[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]


 
                  TAX REFORM: ENSURING THAT MAIN STREET 
                             ISN'T LEFT BEHIND

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

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                             APRIL 15, 2015

                               __________


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            Small Business Committee Document Number 114-008
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                   HOUSE COMMITTEE ON SMALL BUSINESS

                      STEVE CHABOT, Ohio, Chairman
                            STEVE KING, Iowa
                      BLAINE LUETKEMEYER, Missouri
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                        TOM RICE, South Carolina
                         CHRIS GIBSON, New York
                          DAVE BRAT, Virginia
             AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
                        STEVE KNIGHT, California
                        CARLOS CURBELO, Florida
                          MIKE BOST, Illinois
                         CRESENT HARDY, Nevada
               NYDIA VELAZQUEZ, New York, Ranking Member
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                       BRENDA LAWRENCE, Michigan
                       ALMA ADAMS, North Carolina
                      SETH MOULTON, Massachusetts
                           MARK TAKAI, Hawaii

                   Kevin Fitzpatrick, Staff Director
            Stephen Dennis, Deputy Staff Director for Policy
            Jan Oliver, Deputy Staff Director for Operation
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director
                            
                            C O N T E N T S

                           OPENING STATEMENTS

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

                               WITNESSES

Mr. Scott Lipps, Owner, Sleep Tite Mattress Factory, Franklin, 
  OH, testifying on behalf of the National Federation of 
  Independent Business...........................................     4
Mr. Pete Sepp, President, National Taxpayers Union, Alexandria, 
  VA.............................................................     7
Mr. Dan McGregor, Chairman of the Board, McGregor Metalworking 
  Companies, Springfield, OH, testifying on behalf of the S 
  Corporation Association of America.............................     8
Eric Toder, Ph.D., Institute Fellow, Urban Institute, Co-
  Director, Urban-Brookings Tax Policy Center, Washington, DC....    10

                                APPENDIX

Prepared Statements:
    Mr. Scott Lipps, Owner, Sleep Tite Mattress Factory, 
      Franklin, OH, testifying on behalf of the National 
      Federation of Independent Business.........................    28
    Mr. Pete Sepp, President, National Taxpayers Union, 
      Alexandria, VA.............................................    32
    Mr. Dan McGregor, Chairman of the Board, McGregor 
      Metalworking Companies, Springfield, OH, testifying on 
      behalf of the S Corporation Association of America.........    48
    Eric Toder, Ph.D., Institute Fellow, Urban Institute, Co-
      Director, Urban-Brookings Tax Policy Center, Washington, DC    53
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    AEO - Association for Enterprise Opportunity.................    68
    AICPA - American Institute of CPAs...........................    73
    CFETR - Coalition for Fair Effective Tax Rates...............    91
    IFA - International Franchise Association....................    97
    Letter from Hon. Orrin Hatch, Chairman, Committee on Finance, 
      United States Senate, and Paul Ryan, Chairman, Committee on 
      Ways and Means, U.S. House of Representatives..............    99
    WIPP - Women Impacting Public Policy.........................   101


        TAX REFORM: ENSURING THAT MAIN STREET ISN'T LEFT BEHIND

                              ----------                              


                       WEDNESDAY, APRIL 15, 2015

                  House of Representatives,
               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 11:00 a.m., in Room 
2360, Rayburn House Office Building. Hon. Steve Chabot 
[chairman of the Committee] presiding.
    Present: Representatives Chabot, Luetkemeyer, Rice, Gibson, 
Brat, Knight, Curbelo, Bost, Hardy, Velazquez, Chu, Hahn, Meng, 
and Moulton.
    Chairman CHABOT. The Committee will come to order.
    Good morning. I want to thank everyone for being here. A 
special thanks to our witnesses, who have taken time away from 
their undoubtedly busy schedules to be with us. Today is the 
day that nobody looks forward to, except maybe the IRS, Tax 
Day. I expect most of us have already filed our returns while 
struggling to figure out our liabilities and deductions and 
credits. We do this all the while trying to discern what, 
exactly, the terms ``adjusted basis'' and ``imputed interest'' 
mean and sifting through a myriad of instructions or even the 
most basic of tax returns. Without question, the middle of 
April can be miserable for a lot of us. Taxpayers face a tax 
code that has become intensely complex and truly temporary with 
tax relief being extended for one year, months at a time, or 
even retroactively sometimes.
    America's 28 million small business owners, taxpayers 
themselves, repeatedly complain that this uncertainty has made 
it difficult to plan and grow their companies. In fact, a 
recent survey by the National Small Business Association found 
that the pure complexity of the tax code is actually a more 
significant problem for America's small businesses than the 
overall tax liability. Imagine that. Businesses are so fed up 
with not knowing what to do and how to do it that they care 
less about what they have to pay the IRS. Unfortunately, the 
current U.S. tax code has become one of, if not the most 
significant hurdles to the growth of existing businesses and 
creation of new firms.
    But it does not have to be that way. Over the past few 
years, there has been a renewed effort in Congress to reform 
our tax code to make it easier, fairer, and more stable. Here 
in our Committee, we are working to identify the aspects of the 
code that are most troublesome to small business formation. We 
have already held hearings, met with trade associations, and 
most importantly, we have talked with our constituents back 
home. The message we hear is always the same. We have got to 
make it simpler, and flatter, and fairer. And taxpayers want 
Congress to enact changes in the code earlier in the year, or 
better yet, make certain beneficial tax provisions permanent so 
they can plan ahead. Unfortunately, Washington usually does 
things at the last minute or even makes changes sometimes 
retroactively.
    Another critical aspect of the tax reform debate is making 
sure we are not leaving Main Street behind. Some people may not 
realize that the vast majority of small businesses in the 
United States are organized as pass-through entities, meaning 
they pay no corporate income tax. Instead, business profits are 
passed through to the owner or owners to be reported and taxes 
paid on their individual returns. Our entire tax system needs 
to be revamped, not just half of it.
    There is no doubt that we must reform our corporate tax 
structure. We have the highest corporate income tax rates in 
the industrialized world, but as our Committee has identified 
numerous times before, our small businesses are the backbone of 
our economy. They create 70 percent of the new jobs in this 
country and represent over 99 percent of all employers in the 
United States. Because so many of these enterprises file and 
pay their taxes on their individual return, we cannot, and must 
not, ignore them as we move forward with any tax reform debate.
    It is time for Washington to get serious about helping 
American families and small businesses. It is not just about 
helping them keep more of their hard-earned money, as important 
as that is, but about making April 15th not such a nightmare. 
Nobody likes to pay taxes, but the convoluted system we have 
now is simply too much of a burden. Reforming our tax code in 
its entirety will unleash the true potential of our economy. 
Our constituents deserve better than the mess Washington has 
given them.
    Again, I want to thank each of our witnesses for taking the 
time to be with us today, especially my constituent, Scott 
Lipps, who is from Franklin, Ohio, which is in the First 
Congressional District, my district, and another Ohioan, Dan 
McGregor. And we will do further introductions in a few 
minutes, but I would now like to yield to the ranking member, 
Ms. Velazquez, for her opening statement.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman. And I, too, want to 
thank all the members of the panel for being here, especially 
Dr. Toder, our witness.
    Spurred largely by Main Street growth, the American economy 
is as strong as it has been in years. However, our nation has 
also managed to outgrow many tax policies. For small firms, 
these outdated and increasingly complex provisions create an 
obstacle to success, rather than a means of fostering expansion 
and job creation. This committee is well aware of the 
challenges created by the Internal Revenue Code and the major 
complications it has on business planning.
    Modernizing our code to reflect new business reality will 
assist in providing simplicity, fairness, and permanency to 
businesses of all sizes. The last major reform of the code took 
place in 1986, making an overhaul long overdue.
    But we cannot go forward without input from small business 
owners. These entities are a vital part of that equation as 
they are responsible for most new job growth and business 
income. As such, they are a major part of our economy, and an 
important aspect of today's discussion, but too often, their 
tax reform concerns are lost in broader debates. Today's 
hearing will allow us to start a dialogue between the small 
business community and policymakers regarding the best tax 
policies supporting the success of small firms. They are the 
drivers of the nation's economy, and we cannot afford to put 
the cost of collecting taxes on them, which is what a 
corporate-only approach will do. It is clear that small 
businesses can thrive and continue to improve our economy if we 
approach tax reform in a comprehensive manner, rather than a 
piecemeal approach. Comprehensive reform will have immediate 
benefits for small businesses, while also serving our nation's 
economic objective of promoting pro-growth policies.
    Focusing reform efforts to a complete overhaul of the code 
ensures the small business community no longer has to worry 
about keeping up with constant tax changes. It also guarantees 
small business owners will not be the cause of lowering 
corporate rates alone. Such an approach also reflects the 
growth of tax reform simplicity, certainty, and fairness.
    I stand committed to working in a bipartisan way to revise 
policies that stifle entrepreneurship and innovation. A real 
opportunity exists to implement long-lasting reforms, and doing 
so will have immediate benefits for small businesses.
    With that, Mr. Chairman, I yield back.
    Chairman CHABOT. Thank you very much. The gentlelady yields 
back.
    If Committee members have opening statements, we would ask 
that they submit them for the record.
    And I will just briefly explain the five-minute rule, which 
is you get five minutes. We will give you a little bit of 
leeway there. But there is a lighting system. The yellow light 
will come on when you have a minute to wrap up, and the red 
light, we would ask you to wrap up as close to that as 
possible. As I say, there is a little flexibility.
    And I would now like to introduce our panel. I will begin 
with our first witness this morning. Our first witness will be 
Scott Lipps, who is the owner of Sleep Tite Mattress Factory in 
Franklin, Ohio. He happens to be a constituent, as I mentioned 
before, in the First Congressional District. Scott started a 
business manufacturing institutional mattresses in 1989, and 
after four successful years, he and his wife, Debbie, and their 
five employees, merged with Sleep Tite, a company that was 
founded in 1947. Now producing both institutional and home 
bedding, Sleep Tite has grown to 18 total employees. In 
addition to running Sleep Tite, Scott also served for 15 years 
on the Franklin City Council and two terms as the city's mayor.
    Scott, thank you for being here today.
    And our second witness will be Pete Sepp, who is the 
president of the National Tax Payers Union. In this role, he 
leads the NTU's government affairs, public relations, and 
development activities. He also oversees the research and 
educational operations of the National Tax Payers Union 
Foundation. He has been with the NTU since 1988. He received 
his degree in History and Political Science from Webster 
University, and we thank you for your testimony here shortly.
    And our third witness is Dan McGregor, chairman of the 
board of McGregor Metalworking Companies in Springfield, Ohio. 
Also a Buckeye. Dan started his career with Morgal Machine 
Tool. Machine Tool Company in 1968, the first of the McGregor 
Metalworking Companies. Dan worked with other family members 
and created five different business units, focusing on six 
metalworking specialties. In June 2010, Dan retired as 
president of McGregor Metalworking Companies and now serves as 
Chairman of the Board. He graduated from Lehigh University in 
1965 and served three years in the Navy, and we thank you for 
your service to our country. And thank you for being with us 
today.
    And I will now yield to the ranking member to introduce our 
fourth witness.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman.
    It is my pleasure to introduce Dr. Eric Toder. He is an 
institute fellow at the Urban Institute and co-director of the 
Urban Brookings Tax Policy Center. Mr. Toder previously held a 
number of positions in tax policy offices in the U.S. 
government and overseas, including serving as deputy assistant 
secretary for Tax Analysis at the United States Treasury 
Department, director of Research at the IRS, and deputy 
assistant director for Tax Analysis at the Congressional Budget 
Office. He is the author and co-author of numerous papers on 
tax policy, tax administration, and retirement issues. Welcome 
to the committee.
    Chairman CHABOT. Thank you very much. The gentlelady yields 
back.
    And we will now go to our witnesses. And Mr. Lipps, you are 
recognized for five minutes.

