 
differences in regional emphasis you might say, but we were 
hearing the same half dozen or so major themes everywhere we 
went in terms of what is in their way. And in their own words I 
will just run through these very quickly. We have the jobs, and 
we need to fill them in order to grow. We cannot find enough 
people that have the skills that we need. Our immigration 
policies are blocking our ability to attract and retain the 
world's best talent and we need them. Access to capital for 
startups is even more difficult in the wake of a financial 
crisis. Overregulation is killing us. Tax complexity and 
uncertainty is diverting far too much attention away from our 
new businesses, and finally, and with apologies, there is far 
too much economic uncertainty and it is Washington's fault.
    We recorded all of our conversations which gave us the 
opportunity to transcribe those discussions so we could go back 
and read them over and over again and really get to understand 
what the entrepreneurs were telling us and to pull out 
consistent themes. We subsequently, as I mentioned, wrote 
``Where the Jobs Are'' and in that book we propose 30 specific 
policy proposals based on what the entrepreneurs told us they 
need, and they are all in my written testimony. I think what is 
of unique value to those proposals is because they are all 
based on what the entrepreneurs told us they need. In fact, 
many of them came right from the entrepreneurs themselves, who 
in the course of our roundtable said, you know, it would be 
really great if the government would do X, and Courtney and I 
would look across the table at each other and nod and write it 
down.
    So I commend those proposals to you. I am happy to answer 
any questions about them or anything else that we did on our 
summer road trip. Thank you.
    Chairman HANNA. Thank you. So there is nothing new under 
the sun. Thank you.
    Our third witness today is Mr. Chad Moutray. Mr. Moutray is 
the chief economist for the National Association of 
Manufacturers. Previously, Mr. Moutray was the chief economist 
and director of economic research for the Office of Advocacy 
for the Small Business Administration from 2002 to 2010.
    Thank you very much for being here. You may begin.

                   STATEMENT OF CHAD MOUTRAY

    Mr. MOUTRAY. Thank you, Chairman Hanna, Ranking Member 
Meng, and thank you for the opportunity to testify on the issue 
of business formation and policies that can help increase the 
overall economic activity. I will be taking these issues as you 
might imagine from a manufacturing perspective.
    The National Association of Manufacturers is the largest 
industrial trade association and voice for more than 12 million 
men and women who make things in America. The NAM is committed 
to achieving a policy agenda that helps manufacturers grow and 
create jobs. Manufacturers very much appreciate your interest 
in and supporting the manufacturing economy.
    Manufacturing activity has seen a resurgence since the end 
of the recession, and manufacturers mostly are upbeat about the 
coming months in the next few years. Yet, they are also 
frustrated with the overall slowness of the recent recovery, 
making business leaders more cautious in their assessments than 
they might otherwise be. A number of downsize risks, of course, 
exist in the coming months, including geopolitical events as 
you well know, the prospect of rising interest rates, and 
softness in several key export markets. At the same time, 
manufacturers of all sizes and in a wide swath of industries, 
have expressed concern about skills-gap shortages.
    The mostly positive outlook stands in contrast to the 
decline in business formation rates which is the basis of this 
hearing. The number of manufacturers has also fallen 
dramatically over the past decade from 354,498 establishments 
in 2000 to 295,643 establishments in 2011, the most recent year 
that there was data. The rate of manufacturing establishment 
startups has also declined according to the business employment 
dynamics data from the BLS, off from 2.25 percent of all 
establishments in 1995 to 1.45 percent in 2013. In terms of raw 
numbers, there were roughly 8,000 manufacturing startups per 
quarter in 1995, with around 5,000 per quarter in 2011-2013 
timeframe. It is also clear that closures have exceeded 
startups in the sector in since at least 1999. At least part of 
this trend could be explained by the tremendous consolidation 
that has taken place in the manufacturing sector, yet the trend 
rate for manufacturers is significant, mostly because it 
mirrors other data as much as you have heard already.
    In addition, a number of factors might help explain the 
reduced business formation rates. First and foremost, economic 
growth has been much slower more recently. Real GDP growth 
averaged 3.8 percent in the 1990s. While the sector experienced 
modest growth after the 2001 recession, the economy grew by an 
average of 2.7 percent between 2002 and 2007. Since the Great 
Recession of 2007 and 2009, real GDP growth has averaged just 
2.2 percent as you just mentioned.
    Indeed, the consensus forecast for 2015 is for roughly 3 
percent growth, but if that is true, it would be the first year 
since 2005 that we would have had a three in front of our GDP 
growth figures.
    This more sluggish economic activity likely serves as a 
disincentive for new business creation or for existing firms 
potentially dissuading investments and new capital spending or 
in hiring. Along those lines, nonresidential fixed investment 
also has increased at a much slower pace, down from an average 
of 8.6 percent in the 1990s to a 5.4 percent and 5.1 percent 
respectively in the 2003-2007, and 2010-2013 timeframes. 
Employment growth has also decelerated.
    One must look at a number of business environment 
conditions really as a possible source that also might 
discourage business formation. Indeed, economic and political 
uncertainty, the need for comprehensive tax return, rising 
health insurance costs and rising regulatory burdens have often 
been cited as possible factors for explaining reduced business 
activity, and we can spend a lot of time talking about each one 
of those elements but I am going to talk about regulations.
    Yesterday, the NAM released a study on total federal 
regulatory compliance costs by Mark Crain and Nicole Crain. 
This analysis update of the author's prior work for the Office 
of Advocacy at the SBA where I used to be the chief economist 
as you mentioned. This report found that businesses spent 
$2.028 trillion to comply with federal regulations in 2012. 
More recently, compliance costs for businesses in the United 
States averaged $9,991 per employee in 2012, with manufacturers 
incurring a per employee cost of nearly double that amount, 
$19,564 per employee. Small manufacturers with less than 50 
employees spent a whopping $34,671 per employee, illustrating 
the massive burden that we are placing on many of these small 
businesses and manufacturers.
    Manufacturers believe that regulation is critical to the 
protection of worker safety, public health, and our 
environment. At the same time, our regulatory system is in need 
of improvement. We need smarter regulations that minimize 
unnecessary burdens and better balance benefits and costs, 
eliminating redundancies wherever possible. Regulations are 
allowed to accumulate with no real effort to evaluate or clean 
up the outdated or obsolete rules already on the books. It is 
imperative that policymakers and regulators understand the 
cumulative burdens that these rules are placing on businesses 
and enact policies that minimize those costs that do not 
contribute to the realization of regulatory objectives.
    The Crane and Crane report also illustrates how regulatory 
relief can be an economic development issue. In a survey 
conducted by these authors, 85 percent of manufacturers 
responded that they would invest more in the business, both in 
their workers and in capital equipment, if their compliance 
costs could be lessened even a little. These business leaders 
hope that policymakers look at the larger regulatory landscape 
before imposing new burdens that will stifle growth and 
dissuade investments.
    In conclusion, Chairman Hanna, Ranking Member Meng, and 
other members of the Subcommittee, thank you for your 
leadership on this issue and for holding this hearing. Falling 
business formation rates are a challenge and one that is worthy 
of your attention.
    Chairman HANNA. Thank you.
    I yield to Ranking Member Meng to introduce our next 
witness.
    Ms. MENG. Thank you, Mr. Chairman.
    Dr. John Deskins is the director of the Bureau of Business 
and Economic Research and associate professor of Economics at 
West Virginia University. His recent research has focused on 
small business growth, U.S. state economic development efforts, 
and government tax and expenditure policy. His work has 
appeared in journals, including Small Business Economics, 
Public Finance Review, and Economic Development Quarterly, 
amongst others. He holds a Ph.D. in Economics from the 
University of Tennessee.
    Thanks for being here.