STATEMENTS OF SCOTT LIPPS, OWNER, SLEEP TITE MATTRESS FACTORY; 
 PETE SEPP, PRESIDENT, NATIONAL TAXPAYERS UNION; DAN MCGREGOR, 
 CHAIRMAN OF THE BOARD, MCGREGOR METALWORKING COMPANIES; ERIC 
  TODER, INSTITUTE FELLOW, URBAN INSTITUTE, CODIRECTOR, URBAN-
                  BROOKINGS TAX POLICY CENTER

                    STATEMENT OF SCOTT LIPPS

    Mr. LIPPS. Good morning, Chairman Chabot, Ranking Member 
Velazquez, and members of the Committee. I am pleased to be 
here on behalf of the National Federation of Independent 
Business (NFIB).
    Our family owns Sleep Tite Mattress Factory and Showroom 
and has been a member of NFIB since 1995. I also currently 
serve on the NFIB-Ohio Leadership Council. Thank you for 
holding today's hearing, ``Tax Reform: Ensuring that Main 
Street Is Not Left Behind.'' The current tax code negatively 
impacts small and closely-held businesses in several important 
ways, so I appreciate the invitation to be here today to 
discuss these important issues from the perspective of a small 
business owner.
    The NFIB is the nation's leading small business advocacy 
organization. The typical NFIB member employs about 8 to 10 
employees with annual gross receipts of about $500,000. All of 
NFIB's members are independently owned, which is to say none 
are publicly-traded corporations. While there is no one 
definition of a small business, the problems NFIB members 
confront, relative to tax code, are most representative of 
small businesses. A few consistent concerns are raised 
regardless of the trade or industry in which the small business 
is engaged.
    As part of representing small business owners, NFIB 
frequently conducts surveys of both NFIB members and small 
business population as a whole, and taxes consistently rank as 
one of their greatest concerns. In the most recent publication 
of the NFIB Research Foundation's Small Business Problems and 
Priorities, 5 of the 10 small business concerns are tax-
related. In fact, the February 2015 Small Business and Economic 
Trends report ranks taxes as the number one problem small 
business owners currently face. Right now, taxes are a bigger 
problem than poor sales, the cost and quality of labor, and 
government regulation.
    I would like to spend the rest of my time telling you about 
my personal experience. Sleep Tite Mattress Factory and 
Showroom was founded in 1947, by Stan Rothman. In 1990, our 
family founded an institutional (acute and long-term care) 
bedding company, HomeCare Mattress. In 1992, we merged HomeCare 
and Sleep Tite. We started with four employees and now have 15 
full-time employees. We are currently structured as a C 
corporation, but we started as a pass-through. While oftentimes 
a struggle, we are very proud to offer our team members health 
insurance, a 401K program, paid sick leave, paid vacation time, 
and more benefits. Aggressive tax rates and compliance efforts 
directed to fulfill intrusive regulations severely impact our 
ability to offer this full-time benefits package that our 
employees need and deserve.
    We are proud of Sleep Tite Mattress Factory. We think you 
would be, too. As I mentioned, we strive to offer our team 
members a positive work environment that offers a learning 
experience, the ability to make decisions, career 
opportunities, and full benefits.
    Beyond that, we believe community involvement is critical. 
Small businesses are the ``fabric of the community.'' For 
example, across America, you will find small businesses 
sponsoring school plays, pee-wee football teams, cheerleading 
squads, and church youth group programs. The list goes on. The 
small business owner works in the community, lives in the 
community, and hires in the community. Sleep Tite Mattress has 
been recognized by our schools for involvement and won our area 
Chamber of Commerce Business of the Year Award in 1999. That 
makes us feel good. What makes us feel even better is seeing 
our employees grow and build their lives and stay with our 
company for years. To serve our employees and community, we 
must have lower tax rates, fewer regulations, and a less 
confusing, less complex tax code.
    We have been in business in our community for over 24 
years. I witnessed and experienced what punitive local, state, 
and federal laws were doing to the business community in 
Franklin, so in 1999, I did something about it. I ran for city 
council and won a seat. After encouraging a few fellow business 
owners and business people to run for council, I was honored to 
serve as mayor for two terms. We concentrated on fixing 
problems a bloated bureaucracy and out-of-touch government had 
levied on our city.
    Our council addressed local incentive programs that 
unfairly assisted large corporations but did not offer 
incentives to small business. We instituted a ``Downtown 
Improvement Program'' (DIP) that offered grants and low 
interest loans to small businesses locating or expanding within 
our community. We met with local zoning, planning, and building 
officials and redesigned zoning laws to assist businesses with 
fewer or less restrictive regulations. For example, sign 
ordinances and requirements. Not every small business person 
can run for elected office. Instead, Congress should work to 
reform our tax code in order to help small businesses get back 
to doing what they should be doing--running their small 
business. Over 85 percent of NFIB members agree that Congress 
should fundamentally reform the tax code.
    As Congress considers tax reform, I would encourage you to 
keep these most important goals in mind. Achieving these goals 
will greatly enhance the ability of small and closely-held 
businesses to thrive in the 21st century--permanently keep the 
tax rates low, do not create disparity between the corporate 
rate and individual rate, reduce complexity, and not separate 
the business owner from the business. NFIB members are willing 
to make tradeoffs necessary to lower taxes, such as reducing or 
eliminating deductions, credits, or exclusions.
    Should Congress enact comprehensive tax reform that 
achieves these goals, small business owners would no longer 
face one of their most consistent complaints--arbitrary and 
inconsistent tax preferences, constant change, and complexity 
in the current federal code.
    Small businesses truly are the engine of economic growth. 
This is not just a slogan, as small businesses created two-
thirds of the net new jobs over the last decade. Small business 
owners are risk-takers and entrepreneurs. They are the last 
businesses to lay off employees when business declines, and 
slow to rehire when business picks up. The owners work 
additional hours until they can take it no more. When small 
businesses hire an employee, it is their intent to keep them 
for the long run.
    The current tax code has become a confusing and 
unpredictable challenge for the vast majority of small business 
owners. Our tax laws should not deter or hinder the ability of 
small business owners to create or expand their business. Taxes 
are a major issue for all small business owners. Tax law can 
dictate the business decisions an owner must make, whether it 
is the type of structure to adopt, whether to make an 
investment in programs or machinery, to expand their facility, 
or to hire employees.
    After decades of patchwork changes, Congress needs to make 
major adjustments to our tax laws to reduce the complexity and 
confusion of business growth. I appreciate Congress taking a 
serious look at reforming the tax code and urge you to keep in 
mind the unique challenges that face small businesses.
    Thank you for having me here today, and I am happy to 
answer any questions.
    Chairman CHABOT. Thank you very much.
    Mr. Sepp, you are recognized for five minutes.

                     STATEMENT OF PETE SEPP

    Mr. SEPP. Mr. Chairman, Madam Ranking Member, Members of 
the Committee, National Tax Payers Union (NTU) is honored to 
have been invited to this hearing. And I could discuss at 
length very technical changes to the tax laws itself to go on 
and on about rates and bases and JCT scores and econometric 
analyses, but I want to focus my brief remarks here on one 
issue--administrability.
    To us, with the tax laws as they affect small businesses, 
administrability means reducing complexity in the system that 
businesses encounter every day. It also means increasing the 
access to justice that businesses have should they find 
themselves in a dispute with the IRS.
    One interesting statistic about the complexity costs that 
small businesses face--I give a number of them in my 
testimony--but the National Association of Manufacturers 
determined that for businesses with fewer than 50 employees, 
the burden per worker of tax compliance alone is more than 50 
percent higher than all other businesses. It is a regressive 
burden, and it is a costly burden.
    What we want to do here is try to identify the areas of the 
tax code that are the most complex for small businesses and 
legislate in those areas accordingly. There are some 
instructive studies here that I think could help us.
    One that was taken by the IRS Statistics of Income 
Division, measuring the tax compliance burden of small 
business, identified areas of business activity and tax return 
activity where businesses encountered unduly harsh burdens of 
time or money. Those were things like using the accrual 
accounting method, having foreign operations, filing returns in 
multiple states, keeping records for alternative minimum tax 
liabilities, completing an end-of-year inventory to comply with 
various tax requirements. These are areas where Congress needs 
to focus its attention in simplifying the law. How do we do 
that? Well, I think that for one, foreign operations of 
businesses need to be scrutinized with an eye towards reducing 
the number of forms and instructions. The Taxpayer Advocate's 
office has the astounding statistic that there are for U.S. 
businesses conducting economic activity abroad, 43 publications 
with 1,212 pages referring to other publications with over 
13,000 additional pages, 1,500 pages of forms. No small 
business can possibly shoulder a burden like that without the 
owner just throwing up his hands saying ``why bother to expand 
abroad?'' And yet that's precisely what we want small 
businesses to do--conduct more activity abroad.
    I will confine the remainder of my remarks to a very 
important and overlooked topic, and that's taxpayer rights in 
the appeals processes and the special problems that small 
businesses encounter. We heard hearing after hearing back in 
the 1980s and 1990s from businesses that were literally shut 
down just by the audit procedure itself. They simply could not 
conduct their operations while the IRS was going through their 
records. We enacted laws, especially a very comprehensive one 
in 1998, to try to improve the appeals process, give businesses 
more opportunities to remain self-supporting during the 
examination and the appeals and collection process. We need to 
make modifications to those laws now.
    There is a set of proposals introduced on the Senate side 
by Senator Cornyn, called the Small Business Taxpayer Bill of 
Rights. This has some improvements to the current laws, such as 
introducing alternative dispute resolution to the process for 
appealing audits. This would be a fantastic tool. It would be 
lower cost. It would be a quicker resolution. And it would help 
to address some of the problems that the taxpayer advocate 
herself has identified in the examination process. She is 
saying, for example, that examiners, revenue officers, are not 
being given the latitude to make offers and compromise and 
approve them with businesses in audit situations quickly 
enough. The businesses end up suffering, the collection 
activities go on, and ironically, the government hurts itself 
because these businesses are basically dissolved under tax 
problems and they're on longer contributing to the Treasury. 
That serves no one's interests.
    In short, ensuring that Main Street does not get left 
behind means ensuring that the tax system does not crush the 
entrepreneurial spirit. And that entrepreneurial spirit is not 
something you find when a small business owner confronts the 
rates and bases and minutia of the tax system. It is what they 
confront when they face hours upon hours, thousands upon 
thousands of dollars trying to fill out tax returns, and the 
very real fear that if the IRS questions an item on that 
return, they might as well pay up rather than fight it, even if 
they think they are right, because the expense to them 
personally and to their business is just too great. We have to 
change that situation. We came together in a bipartisan 
fashion, not only in 1986, but in 1998, with the IRS 
Restructuring and Reform Act. Let us do it again. NTU and its 
members are ready to assist in that task.
    Thank you.
    Chairman CHABOT. Thank you very much, Mr. Sepp.
    Mr. McGregor, you are recognized for five minutes.