                   STATEMENT OF JOHN DESKINS

    Mr. DESKINS. Chairman Hanna, Ranking Member Meng, and 
Members of the Committee, thank you so much for inviting me 
today to discuss the very important role that small businesses 
play in our economy.
    Numerous statistics from the Small Business Administration 
and other sources suggest that small businesses do, indeed, 
play a vital role in our economy. For instance, as we know 
already, statistics based on standard SBA definitions indicate 
that small firms represent the large majority of firms in the 
nation. Small firms employ around half the total U.S. private 
sector workforce and small firms have historically accounted 
for more than half of the net job creation in the U.S. 
Furthermore, economic research has demonstrated the importance 
of small business to economic growth using advanced statistical 
methods. Recent research has rigorously demonstrated that new 
business formation is not simply correlated with a good 
economic, but is indeed a key driver of economic growth.
    My own co-authored research has found that small business 
establishment berths are the single largest determinant of 
output in employment growth at the U.S. state level. This 
suggests that fostering an environment that is fertile for 
small business formation and growth is likely to be more 
fruitful than many of the simpler policy levers that officials 
often look toward. Research has found that new firms are more 
likely to promote economic growth as a result of innovation 
compared to existing firms, and research has also shown that 
new firms often increase competitive pressure on existing 
firms, forcing those existing firms to be more competitive, 
thereby creating a broader economic benefit for society.
    As the term small business and entrepreneurship are 
somewhat vague notions, research has also refined our 
understanding of the specific types of small businesses that 
are most effective in promoting economic growth. Here, as has 
been mentioned before, the key finding is that new firms are 
most important to economic prosperity, not necessarily small 
firms. However, new business formation rates in the U.S. have 
suffered during recent years, and it stands to reason that this 
decline is a significant concern as it relates to innovation 
and long-run economic growth. It is imperative that public 
policy is structured to be conducive to small business 
formation to help ensure that our economy remains healthy and 
innovative in the long run.
    Fortunately, a large literature has developed that examines 
the ways in which public policy affects small business 
activity. This research has investigated the question using a 
variety of data--survey data, tax return data, aggregated 
data--and at multiple levels--national, state, and local. The 
literature has investigated a variety of tax and expenditure 
policies, such as various income tax rate measures and tax 
credits, as well as nonrate policies, such as depreciation 
policy and the deductibility of health insurance premiums.
    Some important findings from this literature are as 
follows. Federal income tax rates and credits do matter. 
Research has convincingly shown that a relatively more 
favorable tax policy towards the self-employed compared to wage 
and salary workers does increase self-employment. A sample of 
findings in this area is as follows. A lower average tax rate 
for self-employment income relative to that of wage and salary 
income has been shown to encourage the transition to self-
employment. Higher expected marginal income tax rates faced by 
the self-employed have been shown to shorten spells of self-
employment, and correspondingly, increases in the expected 
marginal income tax rate for wage and salary income relatively 
speaking increases length of self-employment. Further, spending 
on research and development is positively influenced by tax 
credits towards small business.
    Other tax policies, aside from rates, are also found to 
matter in recent research. For instance, research has shown 
that greater deductibility of health insurance premiums for 
federal income tax purposes does reduce exit from self-
employment. However, it is important to remember that tax 
avoidance and tax evasion are often more pronounced for the 
self-employed. Research has shown that evasion and avoidance 
are likely to be one of the drivers behind the transitions into 
self-employment. Indeed, entry into self-employment may 
actually be high when marginal rates in general are high, 
driven by the potential to evade or avoid taxes, and all 
together this implies that the policymakers should be mindful 
of the potential for inefficient tax avoidance or illegal tax 
evasion when crafting policy towards small business.
    Policymakers must also be mindful, however, that some of 
the identified behavioral effects that I mentioned before, 
while they are readily apparent, they are oftentimes small in 
magnitude. In contrast of these findings, some research has 
failed to identify any relationship between other elements of 
public policy and small business activity. For example, recent 
research has failed to identify that more favorable 
depreciation rules towards small business has been effective in 
promoting small business activity.
    Thank you again for the invitation. I look forward to your 
comments.
    Chairman HANNA. Thank you very much.
    Mr. Dearie, I want to ask anybody here actually, one of the 
things we talk about a lot is the skills gap, which for me 
directly relates to our immigration policy and our lack of 
dealing with it directly, particularly with highly skilled 
individuals who have other options now. At one time their 
options were much more limited. They can go back to a number of 
places that welcomed them more clearly and more easily than we 
do. And I want to talk to you about risk, but visas for the 
highly skilled, anybody here can confirm or deny or push back 
in any way you like, but I would like to hear your opinion.
    Mr. DEARIE. A couple of quick comments. First of all, very 
quickly on your comment about there is nothing new under the 
sun yet, I take your point well that none of the things that we 
heard from entrepreneurs around the country are terribly 
shocking in terms of the problems, but the fact that we heard 
it everywhere we went at individual, unrelated roundtables I 
think underscores that these really are the problems. And one 
of them is the one that you speak to in terms of the skills gap 
and its relationship to our policies with regard to 
immigration. I know that there is a lot of debate about the 
skills gap. I have talked with folks here in Washington who 
absolutely deny it because they say that if there were a skills 
gap you would see it showing up in wage data and it is not 
showing up in wage data. I think there are reasons, or at least 
some reasons why it is not showing up. One is, and we heard 
this at roundtables all across the country, so many of the 
skills these days that the small businesses and entrepreneurs 
need are highly commoditized or they are commoditizable. It is 
very easy to outsource, for example, coding assignments. And 
when entrepreneurs cannot find local talent, it is very easy to 
outsource that work somewhere else. And so therefore, there is 
not upper pressure on wages.
    With regard to the importance of more foreign-born talent, 
our recommendation in the book is to eliminate the cap on H-1B 
visas. Keep the criteria. The criteria are very, very 
important, but as you know, Mr. Chairman, we have about 85,000 
H-1Bs this year. All of the openings for H-1B visas were taken 
up within five days of them becoming available this year. It is 
clear that we need many, many more, and the problem is that 
when you limit something, you make the price higher, and too 
often, startups that have the least amount of cash and 
resources to get foreign-born talent by way of H-1B visas are 
shut out of the process.
    Chairman HANNA. Well, thank you. We have--go ahead, Mr. 
Ortmans, I am sorry.
    Mr. ORTMANS. Well, I just have a couple of very quick 
comments. I think the most important thing we have got to 
remember is that new firms are not necessarily founded by 
individuals. They are founded by teams. So we are not, you 
know, this is not an idea that you let all these foreigners 
into the country who, you know, it is all people from outside 
the United States. So they bring talent to a founding team, 
which I think is really important for us to remember. And we 
obviously did a study at the Kauffman Foundation that showed 
that actually this is such a small number of people we are 
talking about giving some kind of startup visa to, the they are 
obviously not job creators, and this is really hard for, I 
think, the average citizen to understand. I mean, our study 
showed that after 10 years, certainly one of the proposals for 
a startup visa would create 1.6 million jobs. So I do not think 
there is any evidence to show there is any kind of crowding out 
hypothesis as far as the declining rates.
    Chairman HANNA. In the interest of time I am going to turn 
to Ranking Member Meng.
    Ms. MENG. Thank you.
    I am curious that it is often talked about that students 
graduating with relevant majors are not graduating with the 
skills that employers are seeking. Are there efforts that 
entrepreneurs or associations representing these small 
businesses are making to communicate with colleges and 
universities on what the industry needs are and how academic 
institutions can change their curriculums to address the skills 
gap?
    Mr. MOUTRAY. So, yes. Certainly from the manufacturing 
perspective, this is something we hear almost universally 
across all sectors. We actually have a workforce taskforce that 
is meeting right now led by many of our CEOs from our member 
companies. It is something that our manufacturing institute is 
very devoted to, and I think that one of the things that we are 
trying to do is to get our manufactures to meet with 
educational institutions and their state and local economic 
development entities to try to proactively come up with 
curricula that will meet the needs of manufacturers.
    I was just at a manufacturer down in Virginia Beach about a 
month ago, and because of the lack of workers in their area, 
they actually have a high school camp where they invite in high 
schoolers to come in, and that is really one of the sources 
that they have for new talent. But it shows you the extent to 
which many manufacturers have had to become proactive because 
they are not seeing the educational institutions meet those 
needs. But we are seeing shortages in welders, mechanics, 
engineers, et cetera across the board.
    Mr. DEARIE. And if I could just add very quickly a very 
important point that I think you will take a lot of interest to 
underscore what Chad just said, the manufacturing and business 
community is very eager to have input into curricula and to be 