                   STATEMENT OF DAN MCGREGOR

    Mr. MCGREGOR. Chairman Chabot, Ranking Member, and other 
Members of the Committee. Thank you for the opportunity to 
testify here today. I recognized my timeliness when my cab 
driver asked me this morning if I had paid my taxes. And he 
went on to complain about his taxes.
    Chairman CHABOT. The ranking member asked me the same thing 
when I got up here.
    Mr. MCGREGOR. This year is the 50th year----
    Chairman CHABOT. And I did, by the way.
    Mr. MCGREGOR. This year is the 50th anniversary of McGregor 
Metalworking.
    Back in 1965, my family purchased a small eight-man tool 
and die shop. Today, we employ 375 workers in four locations in 
Springfield, Ohio, and one in Aiken, South Carolina. These are 
good-paying manufacturing jobs in areas that need them.
    Our business is contract metal forming, and our major 
customers are in transportation, auto, lawn and garden, and 
agriculture.
    In support of my written testimony, I would like to 
accentuate the following important points. First, pass-through 
status is essential for a family-owned business. In 1986, we 
changed from C corp to S corp. This change fit our desire to 
grow our business and still be able to reward our shareholders. 
Last week we had our semi-annual family shareholder meeting 
where we reviewed the results of 2014 and our plan for 2015. 
This is important so that the shareholders understand the 
impact of their pass-through earnings on their tax filing, 
recognizing that when the earnings are reported, they have to 
pay their taxes and pay estimates the following year.
    Second, lower taxes mean higher retained earnings allowing 
the company to grow. After the big recession of 2008 and 2009, 
we were faced with two bank covenants--a requirement tying debt 
service to free cash flow, and a cap on our total debt to 
equity. Taxes play an important role here since our ability to 
retain earnings is limited by how much tax we pay. Prior to 
2013, we paid about 34 cents of every dollar to cover 
shareholder taxes. Today we pay about 42 cents. This is a huge 
increase and it limits both our ability to borrow and our 
ability to increase employment. In my business, $30,000 in 
retained earnings can mean the addition of a new job.
    Third, the R&E tax credit. Because our business is 
technical in nature, we rely on the R&E tax credit to develop 
new processes. Some of our shareholders are unable to use this 
credit because of the alternative minimum tax. Changing that 
rule to allow taxpayers under the AMT to get the R&E tax credit 
would fix that. The total elimination of AMT would be even 
better.
    Fourth, the estate tax. The 2012 increase in the estate tax 
exemption to $5 million was a positive step for closely-held 
businesses, but any family that grows their business beyond 
this exemption must constantly make this part of their business 
strategy. Often, this is contrary to the best interest of the 
business and the family members. Transition of ownership in 
privately held businesses is never easy and the estate tax is 
often the death knell of family business continuance.
    And finally, tax return. Our family business started 50 
years ago and has become a significant employer in our 
community of 65,000 people. The population of Springfield is 
gradually declining and needs jobs to help retain citizens. Tax 
reforms that incentivize business growth and retention are 
essential to our community.
    So I will close with three recommendations for tax reform 
going forward. A, it should be comprehensive and improve the 
tax treatment of pass-through businesses and corporations 
alike. B, parity should be restored for the top rates paid by 
pass-through entities and corporations. And C, it should reduce 
or eliminate the double tax paid by C corporations.
    Reform that follows these principles would help McGregor 
Metalworking and other employers in our area continue to 
succeed and create jobs.
    Thank you, Mr. Chairman and ranking member for this 
opportunity to testify. I look forward to answering any 
questions.
    Chairman CHABOT. Thank you very much.
    Dr. Toder, you are recognized for five minutes.

                    STATEMENT OF ERIC TODER

    Mr. TODER. Thank you very much.
    Chairman Chabot, Ranking Member Velazquez, and Members of 
the Committee. Thank you for inviting me to appear today to 
discuss the effects of tax reform on small business. The views 
I am expressing are my own and should not be attributed to the 
Tax Policy Center or to Urban Institute, its board, or its 
funders.
    There is a growing consensus that our current system of 
taxing business income needs reform and bipartisan agreement on 
some main directions of reform, although not the details. The 
main drivers for reform are concerns with a corporate tax 
system that discourages investment in the United States, 
encourages U.S. companies to retain profits overseas, and 
places some U.S.-based companies at a competitive disadvantage. 
At the same time, the corporate tax raises relatively little 
revenue compared to other countries, misallocates scarce 
capital by providing selected preferences to favorite assets 
and industries, and allows some U.S. multinationals to pay very 
low tax rates by shifting reported profits to low tax 
countries. No one is happy with this state of affairs.
    President Obama's framework for corporate reform shares 
important features with the tax reform proposal introduced last 
year by former Ways and Means Chairman Dave Camp. Both would 
reduce the corporate tax rate, pay for the lower rate by 
cutting back major business tax preferences, and reform 
international tax rules.
    Corporate tax reform, however, cannot proceed in isolation 
from the individual income tax system. The base broadening 
needed to pay for a lower corporate rate would affect all 
businesses, including pass-through entities that pay no 
corporate income tax but instead report income to their owners 
who pay individual income tax. A reform that pays for a 
corporate tax rate cut by reducing business tax breaks will 
raise taxes on these business owners. Businesses affected 
include partnerships, subchapter S corporations, and sole 
proprietorships. Many of these are small businesses. Tax reform 
proposals therefore must address the concerns of small business 
owners.
    A large and growing number of U.S. businesses are organized 
as pass-through entities. In 2011, 95 percent of U.S. 
businesses were either sole props or pass-throughs and received 
38 percent of business receipts. Most partnerships in S corps 
are small businesses, but 95 percent of their net income and 
business receipts comes from large and mid-size businesses with 
assets greater than $10 million.
    Pass-throughs are taxed more favorably than taxable 
corporations because they face only a single level of tax, 
where profits from taxable corporations face both the corporate 
tax and the individual tax when companies pay dividends or 
shareholders receive capital gains. A lower corporate rate 
would create a more level playing field between corporations 
and pass-throughs.
    Less than 4 percent of individual taxpayers who receive 
most of their income from business are in the two highest tax 
brackets. These taxpayers receive 65 percent of business 
income, but much of this does not come from small businesses. A 
broader tax reform that reduced marginal tax rates and 
eliminated tax preferences, which I might prefer for both 
individuals and corporations, need not raise taxes on pass-
throughs, but to maintain revenue and distribution on 
neutrality, such a reform would have to cut back on popular tax 
preferences, such as the deductions for home mortgage interest, 
charitable deductions, state and local taxes, and the exemption 
of health insurance premiums from tax. Even then, as in the 
Camp proposal, an additional surtax at the highest incomes 
might be required to meet the revenue and distributional 
targets.
    Congress should shield most businesses from the adverse 
effects of business-only tax reform through targeted relief. 
This might include extending and expanding the higher section 
179 expensing limits that expired at the end of 2014, or 
increasing the width of the 15 percent corporate rate bracket. 
A special tax rate for pass-through income, however, would 
create unequal treatment between high income individuals with 
business income and those with labor compensation, and would 
create market distortions as businesses seek ways to compensate 
highly paid employees as independent contractors and engage in 
other transactions to recharacterize income.
    In conclusion, the corporate tax reforms now under 
discussion raise concerns about the treatment of pass-throughs, 
many of which are small businesses. These concerns are best 
addressed through targeted relief for truly small businesses 
instead of general tax rate cuts for income from pass-throughs, 
and I would point out some of these forms of relief, like 
expensing, would also be a major simplification.
    Thank you.
    Chairman CHABOT. Thank you very much, Dr. Toder. And I 
would like to thank all the panel for their excellent testimony 
here this morning. And now the members of the Committee will 
have five minutes to ask you questions. And I will begin with 
myself recognized for five minutes.
    Scott, let me begin with you. You mentioned the NFIB's 
recent Small Business Problems and Priorities survey and that 5 
out of the top 10 concerns in that survey relate to taxes. 
Could you talk a little bit about where taxes fall on your list 
as a business owner and how that has changed over the past 25 
years that you have been in business?
    Mr. LIPPS. Well, the most important part to us is we are 
only 15 employees. We do not have a compliance officer to 
assist with taxes. So just keeping up with the code and 
investing--we have to hire outside help. So that is an expense 
to the corporation that the tax burden is creating. So a less 
confusing regulation would allow us to continue to offer more 
benefits, for example.
    I mean, I was very proud to tell you we offer a full range 
of benefits. We even have paid healthcare for our employees. We 
have paid sick time, paid vacation, but our 401K, something had 
to give, and jobs are so important to us that we no longer can 
match. So, example. If we were not paying or fighting an 
aggressive tax code or a confusing tax code, I think we would 
be able to do things like restore our match to the 401K.
    Chairman CHABOT. Thank you very much.
    Mr. Sepp, I will go to you next. At a hearing that we 
conducted last month, we focused a lot on the fact that for the 
last six years, the number of business deaths, or businesses 
going out of existence, small businesses, has outpaced the 
number of business births. And apparently, that is the first 
time in American history according to what we were told. This 
is a very troubling statistic. Do you feel that the problems 
with our tax code could be a factor in the fact that we do see 
businesses going out of existence more, you know, dying than 
rising?
    Mr. SEPP. Oh, I definitely think so. In the metaphysical 
sense, we have businesses thinking about the burdens of 
complexity, not only at the federal level but even at the state 
level in complying with taxes. That is not really something 
that Congress can deal with, but it is a consideration in every 
business owner's everyday operations. But even in the more 
practical narrow sense, there may be an issue with the IRS's 
own collection procedures here in that the taxpayer advocate 
has noted several times that all too many cases involving small 
business tax debts are being thrown into the automated 
collection system rather than being kept at levels where there 
might be an efficient resolution to the problem to keep the 
business self-supporting.
    So again, we sort of have a bifurcated problem here, one 
that is systemic in terms of how the tax laws are written, and 
one that is operational in terms of how the IRS is approaching 
resolutions with businesses.
    Chairman CHABOT. Thank you.
    Let me turn to you next, Mr. McGregor.
    You also mentioned the death tax in your written testimony, 
Federal Inheritance Tax. We call it the death tax around here 
now. This week we are voting once again on the floor on 
legislation to eliminate it. Your family has had businesses for 
several generations now. Could you talk a little bit about how 
the death tax impacts a small business, plans that you make, 
and how many employees you can hire and what you have to go 
through in planning for that?
    Mr. MCGREGOR. I think the real issue is the extenuation of 
the business down into the next generation. In our particular 
case, we gave stock to the next generation, which may or may 
not be a great idea. It has worked out well for us but we have 
continually worked around this issue and tried to prepare to be 
able to move it forward. So it is really more of a cost of 
planning and making a mistake that damages the business.
    Chairman CHABOT. And we have been told for years that the 
two entities that are most directly affected by the death tax 
are small businesses because of the difficulty in passing to 
the next generations and family farms are the two that it 
affects most directly.
    I am almost out of time, so in the time that I have left 
here, let me just ask the question. We have talked about--I 
think we are probably--it is a bridge too far now, but we have 
talked about going to either a flat tax or a flatter tax. Or to 
a national sales tax and getting rid of the IRS and getting 
read of income taxes all together. And I would just like to see 
a show of hands because I do not have a lot of time. Can I see 
how many of you think that we ought to go to a flatter or a 
flat tax? Just a show of hands. Three out of four.
    And how about if we could get rid of income tax and IRS all 
together and go to a sales tax, can I see how many would be 
supportive of that? Okay. So I am seeing two of the four there. 
Okay. It is interesting. I appreciate that very much.
    And I will now yield to the ranking member, Nydia 
Velazquez.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman.
    Mr. Toder, the last time broad based tax reform took place, 
one of the driving principles was tax neutrality. Today, as we 
move forward on tax reform, there is also concern with the 
long-term budget; what principles should be included in our 
effort to overhaul the code while also minding current fiscal 
realities.
    Mr. TODER. That is a very good question. We certainly could 
have a revenue-neutral tax reform that would not address the 
long-term budget efforts. I think it is difficult. The problem 
with doing that is a true tax reform would cause so many 
special interests to be hurt and so many people would object to 
it that it is a very hard political lift to do without also 
making some contribution to the long-term budget effort. So 
that is my reservation, but I think that would be a positive 
step to do revenue-neutral tax reform.
    With regard to the long-term budget, you really have to 
address the issue of entitlements and the growth of 
entitlements and do something on the spending side. So I think 
the revenue probably would fall short and we would need more 
revenue as well, but those two things really need to be handled 
simultaneously.
    Ms. VELAZQUEZ. Thank you.
    The administration stated that its intention is to lower 
corporate rates from 35 to 28, and 25 for manufacturers. The 
tax code already has specific provisions for certain industries 
and sizes of businesses, so this idea is nothing new. However, 
should we be moving away from picking winners and losers as we 
move forward to reform the tax code? Is having special tax 
treatment inevitable to ensuring Main Street businesses can 
compete on a level playing field as their larger counterparts. 
Where do we draw the line?
    Mr. TODER. Well, I think my view is we should have as 
little special tax treatment as possible. And we would be much 
better off with lower tax rates for all forms of businesses 
rather than trying to have the government pick winners and 
losers. I do not think the government is very good at that.
    Some people talk about the research credit, so there might 
be some argument for keeping that, but I am not even 
necessarily persuaded of that. And there might be some 
proposals, such as small business expensing, which are aimed at 
the very high compliance costs that small businesses face 
relative to their level of revenue or profits. And so I think 
easing those compliance costs may require--does require some 
special provisions. But generally, the answer, yes on the level 
playing field.
    Ms. VELAZQUEZ. Thank you.
    Mr. Lipps, one of the goals of tax policies is providing 
business owners with certainty when it comes to taxes. Adding 
to this uncertainty is the ongoing debate on tax reform. What 
effect does this have on your business success?
    Mr. LIPPS. I think it would allow us to become more of the 
fabric of the community. Any dollars that we have we use to 
sustain the corporation and improve our benefits package. We 
support our local school system. We give our employees, as I 
mentioned earlier, a 401K match back. So I feel like a small 
business owner has a responsibility to be part of the fabric of 
their community. Tax assistance, of course, will help us with 
that.
    Ms. VELAZQUEZ. If we do not take affirmative action on 
comprehensive tax reform, what effect will that have in terms 
of you being able to hire, to make business investments?
    Mr. LIPPS. It will limit our ability, and we may have to 
look at other options, like reducing how much we contribute 
towards our company health policy. It will help some small 
businesses in the sense that we have to pay a local tax 
preparer, so fees are going to go up as it becomes more 
confusing, so the local tax person is probably going to say, 
``Scott, send a check.''
    Ms. VELAZQUEZ. Thank you.
    I would like to ask this question to each of the panel. 
Many members on this committee have been adamant that 
comprehensive tax reform legislation get passed this year. I 
think quick action could send an important message to the 
business community, yet there is widespread pessimism that 
anything will evolve anytime soon because some difficult 
compromises must be made. If we could accomplish only corporate 
tax reform and not individual, is this something the small 
business community could accept? I heard almost all of you 
saying comprehensive tax reform. Or would you rather see 
nothing get done until a complete overhaul can be completed?
    Chairman CHABOT. The gentlelady's time has expired but you 
can all answer the question.
    Ms. VELAZQUEZ. Yes, Mr. McGregor.
    Mr. MCGREGOR. I would rather hold out. I would like to see 
comprehensive.
    Ms. VELAZQUEZ. Thank you.
    Mr. MCGREGOR. Thirty percent of my competitors are C 
corporations and I would be at a big disadvantage.
    Ms. VELAZQUEZ. Mr. Sepp?
    Mr. SEPP. Well, the last thing we want to see is some kind 
of C corp reform effort that severely disadvantages pass-
through entities. We might be able to create some kind of safe 
harbor for pass-throughs while the C corp reform is going on. I 
also think there are other reforms that can be made 
incrementally to benefit both small businesses and large ones 
that would lead toward comprehensive reform in the next 
Congress. I recount some of them in the testimony.
    Ms. VELAZQUEZ. Yes. But my question was if all we can do is 
corporate tax reform, would you be supportive?
    Mr. SEPP. Not comprehensive enough.
    Ms. VELAZQUEZ. Mr. Lipps?
    Mr. LIPPS. We are a C. We were a pass-through and we are a 
C now. So removing the individual story, I would say I fear 
removing the business owner and the small business and causing 
separation there.
    Ms. VELAZQUEZ. Thank you.
    Mr. Toder?
    Mr. TODER. I cannot speak for the small business community, 
but I can say that our international and corporate rate 
structure relative to the rest of the world is so problematic 
these days that I think we have to address those issues. And in 
doing so, we will inevitably affect other businesses and we 
will have to take some measures to deal with that.
    Ms. VELAZQUEZ. Thank you.
    Thank you, Mr. Chairman.
    Chairman CHABOT. Thank you. The gentlelady's time has 
expired.
    The gentleman from Missouri, Mr. Luetkemeyer, is recognized 
for five minutes.
    Mr. LUETKEMEYER. Thank you, Mr. Chairman. And thank all of 
you for being here today. I appreciate your testimony.
    I want to start out with a situation. I know that the tax 
extenders that we passed at the end of last year, you know, we 
waited until the eleventh hour to do that and it is kind of 
interesting. I had one of my constituents who sells a lot of 
equipment to rock quarries and people who are in that business, 
and he sold five particular pieces of equipment, all the rest 
of the year, but when we passed the tax extenders at the end of 
the year with accelerated depreciation in it, suddenly he sold 
six more pieces of equipment in the last two months of the 
year.
    What tax extenders are important to you? The first part of 
the question. And the second part of the question is with 
complex tax reform or comprehensive tax reform, will you be 
willing to give all that up if we can go back to a flatter tax?
    Mr. Lipps, let us start with you.
    Mr. LIPPS. We use section 179 small business expenses. I 
think that is a tax extender. We also have the bonus 
depreciation program we use, so that is important to us. 
Obviously, section 199.
    I think that tax extenders are critical today because of 
the current tax code we are living under. However, if you 
flatten that tax code out or do a comprehensive reform that 
addresses all of our measures, I believe that small businesses 
are much, much--very willing to give that up.
    Mr. LUETKEMEYER. Mr. Sepp, what do you see?
    Mr. SEPP. Well, section 179 is obviously very important for 
small businesses. It takes us in the direction of full 
expensing, which should be the ultimate goal of tax reform for 
all businesses. That is probably a long way off, very difficult 
to achieve. But among other extenders, there are only perhaps a 
handful. The R&E is one that comes to mind that would be worth 
preserving in many situations. Here again though, taking them 
all and trading them for rate reduction in a simplified system 
might be worthwhile. Your colleague, Congressman Pompeo had an 
excellent bill in the last Congress to take about a dozen very 