involved in solving this problem. Where the resistance is is in 
the education establishment, so I think that is a very, very 
important point, and pressure has to be put where it 
appropriately is put in order to get that increased cooperation 
between the business community manufacturing and our education 
establishments.
    Mr. DESKINS. Being from a university, could I comment on 
that as well briefly?
    We understand that universities, we are oftentimes slow to 
move to respond to the needs of the new economy, but I think 
some universities are moving, albeit slowly, to make sure that 
our curricula are better suited to the needs. I would point 
towards internships. Colleges and universities need to do a lot 
more to promote internships for students to ensure that they 
have at least one internship before they graduate so they have 
that real-world experience in addition to the college 
classroom, and also experiential learning programs. A lot of 
times we have programs that are moving more towards projects 
that students work on that are in conjunction with the local 
business community. So I think businesses, colleges, are doing 
better, but they can do even more to promote experiential 
learning and internships because those are crucial to making 
sure that the skills that we teach are the right skills.
    Ms. MENG. And student loan debt actually is a growing 
problem in the United States. How big of a deterrent do you 
believe that this burden is to entrepreneurship and any 
possible solutions, like loan forgiveness programs? Anyone can 
answer.
    Mr. DEARIE. We heard about this problem at virtually every 
roundtable that we conducted. And the way that it impacts 
entrepreneurs is that kids who are graduating from school who 
might be highly inclined to join a startup and are very, very 
talented and those startups desperately need, cannot afford to 
because they are carrying a huge student debt that they have to 
pay off, and so they go to an established company instead.
    We offer a couple of ideas for dealing with this, 
particularly in the context of trying to focus on our 
increasing need for STEM graduates, and one of the ideas is to 
think about a federal tax credit that if you are a graduate, 
you graduated with an undergraduate or graduate degree in STEM, 
that you get a federal tax credit, that that can be applied in 
increments over the course of five years to reducing your 
taxable income to make it easier to deal with your student 
debt.
    Ms. MENG. Thank you, and I yield back.
    Chairman HANNA. Thank you.
    Mr. Tipton?
    Mr. TIPTON. Thank you, Mr. Chairman. And thank the panel 
for taking the time to be here.
    Mr. Dearie, I probably could have saved you a lot of money 
in terms of your research going out. I went out to our 
district, a lot of rural communities, small businesses that are 
out there. We heard the exact same stories during this month of 
August, frankly, over the last two years as we traveled through 
the district, and real frustration from our small business 
community in terms of opportunities to be able to create jobs 
and new startups as well just with the challenges that we face. 
I certainly took no offense, and I do not think anyone here 
probably did when you were talking about uncertainty coming out 
of Washington and trying to be able to actually address that 
overregulation.
    Do you have some suggestions in terms of we have actually 
passed a bill with some bipartisan support out of the House of 
Representatives called the REINS Act, to be able to put 
Congress back into those regulatory authorities because I am a 
small businessman. Incredibly frustrating when we have to be 
able to have the proverbial act of Congress vote through the 
House or vote through the Senate a presidential signature to be 
able to resend something that we never voted on. And we all 
know that we need rules and regulations. Do you have some 
thoughts on being able to simplify that? You know, we have had 
174,000 new pages added, 4,000 new regs are in the pipeline. I 
think Mr. Moutray noted we have got over $2 trillion regulatory 
costs, and that is just the federal end of the world. There are 
state costs, county costs, city costs that are literally 
crippling our ability to get this economy moving considering we 
have got the lowest labor participation rate in the last 36 
years.
    Mr. DEARIE. That is quite right. And the study that Chad's 
group put out yesterday is only the most recent confirmation 
that we have a problem. The government is very, very good by 
its nature at putting out regulations. It is not very good on a 
regular basis going back, streamlining existing regulations, 
getting rid of regulations that are no longer appropriate, et 
cetera.
    I think in addition to the REINS Act, I will call your 
attention to a piece of legislation--and forgive me, I do not 
remember all the details. I will get it to you, but I believe 
it is called the Regulatory Improvement Act. I know that 
Congressman Mulvaney was a cosponsor. I cannot remember the 
other cosponsor, but I will get it to you. It is based on an 
idea that came out of all places--and I say that with great 
respect, but it just is not the kind of place you tend to 
associate with an effort to reduce regulation. The Progressive 
Policy Institute, and specifically Mike Mandel, an economist 
there who has spent a lot of time thinking about the impact on 
businesses of just the buildup over time of regulation. Even if 