narrowly drawn energy credits and direct the secretary after 
their repeal to put that into rate reduction. That is an 
incremental approach we might want to take.
    Mr. LUETKEMEYER. Perfect.
    Mr. McGregor?
    Mr. MCGREGOR. We do use the R&E tax credit and it takes a 
lot of effort to create that data. So it is nice to know in 
advance that it is going to happen, because to do it for a year 
and not get it.
    As far as tradeoffs, that is an expectation. You know. I am 
not a huge bonus depreciation person. We are heavy, you know, 
heavy investment and it can pay off beautifully. And if we have 
it, it is wonderful, but you know, so that would be on the 
table.
    Mr. LUETKEMEYER. Perfect. Thank you.
    Mr. Lipps, you are representing NFIB today, and quick 
question for you here with regards to, you know, the chairman 
made reference a while ago to the fact that we have lost more 
businesses in the last several years than we have actually 
created. And so I was wondering if you have an idea of how many 
businesses were lost due to the complexity of the tax code or 
how many were not started. Is there some sort of information 
out there? That is a pretty nebulous question there but I am 
just curious if you have seen some trends perhaps that you 
could tell me that were based on the tax code.
    Mr. LIPPS. I am usually spending my time trying to run my 
small company and understand the tax code. So NFIB studies the 
numbers. But I would certainly tell you a personal situation. I 
have a daughter who actually asked to sit down in our company 
and say, ``How do I resign when my dad is the president?'' She 
wanted to start her own company. And we found it so much more 
difficult than just 25 years ago. It was so complex for her 
that we had trouble even helping her do that, and we were so 
proud she wanted to be an entrepreneur, but it is a very 
difficult and daunting situation when you first analyze it.
    Mr. LUETKEMEYER. I think, you know, that is one of the 
problems that we have is that there are so many disincentives 
now to starting a small business, and the statistics bear it 
out. When you look at the number of businesses that are not 
being started compared to the ones that are losing, it should 
send up some alarms here.
    Just very quickly, Mr. Sepp, you made a comment a while ago 
with regards to business being able to expand abroad and to use 
tax incentives to do that. Do you have some ideas?
    Mr. SEPP. Well, I think that making the switch to a 
territorial tax system versus the worldwide one we have would 
be a step in the right direction. That is a very 
comprehensive----
    Mr. LUETKEMEYER. Do you think if you went to like a flat 
tax that would that be helpful or would that be hurtful?
    Mr. SEPP. That would be helpful in my opinion. There are 
lots of other smaller steps we have to take, but most 
importantly, even if we are to live under the current system, 
we have got to simplify the structure of forms and reporting 
for smaller businesses that have activities abroad. One way we 
might want to do that is through a quadrennial simplification 
process. That was something that was brought up when we were 
debating the IRS Restructuring and Reform Act back in 1998. You 
bring in a bunch of volunteers from the public and private 
sector to go through the code and the regulations, make a list 
of recommendations, have an up or down vote on them. That would 
be a way to resolve some of this.
    Mr. LUETKEMEYER. Well, it would certainly be great if we 
could simplify the tax code because I know 15-20 years ago I 
did my business's taxes and it was like eight or 10 pages, and 
now my taxes, I cannot do them any longer and they are at least 
an inch and a half thick. So we need to do something.
    Thank you very much for your testimony.
    Chairman CHABOT. The gentleman's time is expired.
    The gentleman from Massachusetts, Mr. Moulton is recognized 
for five minutes.
    Mr. MOULTON. Thank you, Mr. Chairman.
    Gentlemen, there is broad consensus on this panel and 
certainly in the room that we need to have comprehensive tax 
reform. And I just want to get at that a little bit more.
    Mr. Lipps, from your position, not just as a small business 
owner but also from your position at NFIB, from your 
perspective, what is holding us back in being able to tackle 
this issue? And you can answer that both in terms of what your 
view of the problems in Congress is but also why is there not 
more pressure from the small business community to really get 
this done?
    Mr. LIPPS. I think the small business community is so 
committed to its job to daily making payroll that we--we are 
not protestors. We do not have time. So we do at local town 
halls when Congressman Chabot appears in Franklin, believe me, 
we ask him to help us with this issue. But I really think it is 
a time factor. If we take time away from our company, who is 
going to do the job while we are out trying to fight for tax 
reform? So sometimes our voices may be muffled.
    Mr. MOULTON. That is a good question.
    Is there anyone else who would like to comment on that? Dr. 
Toder, do you have any thoughts in particular?
    Mr. TODER. Well, you know, the tax system is very 
complicated, and changing it is also very complicated. There 
are many moving parts and there are many people who will be 
affected, some of whom will be affected adversely. You get 
lower rates down by eliminating benefits for some groups of 
taxpayers. They are not just small loopholes. They are things 
like home mortgage interest and charitable contributions. And 
without saying that necessarily that is a bad thing to trade 
off lower rates for eliminating benefits, it is not easy to do.
    And I testified at a hearing on the home mortgage interest 
and suggested ways which I thought it could beneficially be cut 
back, and I was not surprised that the total lack of interest 
from members of the Ways and Means Committee in those ideas. So 
it is difficult.
    Mr. MOULTON. Mr. Sepp?
    Mr. SEPP. I would say there is a problem of follow through 
at the granular level of small business input about the tax 
system. The taxpayer advocacy panels, for example, that are 
meeting around the United States, take all kinds of suggestions 
from small business owners about everything--how to improve the 
look of forms, the ease of compliance and the like. Some of 
those are adopted by the IRS. Others are cast by the wayside. 
The same thing happens with the Taxpayer Advocate's Report to 
Congress. If you look through the report cards that follow 
subsequent to each one of those, there are just a whole list of 
recommendations the advocate made, and the IRS's responses. 
More often than not, the IRS refuses to implement them. One 
thing that might be helpful would be for Congress to put policy 
riders, frankly, and appropriations bills instructing the IRS 
to pay more attention to these recommendations and try to 
implement them.
    Ms. VELAZQUEZ. Would you yield for a second?
    Mr. MOULTON. Yes.
    Ms. VELAZQUEZ. You do not think that budget has any 
implication in terms of the lack of staff at the IRS?
    Mr. SEPP. I think budget does have somewhat of an 
implication, though I would point out that between 2005 and the 
present, if you take a look at the three major categories of 
the IRS budget, taxpayer service has been declining at the 
expense of enforcement and administrative costs. So that is a 
priority problem, too.
    Ms. VELAZQUEZ. I thank the gentleman for yielding.
    Mr. MOULTON. Thank you.
    Mr. MCGREGOR. Can I just say a word?
    Mr. MOULTON. Mr. McGregor, yes, sir.
    Mr. MCGREGOR. The big C corporations are squealing loudly 
because of global competitiveness, and you are hearing them. We 
are starting to squeal because we do not want to be left 
behind. So that is my answer for you.
    Mr. MOULTON. So there is broad consensus among many people 
on the principle of a simpler tax code where we are able to 
reduce overall rates in exchange for eliminating loopholes. The 
problem, Dr. Toder, as you referred to, is that everybody has 
at least three or four loopholes that he or she wants to hang 
on to. From the small business perspective, what are the carve 
outs that are most important if you were to just pick two that 
you think are most important to preserve in a reform that would 
eliminate many of the loopholes overall?
    Mr. Sepp?
    Mr. SEPP. I would say the provisions regarding expensing 
because they take us as close as we can to the full expensing 
ideal that we want in a tax system.
    Mr. MOULTON. Mr. Lipps?
    Mr. LIPPS. I would say for our situation, the 179 has been 
most beneficial. And I would certainly look at the death tax 
because I have so many family farms in my area that it is a 
bigger problem for the family farm than small businesses 
because you have got the $5 million carve out right now.
    Mr. MOULTON. Mr. McGregor?
    Mr. MCGREGOR. You are asking what do we not want to give 
up?
    Mr. MOULTON. Exactly.
    Mr. MCGREGOR. I would say state and local taxes as a 
deduction.
    Mr. MOULTON. Great.
    Dr. Toder?
    Mr. TODER. Well, I am not sure I am----
    Mr. MOULTON. That is all right. My time is expired.
    Mr. TODER. I am not giving anything up, I guess.
    Mr. MOULTON. Thank you.
    Mr. TODER. I mean, I have my benefits but they are not 
business benefits.
    Chairman CHABOT. The gentleman's time is expired. Thank 
you.
    The gentleman from New York, Mr. Gibson, is recognized for 
five minutes.
    Mr. GIBSON. Thanks, Mr. Chairman. I appreciate the 
panelists' informative hearing. I appreciate your testimony.
    Mr. Sepp, a couple of data-related questions. The first 
one, if you can, if possible, I would be interested in your 
report and analysis in terms of 1987 to 2015, if that is 
available. First question is compliance cost as a percentage of 
business. Any data you have on that and sort of looking at it 
from 1987 to 2015.
    Mr. SEPP. Well, there have been attempts to quantify the 
costs of the federal tax system going back something on the 
order of 70 years, and depending on what you count in the 
estimates, the burdens have been figured at anywhere between 1 
percent and over 11 percent of actual tax collections. There 
was one conducted back in 1993 by Professor James Payne, who 
suggested that for every additional dollar of tax raised on the 
federal level, there was a 65 cent deadweight loss. Now, my 
review, and I am certainly not in academia, but my brief review 
of the literature says that is the edge of the envelope as far 
as costs go.
    Mr. GIBSON. Is there any sense in terms of what the 
opportunity costs--have you seen any follow-on studies there? 
In other words, it comes disproportionately at capital 
investment, or it comes disproportionately at wages and 
benefits? Is there any sense on what the opportunity costs are?
    Mr. SEPP. It tends to come proportionately on new 
investment. That is what a lot of the literature says. Not all 
of it, certainly. There is also this problem we have, I think, 
in identifying precisely that point, the opportunity cost. 
Payne attempted to do that, which is why his estimate is so 
high. We have a difficulty trying to figure out how you 
quantify something that has never really happened. And I think 
that given the fact the last study I was able to find of small 
business tax burdens was 2011 for the SBA Office of the 
Advocate, this is something Congress might want to explore, is 
having some kind of symposium between SBA, private sector 
professionals, and the like, and really drill down on this 
question of opportunity cost.
    Mr. GIBSON. Thank you.
    And then the second data-related question. It might not 
have empirics on it but maybe intuition or speculation anyway. 
It has to do with 1987 to 2015 IRS approach in terms of 
education and compliance. Have you noted any significant 
changes there in terms of approach, whether or not they are 
spending sufficient time helping small businesses who may be 
not knowingly complying versus coming in and penalizing them?
    Mr. SEPP. I think it is a matter of peaks and valleys. In 
the late 1980s, you had Congress engaged in activity like 
Taxpayer Bill of Rights I. In 1996, you had the second TBR. In 
1998, the IRS Restructuring and Reform Act. And the 1998 act is 
what really put the emphasis on reorganizing the agency 
retraining employees toward customer service, and thinking more 
about the ability of allowing businesses to remain self-
supporting while they were going through collection due 
process. The taxpayer advocate though has noted that 
increasingly they are relying on the automated collection 
system to handle a lot of these things, and I think we probably 
hit a peak on the emphasis on proactive service in resolving 
these problems somewhere in 2005-2007. It has been downhill 
since.
    Mr. GIBSON. And do you think that as we proceed as a 
Committee, it may be worthwhile for us to sort of recapture 
that essence of trying to be helpful?
    Mr. SEPP. Absolutely.
    Mr. GIBSON. Yeah. And then finally, just from the panel, 
given the 1986 reform, a lesson learned. Something that you 
think we should--certainly, a lot of people think it was a good 
reform, but what should we try to stay away from? One each.
    Mr. TODER. All right. I will start.
    I think it was a good reform, but in terms of meeting 
certain targets, they did something, things that they should 
not have done, like the Individual Alternative Minimum Tax in 
its current form is really a product of 1986 reform and trying 
to get a few more dollars to hit targets. And so I think you 
have got to be careful that you do not put time bombs into the 
system.
    Mr. SEPP. That is good.
    Mr. MCGREGOR. I would say that they may have done a few 
things wrong but that would be the target going forward.
    Mr. SEPP. I would have to agree with Dr. Toder about AMT. 
That was a major mistake.
    Also, in the current draft--well, the draft from the last 
Congress, some of the methods, such as repealing LIFO 
accounting might have been a step too far and deserve 
reexamination.
    Mr. LIPPS. In 1986, we were not in business yet. We had a 
dream of being in small business. So I am going to yield to my 
esteemed colleagues.
    Mr. GIBSON. Yeah. Thank you. This is very helpful.
    Thanks, Mr. Chair.
    Chairman CHABOT. Thank you very much. The gentleman's time 
is expired.
    Ms. Meng, the gentlelady from New York, is recognized for 
five minutes.
    Ms. MENG. Thank you, Mr. Chairman. Thank you, ranking 
member. Thank you to the witnesses for being here today.
    I believe that certainty and clarity are necessary to 
improve the tax code for small businesses, and complications 
stem from the various temporary, unstandardized deductions and 
credits. However, many of these credits do serve a valuable 
purpose in incentivizing financial activities useful for the 
public, such as student loans, first time homebuyers, R&D 
investment, charity, and so forth. Do you have any ideas that 
simplify the tax code while still maintaining a system of 
positive incentives for small businesses? And anyone can 
answer.
    Mr. TODER. I will make a comment on that. I think it would 
be very desirable for the Congress to reexamine these proposals 
once and for all that you call extenders. Decide which ones you 
want to keep and which ones you want to get rid of so we do not 
have this uncertainty in this process every single year which 
creates difficulty for taxpayers, difficulty for the IRS, 
difficulties for the tax system. I mean, there are probably 
some of those benefits that you want to make permanent but 
there are many that we would be better off without.
    Ms. MENG. On another note, our current tax code is not a 
progressive tax system because there are many with greater 
ability to pay do not always pay a higher rate. Is there more 
room in our tax code, and if you have any ideas to reflect the 
progressive personal income tax structure.
    Mr. TODER. All right. Well, I will comment on that, too. I 
think we actually do have a very progressive personal income 
tax structure. And to the extent that that does not apply to 
everybody and there are some very high income people who are 
not paying a large share of tax because of certain tax 
benefits, I think the solution to that is to remove those tax 
benefits and try to lower rates in compensation as we did in 
1986. But, you know, you may want the system to be more 
progressive, but I think it is progressive.
    Mr. SEPP. I would just add the concern that while we think 
a lot about longitudinal fairness in the tax system looking up 
and down the income scale, we need to keep looking sideways on 
the income scale, making sure that people with roughly the same 
amount of income or profit pay roughly the same amount of tax. 
And the answer in this system is nowhere close. There was 
actually a study by Quantria Strategies for Small Business 
Administration which took a look at compliance burdens by 
industry for sole proprietorships and the fluctuations were 
wild depending on business models and activities. Some like 
mining, agriculture, transportation, and warehousing, they had 
complexity burdens in terms of hours spent and money spent that 
were 500 percent or more higher. Gigantic differences.
    Ms. MENG. Thank you. I yield back.
    Chairman CHABOT. Thank you. The gentlelady yields back.
    The gentleman from California, Mr. Knight, is recognized 
for five minutes.
    Mr. KNIGHT. Thank you, Mr. Chairman. I will just make a 
couple comments before question.
    You know, coming from California, our biggest concern from 
small business is not so much the whole complexity of 
everything but how much we change. Changing the rules every 
year seems to be the number one concern of small businesses. I 
cannot do a five-year plan or a 10-year plan if you are going 
to change it 5 or 10 times on me, and I cannot invest a certain 
amount of money if you are going to change the rules in the 
next few years on me.
    So let me ask just a broad question about that, about the 
Federal Government. How much does certainty help the small 
business, especially when it comes to taxes and regulations as 
we move forward, and how much has that been changed since the 
reforms in the late 1990s?
    Mr. LIPPS. It is the most critical part of us deciding to 
invest in new facilities, infrastructure, or machinery. If we 
know what we are facing and we face it on time--sometimes the 
extenders are a little late--if we know what is ahead of us, we 
know how much risk can be taken to protect the jobs that we 
currently have.
    Mr. SEPP. Last month there was an interesting study 
conducted by Institute for Policy Innovation where they 
reviewed reports from Federal Reserve Bank of Kansas City and 
employment reports from the media, and they determined that the 
retroactive extension of section 179 expensing was so sudden 
and created a level of certainty after so much uncertainty that 
it did not have its intended effect of helping investment. 
There was not a measurable rise as expected at least in things 
like agricultural equipment investments. It came too little, 
too late.
    Mr. MCGREGOR. I think the example we heard about bonus 
depreciation clearly affects major purchases of capital 
equipment. And it can be very damaging.
    Mr. TODER. I would like to actually commend the Congress. 
You have made great progress since a few years ago when you had 
all the Bush tax cuts being expired or extended, and at least 
you have settled on big parts of the tax code. You have these 
remaining expiring provisions and I would agree bonus 
depreciation is very important. Having an investment incentive 
that you give after the year is over does not really do very 
much for investment. So either keep it, or get rid of it, or 
modify it.
    Mr. KNIGHT. And I think, you know, several of the members 
have hit on a couple of the items that make it very important 
for us. You know, if we talk about an overhaul, I am an 
optimist, and I would like to see that but I am also a realist, 
that there are tens of thousands of people employed by the 
government and there are close to a million people employed 
that do taxes, that do preparation, that do attorney work on 
taxes, and it is very difficult to do an overhaul when you are 
talking about close to a couple million jobs across the 
country. So I would ask that you have a little bit of an open 
mind, too, when we are talking about little pieces that we can 
do that will help small business especially, and we can get 
them through, especially in Congress where we do not agree all 
the time. And getting something that is bipartisan that moves 
forward, that gets signed by the president is very important, 
especially when we are talking about the entrepreneurs that are 
hiring people that are expanding that are helping our economy 
like no one else can. So, those are the comments that me, as a 
freshman, would like to move forward with and especially the 
optimism of getting something done in my first session.
    So I yield back the balance of my time. Thank you, Mr. 
Chair.
    Chairman CHABOT. Thank you. The gentleman yields back.
    The gentleman from Nevada, Mr. Hardy, who is chairman of 
the
    Subcommittee on Investigations, Oversight, and Regulations 
is recognized for five minutes.
    Mr. HARDY. Thank you, Mr. Chairman.
    You know, as a small business owner myself in the past, the 
opportunity to employ is a great thing. And as a business, you 
want to have to pay taxes because that means you are going in 
the right direction, not the other. Tax deductions or tax 
losses is not a good thing.
    But through that process, Mr. Sepp, you talked about 
manufacturers costing them--large manufacturers costing 
somewhere around $960,000 a year to prepare for those taxes. 
And I know that you are correct when you talk about one and a 
half or bigger for smaller businesses that employ under 50, 
that it costs us more. Can you give me an idea why that is? I 
know why but I would like to have you explain that.
    Mr. SEPP. Well, just that there are certain inescapable 
base costs to tax compliance that no business can really avoid, 
has to deal with filing. If we are talking about C corps, well, 
we have a variety of schedules and whatnot that have to be 
filed, but the basic 1120 return takes a lot of time and 
effort. If you are looking at Schedule C filers of any size, 
the Schedule C might become complicated the larger the business 
is, and especially if it does business abroad. But even if 
there is no activity abroad, the filing of the Schedule C has a 
base cost in time and money that really cannot be avoided. The 
National Society of Accountants publishes a whole list of those 
costs by form. Also, of course, if you are distributing the 
costs over your employees, obviously, fewer employees, greater 
costs per employee, that is going to run the math up as well.
    Mr. HARDY. I would like to also now go back to Mr. Knight's 
discussion. I think he is right on point that business has a 
challenge with knowing what the Federal Government is going to 
continue to do, what new creative idea they are going to come 
up with the tax code. Has anybody wondered whether a lot of the 
loss of those businesses over the last eight or so years, or 
six to eight years, might have been because businesses invested 
in some of those write-offs that they had early opportunities 
to do and the change in our economy had us deeply in debt as 
businesses because nobody predicted this collapse, but that 
because of tax codes actually caused people to do things that 
might otherwise have been more prudent to go some other 
direction? Does anybody care to touch on that one?
    Mr. LIPPS. It caused us to be more conservative than I 
think we would have been. We are risk takers. That is the pure 
heart of an entrepreneur. However, if you jump in the water and 
then you do not make the necessary changes, I am still in the 
water. And so I think that it has created a situation where 
entrepreneurs have taken less risks. Honestly, in my opinion, I 
believe that means that we have hired fewer people as an 
aggregate.
    Mr. HARDY. Well, along with my comment on that, I guess 
back in 2004, 2005, 2006, 2007, 2008, things were moving along. 
You got major tax deductions trying to get the economy moving 
again prior to that. You got major tax deductions on equipment 
in the construction industry, mining industry, and other 
industries that you wanted to utilize that opportunity when you 
are spending millions of dollars in taxes and providing that 
opportunity. And then the collapse came, which you still owe 
that debt but you cannot even make the tax. So now you turn a 
different direction. So do you believe there is any cause? 
Because there is uncertainty in taxes, the direction they went, 
and how they changed in that short of a time.
    Mr. LIPPS. Earlier you mentioned that a lot of people did 
not see it coming. The government did not see it coming. We did 
not see it coming. And 2009 was the first time in our career we 
ever had to lay anyone off. If I fire you, that is different. 
It does not matter. You earned the right to be fired. But if we 
lay you off because we missed something, it was the most 
horrible situation our family ever went through because those 
team members to us, that is gold. That is our number one asset.
    Mr. HARDY. That is the toughest thing you will ever do.
    Mr. LIPPS. It was horrible.
    Mr. HARDY. Thank you. My time is expired.
    Chairman CHABOT. Thank you. The gentleman yields back.
    The gentleman from South Carolina, Mr. Rice, who is 
chairman of the Subcommittee on Economic Growth, Tax, and 
Capital Access is recognized for five minutes.
    Mr. RICE. Thank you.
    I want to start with Mr. Lipps and Mr. McGregor because you 
are all in business. Mr. Lipps, is your business exposed to 
international competition?
    Mr. LIPPS. We are really not. The mattress industry is semi 
insulated. If you look at the cubic foot, the size of a 
mattress product coming from a foreign country, it takes up so 
much room in a cargo container that because of not necessarily 
weight but because of cubic feet, we are a little more 
insulated than many of our small business brethren.
    Mr. RICE. Mr. McGregor?
    Mr. MCGREGOR. We do a fair amount of business with 
Husqvarna in South Carolina. And they buy pullies from us. And 
some year we get it and other years we do not, but China is our 
competitor there. And we are scheduled to lose that business. 
We have not lost it yet, maybe because of the dock strike. I am 
not sure.
    Mr. RICE. Do you think that our tax code makes you more or 
less competitive with your competition in China?
    Mr. MCGREGOR. Well, I spent some time in China, and I know 
their cost. I think that the tax code is definitely a factor in 
our pricing. I am not sure it is enough to make a difference.
    Mr. RICE. Basically, I look at the taxes, the price you pay 
to keep the government open, and if you are paying more for 
your government than they are paying for their government, does 
that not put you at a competitive disadvantage?
    Mr. MCGREGOR. Their government is putting them in business.
    Mr. RICE. Mr. Sepp and Mr. Toder, define--Mr. Toder, would 
you define a loophole for me? I keep hearing people throw 
around the term ``loophole.'' Like every deduction is a 
loophole. What is a loophole?
    Mr. TODER. I do not call those provisions loopholes. I call 
them tax subsidies, tax benefits, tax expenditures. To me, a 
loophole is something that is enacted in the dark of night by 
somebody that only a few people benefit from that most people 
do not know about, sneaky things. That is why I do not use the 
word loophole. I prefer to say a tax preference, which means 
something which gives your form of income or your form of 
activity more favorable treatment than somebody else.
    Mr. RICE. Would you not say that most of these things in 
the tax code are intended to promote certain activity and were 
enacted with well-intentioned ideas?
    Mr. TODER. Absolutely. That does not mean they are good 
policy, but absolutely.
    Mr. RICE. Mr. Sepp, would you agree with that? What is a 
loophole in your mind?
    Mr. SEPP. That is an impossible definition because a 
loophole to one person is a subsidy or a tax relief provision 
to another. I would say though that some things that qualify 
for a tax provision being less desirable than more desirable is 
it is very narrowly drawn. It is temporary in nature. It has 
claw backs built into it that might specifically exclude some 
industries from availing themselves of it. So those are things 
to look for in formulating better tax benefits.
    Mr. RICE. Is the mortgage interest deduction a loophole?
    Mr. SEPP. For a write-off for housing, that is a social 
goal that Congress has settled on as something that is 
desirable for many people. I do not think it necessarily has to 
be in the tax code if it is properly----
    Mr. RICE. Is the capital gains rate a loophole?
    Mr. SEPP. No. Because capital gains taxation is a form of 
double taxation in many cases.
    Mr. RICE. I have a question for you. Would you characterize 
our tax code for us? Is it internationally competitive or 
noncompetitive?
    Mr. SEPP. Noncompetitive in a number of ways. We have 
talked a little bit about----
    Mr. RICE. I am running out of time so I have to cut you 
off.
    Mr. Toder, competitive or noncompetitive?
    Mr. TODER. I think our system places some of our companies 
at a disadvantage, but it places some of our companies at an 
advantage. It is really a case by case situation.
    Mr. RICE. I want to follow up with that--on that with you a 
little later. I am just running out of time.
    Would you characterize our tax code, Mr. Toder, as modern 
or outdated?
    Mr. TODER. I think it is outdated.
    Mr. RICE. Mr. Sepp?
    Mr. SEPP. Outdated.
    Mr. RICE. Would you say, Mr. Sepp, that our tax code 
promotes or stifles economic growth in this country?
    Mr. SEPP. Stifles it.
    Mr. RICE. Mr. Toder?
    Mr. TODER. I do not think it stifles it. I think we could 
have a tax code which is more friendly to economic growth, but 
I do not think it is a major factor.
    Mr. RICE. I think we can do a lot better. I think it 
actually stifles economic activity, and I want to end my little 
presentation by apologizing to all of you gentlemen that we do 
not have leadership on both sides of the aisle here that are 
willing to put forth bold ideas about tax reform. So I think we 
could do a lot better for this country, and we could do a lot 
better to promote economic activity.
    Thank you very much.
    Chairman CHABOT. Thank you. The gentleman's time is 
expired.
    The gentleman from Virginia, Mr. Brat, is recognized for 
five minutes.
    Mr. BRAT. Thank you, Mr. Chairman. I thank you all for 
coming before us today. It is a pleasure to have you with us.
    I have been listening, and several things are merging. I 
want you to put on your marketing hats right now. I recently 
ran for federal office, knocked on a thousand doors, whatever. 
My district is all small business. And you go door to door to 
door, and small business says, ``No one listens to us.'' I have 
got cattlemen, ranchers, farmers, a bunch of small business 
community bankers are by far and away the majority, and some of 
them are almost conspiracy minded in terms of the system is 
rigged against them. And so at the end of this I will just give 
a couple ideas and just put a few of the phrases I have been 
hearing forward.
    But at the end of this, if you have 30 seconds of messaging 
on behalf of small business person across the country, what 
would your messaging be to Congress? And a lot of the folks--
Mr. Lipps has been saying over and over and over, that most 
small businesses are too busy doing their own thing to spend 
significant time thinking about messaging when it does matter 
in terms of getting the right policy. And you have kind of got 
to get the current moving in the right direction so us 
politicians can jump in later and help you, but the current has 
got to be moving and it is not moving. And so I always ask my 
small business people, hey, start writing in the local papers. 
Not political pieces, but with this tax rate, with this 
regulation, I cannot stay in business. I am going to go out of 
business. My people are going to lose their jobs. Just so you 
know.
    I just want to get you thinking that way in terms of--I 
will come back. We have been mentioning depreciation, 
expensing, tax rates, what is the message? What should we be 
hitting on there? I have got a tax foundation. Published a 
piece on economic and budgetary effects of full expensing of 
investment. Mr. Sepp was getting at that. It sounded like if 
you could hit that, that was pay dirt. Found cutting corporate 
tax rate 10 points would increase GDP about 2 percent, but full 
expensing would boost GDP about 5 percent. I am just kind of 
asking. Total federal tax revenue would be $97 billion a year. 
Also, benefits accrue disproportionately to low end of the 
income scale due to job growth, productivity, wages. I am just 
kind of throwing those kind of three out--tax rates, 
depreciation, expensing, regulatory burden, just as a set up.
    Thirty seconds to everybody. Why do we not start with Mr. 
Lipps? If you had to message to the country, you are going on 
TV, what would you say for small business?
    Mr. LIPPS. I would start by agreeing with your initial 
comments, that many small businesses have thrown their hands up 
and said their voice is not being heard. Earlier in our 
testimony you heard someone say that there is not an outcry, an 
upswell from the small business community. We are working. That 
is why you do not hear that. But a lot of them will tell you 
they have no say, so why are they going to invest that time 
when they could have been building one more mattress. So that 
is my first point.
    My second point is I do not hear small businesses saying 
find us loopholes or advantages. I find them saying make it 
easy enough that I can understand it. I will pay my taxes and I 
will go back to work and create a job. So I do not think we are 
looking for advantages. I think we are looking for less 
complexity.
    Mr. BRAT. Good. Good. Thank you.
    Mr. Sepp?
    Mr. SEPP. My message would be get more involved in the 
tools that are available and use them to your advantage. 
Volunteer for the taxpayer advocacy panels. That is where tax 
complexity is addressed at the most basic level. Also, have 
more committees outside of Ways and Means Committee get 
involved in tax complexity analysis. There was a requirement in 
the 1998 law that we have an analysis of complexity 
accompanying every major tax provision coming out of Ways and 
Means or Finance. We have not adhered to that rule. We have got 
to have more coordination between those panels and the IRS's 
taxpayer advocate to get these suggestions into the 
policymaking stream so that businesses do feel their concerns 
are being taken seriously.
    Mr. BRAT. Right.
    Mr. McGregor?
    Mr. MCGREGOR. I would echo simplicity, permanence, rates 
designed for growth and acknowledged by everyone that that is 
the intent. As far as expensing, I see that as more of a 
deferral so I am not as excited about that.
    Mr. BRAT. Mr. Toder, sorry, 19 seconds.
    Mr. TODER. Okay. I agree with my fellow panelists on 
simplicity. You know, I think everyone should be paying taxes 
commensurate with their income, but we should make it easy for 
them to do that and we should have a lower rates rather than 
special benefits.
    Mr. BRAT. Thank you all for being with us. Thank you.
    Chairman CHABOT. Thank you. The gentleman yields back.
    I would like to thank our distinguished panel here, both 
this morning and this afternoon, because we are afternoon now. 
I think you all did an excellent job, and I think some of the 
stuff we already inherently knew but you said it so well that 
it is going to stick. And I think one of the things you said is 
how significant it is that we not only reform our corporate tax 
code but also the individual. It has to go hand in hand, and we 
need to simplify it. There was consensus on a lot of things 
here, and we intend on this Committee to work with Paul Ryan 
and the Ways and Means Committee as we move forward on any 
reform package.
    And I want to thank the ranking member and minority members 
of the Committee also for participating today. And I would ask 
unanimous consent that members have five legislative days to 
submit statements and supporting materials for the record. And 
if there is no further business to come before the Committee, 
we are adjourned. Thank you very much.
    [Whereupon, at 12:30 p.m., the Committee was adjourned.]
                            