every single one of the regulations passed was appropriate and 
needed, the sheer buildup over time, he likens it to pebbles in 
a stream or barnacles on the bottom of the boat. It erodes the 
productive capacity of the economy, and he suggested a 
mechanism based on the BRAC Commission, the Base Closing and, 
you know, whatever the words are, that that model would prove 
to be very, very effective in terms of eliminating excess 
capacity in our military base system, and he applies the same 
idea, the same principles to a regular committee, you know, 
sort of a Blue Ribbon panel of experts that would take on a 
specific aspect of our regulatory code on a regular basis, a 
scoop of the pebbles as he calls it, conduct public hearings of 
stakeholders, et cetera, et cetera, and then make 
recommendations in terms of streamlining, elimination, 
combining, et cetera, that would be submitted to Congress for 
an up or down vote. And he believes that that would be very 
effective. I think it would be very effective. It is a wildly 
intriguing idea. It has been submitted. That bill has been 
dropped. And as I said, I will get the details to you because I 
think it holds great potential.
    Chairman HANNA. Great. And I appreciate that. As a small 
business guy, I had a pretty simple principle I tried to live 
by. You know, if it does not work, stop doing it. If it is 
broken, fix it. If it is in the way, get it out of the way in 
to be able to get the economy moving.
    Mr. Deskins, you are an economist, and one of the deep 
concerns that I certainly have in my district is we have some 
of the lower per capital incomes, save Aspen and a couple of 
our resort areas in my district. When we are talking about 
these $2 trillion in regulatory costs, businesses pass those 
costs on, do they not?
    Mr. DESKINS. Of course. Those costs have to flow through. I 
mean, businesses do not pay taxes; people pay taxes as the 
famous saying goes. So either the consumers are going to pay, 
the owners are going to pay, or the employees are going to pay 
fundamentally. I agree with what Mr. Dearie said a second ago, 
that regulatory policy is complex, and I would add my piece of 
that is tax policy is complex, and I think we would find that, 
you know, especially given the issue that I discussed with 
evasion and avoidance with small businesses when there is a 
lack of third-party reporting, I think if we could simplify the 
tax system, if we could, just from a very broad perspective, 
simplify the tax system as well as the regulatory system, if we 
could just reduce the number of exemptions, deductions, and 
credits that have crept into the system over the last few 
decades, I think it would help in terms of compliance burden. 
It would help in terms of the opportunities for evasion and 
avoidance, and it would also help in terms of overall 
efficiency if we could combine a broadening of the tax base 
with lower rates as well. I could not agree more.
    Mr. TIPTON. And if I may, Mr. Chairman, just a little bit 
of a follow-up to that because this seems to me to be a double-
edge sword. In your testimony, and I noted your comment that 
taxes do matter, but we are talking about the tax code. When we 
start talking about $2 trillion in regulatory costs, we are 
virtually having taxation via regulation. This is impacting 
moms and dads that are trying to be able to buy clothes for 
their kids to be able to go back to school. It is showing up in 
higher prices in terms of the marketplace and stifling 
innovation. Is that accurate?
    Mr. DESKINS. I think it is accurate. I think that we have a 
lot of room for improving the overall system. Just over time, 
as Mr. Dearie said, we are good at adding new regulations to 
target specific issues that pop up, but after regulations 
accumulate over decades, it is really hard to look back and to 
streamline the broader system as far as regulatory policy goes 
or as far as tax policy goes. So I am always advocating for a 
simpler, more streamlined system that has broader bases and 
lower rates.
    Mr. TIPTON. Thank you. I am out of time. I yield back, Mr. 
Chairman.
    Chairman HANNA. Thank you very much.
    Thank you, everyone, for being here. I think what we have 
seen here is a long statement of something that is very seldom 
correct, and that is that the commonly accepted wisdom is 
actually correct here; that regulation, the skills gap, over 
burden, an accumulated list of rules and regulations that 
actually kills the very thing that it is trying to protect; 
that in an effort to have some control over every outcome, we 
actually ruin every outcome in some small way.
    I do believe that people should be able to capitalize their 
education in STEM; that is if businesses can do that with their 
biggest capital investment, why should not individuals? So I 
appreciate that comment and I personally support that.
    College debt. It is interesting because if you have 
$100,000 in debt, it is scary to try to open a business on top 
of that. So I think that is worth looking at, and I appreciate 
everybody's comments today.
    Boy, I wish we had more time. We have a hearing, or rather 
a closed hearing with all the members of Congress at 11 
o'clock. If there are no further comments, I want to thank 
everybody again. I ask unanimous consent that members have five 
business days to submit statements and supporting materials. 
Without objection, so ordered.
    Thank you all again.