                            A P P E N D I X

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT] 

    Good morning, Chairman Chabot, Ranking Member Velazquez, 
and members of the Committee. I am pleased to be here on behalf 
of the National Federation of Independent Business (NFIB). Our 
family owns Sleep Tite Mattress Factory & Showroom and has been 
a member of NFIB since 1995. I also currently serve on the 
NFIB-Ohio Leadership Council. Thank you for holding today's 
hearing, ``Tax Reform: Ensuring that Main Street Isn't Left 
Behind.'' The current tax code negatively impacts small and 
closely-held businesses in several important ways, so I 
appreciate the invitation to be here today to discuss these 
important issues from the perspective of a small business 
owner.

    The NFIB is the nation's leading small business advocacy 
organization. The typical NFIB member employs about 8 to 10 
employees with annual gross receipts of about $500,000. All of 
NFIB's members are independently owned, which is to say that 
none are publicly traded corporations. While there is no one 
definition of a small business, the problems NFIB members 
confront, relative to the tax code, are representative of most 
small businesses. A few consistent concerns are raised 
regardless of the trade or industry in which the small business 
is engaged.

    As part of representing small business owners, NFIB 
frequently conducts surveys of both the NFIB membership and the 
small business population as a whole, and taxes consistently 
rank as one of their greatest concerns. In the most recent 
publication of the NFIB Research Foundation's Small Business 
Problems and Priorities, 5 of the top 10 small business 
concerns are tax-related.\1\ In fact, the February 2015 Small 
Business and Economic Trends report ranks taxes as the number 
one problem small business owners currently face. Right now, 
taxes are a bigger problem than poor sales, the cost and 
quality of labor, and government regulation.\2\
---------------------------------------------------------------------------
    \1\ nfib.com/problems&priorities2012

    \2\ nfib.com/sbet

    I would like to spend the rest of my time telling you about 
my personal experience. Sleep Tite Mattress Factory & Showroom 
was founded in 1947, by Stan Rothman. In 1990, our family 
founded an institutional (acute and long term care) bedding 
company, HomeCare Mattress, Inc. In 1992, we merged HomeCare 
Mattress, Inc with Sleep Tite. We started with 4 employees and 
now have 15 full-time employees. We are currently structured as 
a c-corporation, but we started as a pass-through. While often 
times a struggle, we are VERY proud to offer our team-members 
health insurance, a 401K program, paid sick leave, paid 
vacation time, and more benefits. Aggressive tax rates, and 
compliance efforts directed to fulfill intrusive regulations, 
severely impact our ability to offer a full benefits package 
---------------------------------------------------------------------------
that our employees need and deserve.

    We are proud of Sleep Tite Mattress Factory. We think you 
would be, too. As I mentioned, we strive to offer our team 
members a positive work environment that offers a learning 
experience, the ability to make decisions, a career opportunity 
and full benefits. Beyond that, we believe community 
involvement is critical. Small businesses are the ``Fabric of 
the Community.'' For example, across America you will find 
small businesses sponsoring school plays, peewee football 
teams, cheerleading squads, and church youth group programs--
the list goes on. The small business owner works in the 
community, hires in the community and LIVES in the community. 
Sleep Tite Mattress has been recognized by our schools for our 
involvement and won our area Chamber of Commerce Business of 
the Year Award in 1999. That makes us feel good. What makes us 
feel even better is seeing our employees grow and build their 
lives and stay with our company for years. To serve our 
employees and our community, we must have lower tax rates, 
fewer regulations and a less confusing, less complex tax code.

    We have been in business in our community for over 24 
years. I witnessed and experienced what punitive local, state 
and federal laws were doing to the business community in 
Franklin, Ohio, and in our surrounding communities. So, in 
1999, I did something about it. I ran for city council and won 
a seat. After encouraging a few fellow business owners, and 
business people, to run for the city council, I was honored to 
serve two terms as Mayor of Franklin. We concentrated on fixing 
the problems a bloated bureaucracy and out-of-touch government 
had levied on our city.

    Our Council addressed local incentive programs that 
unfairly assisted large corporations but did not offer 
incentives to small business. We instituted a ``Downtown 
Improvement Program'' (``DIP'') that offered grants and low 
interest loans to small businesses locating or expanding in our 
community. We met with local zoning, planning and building 
officials and redesigned zoning laws to assist businesses with 
fewer or less restrictive regulations (example: sign ordinances 
and requirements). Not every small business owner can run for 
elected office. Instead, Congress should work to reform our tax 
code in order to help small business owners get back to doing 
what they should be doing: running their small business. Over 
85 percent of NFIB members agree that Congress should 
fundamentally reform the tax code.\3\
---------------------------------------------------------------------------
    \3\ nfib.com/taxsurvey

    As Congress considers tax reform, I would encourage you to 
keep these most important goals in mind. Achieving these goals 
will greatly enhance the ability of small and closely-held 
businesses to thrive in the 21st century: 1) permanently keep 
the tax rates low, 2) do not create disparity between the 
corporate rate and individual rate, 3) reduce complexity, and 
4) do not separate the business owner from the business. NFIB 
members are willing to make the tradeoffs necessary to lower 
tax rates, such as reducing or eliminating deductions, credits, 
or exclusions.\4\
---------------------------------------------------------------------------
    \4\ Ibid.

    Should Congress enact comprehensive tax reform that 
achieves these goals, small business owners would no longer 
face one of their most consistent complaints: arbitrary and 
inconsistent tax preferences, constant change and complexity in 
the current federal code.\5\
---------------------------------------------------------------------------
    \5\ Ibid.

    Small businesses truly are the engine of economic growth. 
This isn't just a slogan, as small businesses created two-
thirds of the net new jobs over the last decade. Small business 
owners are risk takers and entrepreneurs. They are the last 
businesses to lay off employees when business declines and slow 
to rehire when business picks up. The owner works additional 
hours until they can take it no more. When small business hires 
an employee, it is their intent to keep them on for the long 
---------------------------------------------------------------------------
run.

    The current tax code has become a confusing and 
unpredictable challenge for the vast majority of small business 
owners. Our tax laws should not deter or hinder the ability of 
small business owners to create or expand their businesses. 
Taxes are a MAJOR issue for ALL small business owners. Tax law 
can dictate the business decisions that an owner must make, 
whether it is the type of structure to adopt, whether to make 
an investment in programs or machinery, to expand their 
facility, or to hire employees.

    After decades of patchwork changes to the tax code, 
Congress needs to make major adjustments to our tax laws to 
reduce complexity and confusion and encourage business growth. 
I appreciate Congress taking a serious look at reforming the 
tax code and urge you to keep in mind the unique challenges 
that face small businesses.

    Thank you again for having me here today and I'm happy to 
answer any questions you may have.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


            TESTIMONY BEFORE THE COMMITTEE ON SMALL BUSINESS


                 UNITED STATES HOUSE OF REPRESENTATIVES


                              Hearing On:


        Tax Reform: Ensuring that Main Street Isn't Left Behind


        Dan McGregor, Chairman, McGregor Metalworking Companies


                             April 15, 2015


    Background

    Thank you Mr. Chairman, I appreciate the opportunity to 
testify today on these important topics. My name is Dan 
McGregor and I am the Chairman of McGregor Metalworking 
Companies (MCGREGOR) and a board member of the S Corporation 
Association.

    My family business began in 1965 as an investment with my 
father and 3 brothers. We purchased an 8 man tool and die shop 
in Springfield, Ohio. Since then, we gradually expanded to a 
total of four businesses in Springfield and another located in 
Aiken, South Carolina, employing a total of 375 workers spread 
across both states. These are good paying manufacturing jobs, 
with health insurance and retirement plans, in areas that need 
employment opportunities.

    MCGREGOR is primarily engaged in contract manufacturing in 
the metalworking industry. We perform a wide variety of 
services such as metal stamping, spinning, welding, machining 
and assembly for customers in industries including locomotive, 
auto, agricultural, and law and garden companies. Our customers 
include General Electric, Honda, John Deere and many others.

    We look at our taxes as another cost in a highly 
competitive, low-margin business. Almost all of our customers 
ask us for price decreases each year ranging from 1 to 3 
percent. Contract manufacturing is under heavy competitive 
pressure from global and internal competition within our 
customer base.

    Importance of the S Corporation to Family Businesses

    From the beginning, MCGREGOR has been a family owned and 
run business. Our current shareholders are McGregor family 
members of the second and third generation. A central component 
of the success of our business has been our S corporation 
status.

    When McGregor Metalworking was a C corporation, we paid out 
few dividends to our shareholders abiding by the minimum 
dividend payout rules. Growing the business was our objective 
and paying double taxation did not fit with our entrepreneurial 
spirit. This situation is often referred to as the ``double 
tax'' since the same business income is taxed twice. The 
prevalence of the double tax leading to minimization of 
dividends to shareholders causes family C-Corporation 
shareholders not active in the business to become less 
interested in the success of the business. This is not a 
healthy situation for closely held businesses being passed on 
to the next generation.

    In 1986, anticipating Congressional action to overhaul the 
tax code, we converted to S corporation status. At the time, we 
thought that the opportunity to be taxed as a ``pass-through'' 
to eliminate the double corporate tax would allow us to 
reinvigorate our company and our shareholders. Sure enough, 
after nearly 30 years as an S corporation, I am positive there 
is no better way to organize a family business like my own.

    So much has been written about the erosion of the corporate 
tax base in recent years that an essential reality has been 
lost--the business tax base is larger today than it was prior 
to 1986 tax reforms. It is true the corporate base has declined 
since 1986, but the growth of the pass through business sector 
has made up for it and more.

    According to the Tax Foundation, when my company converted 
to an S corporation in 1986, pass-through businesses 
contributed only 1 percent to our GDP. Today, pass-through 
businesses make up 6 percent of U.S. income. As a result, the 
business tax base--combining corporate and pass through 
businesses--has expanded from 9 percent to 11 percent of our 
national income. The United States today is more 
entrepreneurial because of the 1986 tax reforms and the growth 
of the pass through business sector.

    S Corporation Taxation & the Fiscal Cliff

    There is much confusion about how S corporations are taxed. 
We pay tax on all our business income when it is earned and 
regardless of how much is distributed to our shareholders.

    Since the tax is paid at the shareholder level, we make 
sure to distribute every quarter enough earnings for 
shareholders to pay their tax estimate. And since S 
corporations are allowed only one class of stock, those 
distributions must be equal to the highest marginal rate faced 
by any of my shareholders.

    Prior to the fiscal cliff resolution, the top federal 
marginal rate was 35 percent and the business as a whole had a 
tax rate of about 33.3 percent taking into account federal 
deductions for section 199 and the R&E tax credit as well as 
state and local taxes. That meant that every quarter we would 
distribute at least 34 cents of every dollars we earned to pay 
the S corporation's taxes.