    [Whereupon, at 10:56 a.m., the Subcommittee was adjourned.]

                            A P P E N D I X

[GRAPHIC] [TIFF OMITTED] 


Testimony before the Committee on Small Business, Subcommittee 
                  on Contracting and Workforce

                         Hearing Title:

     ``The Decline in Business Formation: Implications for 
               Entrepreneurship and the Economy''

                      John Deskins, Ph.D.

                       September 11, 2014

    Mr. Chairman and Members of the Committee, I am John 
Deskins, and I serve as Director of the Bureau of Business & 
Economic Research and as Associate Professor of Economics at 
West Virginia University. Thank you for inviting me to appear 
before you today to discuss the role of small business in the 
United States economy.

    Numerous statistics from the U.S. Small Business 
Administration and other sources suggest that small businesses 
play a vital role in our economy. For instance, statistics 
based on standard SBA definitions indicate t hat small firms 
represent the large majority of firms in the nation; small 
firms employ around half of the total U.S. private sector 
workforce; and small firms have historically accounted for more 
than half of net job creation in the U.S.\1\
---------------------------------------------------------------------------
    \1\ United States Small Business Administration, Office of 
Advocacy. ``Frequently Asked Questions.'' 2014.

    Further, academic research has demonstrated the importance 
of small business to economic growth using advanced statistical 
methods. Recent research has rigorously demonstrated that new 
business formation is not simply correlated with a growing 
economy, but is indeed a key driver of economic growth.\2\
---------------------------------------------------------------------------
    \2\ See Acs, Zoltan, and Catherine Armington, ``Employment Growth 
and Entrepreneurial Activity in Cities.'' Regional Studies, 38(8), 
2004.

    My own co-authored research has found that small business 
establishment births are the single largest determinant of 
output and employment growth at the US state level.\3\ This 
research suggests that fostering an environment that is fertile 
for small business formation and growth is likely to be more 
fruitful than manipulating many of the simpler policy levers 
that officials often look toward.
---------------------------------------------------------------------------
    \3\ Bruce, Donald, John A. Deskins, Brian C. Hill, and Jonathan C. 
Rork. ``(Small) Business Activity and State Economic Growth: Does Size 
Matter?'' Regional Studies, 43(2).

    Research has found that new firms are more likely to 
promote economic growth as a result of innovation, compared to 
existing firms. Research has also shown that new firms often 
increase competitive pressures for existing firms, forcing 
existing firms to be more competitive, thereby creating a 
broader economic benefit for society.\4\
---------------------------------------------------------------------------
    \4\ Disney, R., J. Haskel, and Y. Heden. ``Restructuring and 
productivity growth in UK manufacturing.'' Economic Journal, 113, 2003.

    As the terms ``small business'' and ``entrepreneurship'' 
are somewhat vague notions, research has also refined our 
understanding of the specific types of small business that are 
most effective in promoting economic growth. Here a key finding 
is that young firms are most important for long-run economic 
prosperity, not necessarily small firms.\5\
---------------------------------------------------------------------------
    \5\ See Haltiwanger, John C., Ron S. Jarmin, and Javier Miranda. 
``Who Creates Jobs? Small vs. Large vs. Young.'' National Bureau of 
Economic Research, August 2010.

    However, new business formation rates in the U.S. have 
suffered during recent years \6\ and it stands to reason that 
this decline is a significant concern as it relates to 
innovation and long-run economic growth.
---------------------------------------------------------------------------
    \6\ United States Small Business Administration, Office of 
Advocacy. ``Frequently Asked Questions.'' 2014.

    It is imperative that public policy is structured to be 
conducive to small business formation to help ensure that our 
economy remains innovative and as healthy as possible in the 
---------------------------------------------------------------------------
long-run.

    Fortunately a large literature has developed that examines 
the ways in which public policy affects small business 
activity. I will use the remainder of my remarks to comment on 
the findings of this literature.

    This research has investigated the question using a variety 
of data--survey data, tax return data, and aggregated data--and 
at multiple levels--national, state, local. The literature has 
investigated a variety of tax and expenditure policies, such as 
various income tax rate measures and tax credits, as well as 
non-rate policies, such as depreciation policy or health 
insurance deductibility.

    Some important findings from the more recent literature 
relating to how public policy affects small business are as 
follows:

           Federal income tax rates and credits do 
        matter. Research has convincingly shown that relatively 
        more favorable tax policy toward the self-employed, 
        compared to wage and salary workers, increases self-
        employment. A sample of findings is as follows:

                    A lower average tax rate for self-
                employment income, relative to that of wage and 
                salary income, has been shown to encourage the 
                transition to self-employment.\7\
---------------------------------------------------------------------------
    \7\ Bruce, Donald. ``Effects of the United States tax system on 
transitions into self-employment.'' Labour Economics, 7, 2000: 545-574.

                    Higher expected marginal income tax rates 
                faced by the self-employed have been shown to 
                shorten spells of self-employment. 
                Correspondingly, increases in expected marginal 
                income tax rates for wage and salary income 
                lengthen spells of self-employment.\8\
---------------------------------------------------------------------------
    \8\ Gurley-Calvez, Tami, and Donald Bruce. ``Do Tax Cuts Promote 
Entrepreneurial Longevity?'' National Tax Journal, 61(2), 2008.

                    Spending on research and development is 
                positively influenced by tax credits toward 
                small business.\9\
---------------------------------------------------------------------------
    \9\ See Gale, William, and Samuel Brown, ``Small Business, 
Innovations, and Tax Policy: A Review,'' Tax Policy Center, April, 
2013, for a discussion of this issue.

           Other tax policies are also found to matter 
        in recent research. For instance, research has shown 
        that greater deductibility of health insurance premiums 
        for federal income tax purposes likely reduces exits 
        from self-employment.\10\
---------------------------------------------------------------------------
    \10\ Gurley, Calvez, Tami. ``Tax-Based Health Insurance Reforms.'' 
Contemporary Economic Policy, 29(3), 2011.

           It is believed that tax avoidance and 
        evasion opportunities are often more pronounced for the 
        self-employed. Research has shown that evasion and 
        avoidance are likely drivers of the transition into 
        self-employment. Indeed, entry into self-employment may 
        actually be high when marginal rates in general are 
        high, driven by the potential to evade or avoid 
        taxes.\11\ Overall this implies that policymakers 
        should be mindful of the potential for inefficient tax 
        avoidance activities and illegal tax evasion when 
        crafting tax policy toward small business.
---------------------------------------------------------------------------
    \11\ See Bruce, Donald. ``Effects of the United States tax system 
on transitions into self-employment.'' Labour Economics, 7, 2000: 545-
574, for suggestive evidence to this effect.

           Policymakers must also be mindful, however, 
        that some of the identified behavioral effects, while 
---------------------------------------------------------------------------
        readily apparent, are considered small in magnitude.

           In contrast to these findings, some research 
        has failed to identify any relationship between other 
        elements of policy. For instance, recent research has 
        failed to identify any evidence that more favorable 
        depreciation rules and capital expensing policies 
        promote small business activity.\12\
---------------------------------------------------------------------------
    \12\ Bruce, Donald, John Deskins, and Tami Gurley-Calvez. 
``Depreciation Rules and Small Business Longevity.'' Journal of 
Entrepreneurship and Public Policy, 3(1), 2014.

           Several elements of U.S. state tax policy 
        have also been identified to affect small business 
        activity in states.\13\ Although magnitudes here are 
        often small as well.
---------------------------------------------------------------------------
    \13\ Bruce, Donald, and John Deskins. ``Can state tax policies be 
used to promote entrepreneurial activity?'' Small Business Economics, 
38(4), 2012.

    There are many important questions that remain in the 
literature. Even the most basic question of what is a ``small 
business'' is not met with universal agreement. Additionally, 
research needs to investigate further how much of the apparent 
change in small business activity in response to tax policy is 
a real behavioral response versus a change in less economically 
---------------------------------------------------------------------------
substantive tax reporting behavior.

                                 