    Following the resolution of the fiscal cliff, the top tax 
rate on my shareholders increased to approximately 41.4 percent 
due to the higher 39.6 percent marginal rate plus, where 
applicable, the new 3.8 percent Affordable Care Act tax and the 
effect of the reinstatement of the Pease limitation on itemized 
deductions. As a result, today we have to distribute 
approximately 42 cents of every dollar earned so our 
shareholders can pay the federal, state and local S corporation 
tax.

    This sharp increase has hurt our ability to compete, grow, 
and create jobs. Think about it this way--we are in a capital 
intensive business and have two sources of capital: what we can 
borrow from the bank and what we retain from our earnings. 
Unlike a large multinational, we simply do not have access to 
the public capital markets.

    During the ``big recession'' of 2008 and 2009 our bank 
added two convenants to our loans: First, a debt service 
coverage ratio where free cash flow must cover bank payments by 
a multiple of 1.25 and, second, a cap on our total debt to 
equity not to exceed a multiple of two. In order for our 
companies survive and grow, we need retained earnings, but 
right now they are being depleted by our tax burden.

    Prior to the fiscal cliff, we were able to retain up to 66 
cents of ever dollar we earned. Those retained earnings formed 
the core of our working and investment capital and over the 
years we used them to grow the business from 8 workers to 375. 
After the fiscal cliff, we have the option to retain only 58 
cents of a dollar of earnings, depending on our annual budget 
and capital needs.

    I use a rough estimate that it takes between $30,000 and 
$40,000 of after-tax earnings coupled with prudent bank debt to 
create the investment that will justify a new hire. Having 
MCGREGOR's effective tax rate rise from 34 to 42 percent means 
lots of lost job opportunities.

    Tax Reform

    I understand Congress is struggling with the challenge of 
reforming the tax code and making our approach to taxing 
business income more competitive. Part of this discussion is 
the need to reduce the tax rate imposed on C corporations. It's 
hard to compete against foreign companies when you are paying 
significantly higher levels of tax. I am sympathetic to these 
concerns and I know that the S Corporation Association has been 
supportive of cutting the corporate rate to something more in 
line with the rest of the world.

    But the same arguments that support cutting the corporate 
rate also apply to pass through businesses like my own. We face 
the same competitive pressures as C corporations, and we 
currently pay a higher tax rate than both the company 
headquartered overseas and the C corporation down the street.

    Tax reform that broadened the tax base while reducing the 
tax rate on C corporations only would increase this disparity. 
Under the worst case scenario where MCGREGOR loses LIFO, the 
R&E tax credit, and the Section 199 deduction, I estate our 
effective tax rate would rise from 42 to in excess of 46 
percent. No amount of expensing or other band aide provisions 
would offset this hit.

    A 2011 study by Ernst & Young reinforced this point. They 
found that corporate-only reform would raise taxes on my 
company and others like it by 8 percent per year or $27 billion 
overall--and that does not include the effects of the 2013 
fiscal cliff tax hike.

    This recent history illustrates why the proposals for 
``corporate-only'' tax reform are so troubling to me and other 
owners of pass-through businesses. Rather than provide needed 
rate relief to all businesses, corporate reform would reduce 
rates on C corporations only, increasing the differential 
between C and S corporation top rates from the current five to 
ten percentage points up to fifteen percentage points and more. 
It would return the tax code to pre-1986, when nearly all 
businesses were C corporations and tax considerations played a 
measurably negative role in their governance.

    It also would leave S corporation owners with two equally 
painful choices. We could remain an S corporation and attempt 
to compete against domestic and foreign companies while paying 
significantly higher tax rates. Or we could convert back to C 
status to access the lower rate and, like most C corporations, 
stop paying dividends to avoid the double tax.

    This inability to share our company's earnings among family 
members would strike at the very heart of our identity as a 
family-owned business. Why own a private business if you are 
unable to share in its success? Under such circumstances, 
selling the business to a public corporation with no need to 
pay dividends and a ready market for its stock would become 
increasingly attractive. It would also mean that the business 
decisions affecting 375 workers in Springfield would now be 
made in a corporate boardroom someplace else.

    As an alternative to corporate-only tax reform, the S 
Corporation Association and other allied trade groups have 
advocated for three key principles to be adopted in any tax 
reform effort:

          1. Tax reform should be simplified, comprehensive and 
        improve the tax treatment of individuals, pass through 
        businesses and corporations alike;

          2. Tax reform should seek to restore rate parity for 
        the top rates paid by individuals, pass through 
        businesses and corporations; and

          3. Tax reform should seek to reduce or eliminate the 
        double tax paid by C corporations.

    These principles are articulated in a letter attached to 
the back of my testimony and supported by over 100 business 
groups, including the National Federation of Independent 
Business, the Precision Metalforming Association, the American 
Farm Bureau, and the National Restaurant Association.

    Other Tax Considerations

    Let me briefly mention three other tax issues of importance 
to MCGREGOR.

    First, as a manufacturer, MCGREGOR engages in a significant 
level of research and development, and we therefore take 
advantage of the R&E tax credit. The usefulness of the credit 
is limited, however, by the Alternative Minimum Tax (AMT). When 
the advantages and disadvantages of the pass through business 
structure are discussed, the role of the AMT rarely comes up, 
but it is significantly negative. Not only does the AMT raise 
the taxes of many of my shareholders, it also precludes them 
from benefiting from the R&E tax credit, thereby diluting the 
value of the credit to MCGREGOR. Allowing taxpayers paying the 
AMT to access the R&E tax credit would solve this problem. 
Getting rid of the AMT entirely would be even better.

    Second, as a family owned business, succession and the 
estate tax are a constant challenge for MCGREGOR. The outcome 
of the fiscal cliff negotiations set the estate tax exemption 
to $5 million and the marginal rate at 40 percent, but for a 
business the size of MCGREGOR, those levels mean we still have 
to deal with the effects of the estate tax as our shareholders 
grow older. Any family that grows their business beyond that 
exemption level must constantly made this tax part of their 
family business strategy. Often tax strategy is contrary to the 
best interests of the business and the family members. 
Transition of ownership in privately held businesses is never 
easy and the estate tax is often the death knell of family 
business continuance.

    Finally, there are a number of smaller tax items improving 
the governance of S corporations that should be enacted and/or 
made permanent, including the shorter recognition period for 
built-in gains and leveling the tax treatment of charitable 
donations of S corporation stock. These provisions have been 
championed by Representatives Reichert (R-WA) and Kind (D-WI) 
for years and have already passed the House this year.

    Conclusion

    McGregor Metalworking has been proud to provide quality, 
high paying jobs to workers in Springfield for over 50 years. S 
corporations around the country do the same thing, employing 
one out of four private sector workers and contributing 
significantly to our national income. The reforms enacted in 
1986 helped MCGREGOR and other S corporations thrive by 
allowing us to operate in a significantly superior business 
structure. Any reform considered by Congress should seek to 
strengthen and grow the pass through sector. With the tax 
reform principles I have laid out today, I am confident that 
MCGREGOR and other pass-through businesses will continue to 
drive job creation and economic growth in communities like 
Springfield for years to come.

    Thank you for your time and I am happy to answer any of 
your questions or even better I invite you to come to 
Springfield to visit our plants and see the results of 
reinvestment by S Corporations.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

    The Association for Enterprise Opportunity (AEO) is 
submitting testimony in support of comprehensive tax reform and 
to recommend improvements to certain tax policies. AEO is the 
voice of microbusiness in the United States. For two decades, 
AEO and its more than 400 member organizations have helped 
millions of entrepreneurs contribute to economic growth while 
supporting themselves, their families and their communities.

    AEO commends the Committee for convening a hearing on such 
a critical topic. While many small business advocates have 
shared their views on tax policy, AEO is adding the voice of 
microbusiness to this important discussion. There is consensus 
that our tax system should be simpler.\1\ Citing numerous 
reports from the Internal Revenue Service (IRS) National Tax 
Payer Advocate and Small Business Administration (SBA) Office 
of Advocacy, it is clear that small businesses face a tax code 
that drains them of their two most valued resources: time and 
money. Notably, these burdens are not uniform across company 
size--big business has the resources to more easily comply 
with, and even shape, the tax code.
---------------------------------------------------------------------------
    \1\ U.S. House of Representatives Committee on Small Business, 
Memorandum on Tax Reform: Ensuring that Main Street Isn't Left Behind 
(2015), available at http://smallbusiness.house.gov/uploadedfiles/4-15-
2015--hearing--memo.pdf

    Much of this is due to a tax code that is outdated. The 
entrepreneurial landscape no longer aligns with our anticipated 
tax system, last reformed more than 25 years ago. Businesses 
now operate everywhere, including homes and shared office 
spaces, and the ``independent workforce'' is growing at an 
incredible pace: the number of Americans who ``primarily work 
on their own'' is up 14% (1.3 million people) since 2001.\2\
---------------------------------------------------------------------------
    \2\ Joel Kotkin, ``Rise of the 1099 Economy,'' Forbes Magazine, 
July 25, 2012.

    These 21st century entrepreneurs struggle to navigate the 
deductions and credits designed to spur business creation. Of 
the more than 20 tax provisions supporting small businesses, 
almost all require increased record keeping. This requires time 
and money that could be put to better use. It is also these 
entrepreneurs who hold the key to jumpstarting our economy. As 
noted in AEO's Power of One in Three report, if 1 in 3 
microbusinesses hired just one employee, America would be at 
full employment.\3\
---------------------------------------------------------------------------
    \3\ Association for Enterprise Opportunity, ``Power of 1 in 3. 
http://www.aeoworks.org/pdf/one--in--three.pdf

    The majority of these microbusinesses are structured as 
pass-through entities, allowing business owners to calculate 
and pay taxes on their individual taxes. According to the U.S. 
Census Bureau, for example, sole proprietorships make up a full 
third (33.6%) of all pass-through businesses that pay taxes at 
individual rates. For this reason, AEO urges that any reform to 
the corporate tax code be accompanied by a balanced reform to 
the individual code. Comprehensive tax reform is the only 
option to ensure that a vast majority of microbusinesses do not 
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immediately face a significant and unfair disadvantage.

    Any overhaul of the tax system should also be guided by the 
basic principles of simplicity and fairness. In AEO's view, tax 
compliance--while necessary--should not be a barrier to 
entrepreneurship. Microbusinesses should expect a tax system 
that collects revenue in a consistent manner, offering 
certainty from year to year. The annual sprint to extend tax 
credits and deductions, or ``extenders,'' is a prime example of 
how the current system gives business owners little certainty. 
Making tax expenditures that are proven to support small 
businesses permanent would eliminate annual confusion over 
credits and deductions.

    Similarly, tax rates for businesses ought to be the same 
and tax liability should not depend on how a business is 
organized. American corporations only pay an effective tax rate 
of 12.6%, a far cry from the statutory 35%, while small 
businesses operating as S-Corps pay an effective tax rate of 
nearly 27%.\4\ Conversely, tax deductions or credits should be 
applicable to any form of business (e.g. the self-employed 
cannot deduct health expenses, an option available to other 
businesses). Reforms should address these inequities. In our 
view, business is business.
---------------------------------------------------------------------------
    \4\ U.S. Government Accountability Office, ``Corporate Income Tax: 
Effective Tax Rates Can Differ Significantly from the Statutory Rate.'' 
2013. Available online at http://www.gao/gov/assets/660/654957.pdf

    In addition to ensuring that broader reforms take small 
businesses into consideration, AEO recommends the following 
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policies that will benefit Main Street:

    Expand Volunteer Income Tax Assistance Program to Assist 
Microbusiness

    More than 1 in 4 (27%) of microbusinesses cited tax 
preparation as a problem for business.\5\ This does not have to 
be the case. Already a program exists that could aid 
entrepreneurs. The Volunteer Income Tax Assistance (VITA) 
Program currently assists low- and moderate-income (LMI) 
individuals with support from IRS-certified volunteers. 
Congress and the IRS should expand the VITA Program's capacity 
to help microbusiness owners navigate the tax system.
---------------------------------------------------------------------------
    \5\ Corporation for Enterprise Development, ``Microbusinesses: 
America's Unsung Heroes.'' 2013. Available online at: http://cfed.org/
assets/pdfs/FactFile--May2013.pdf

    First, the IRS Office of Stakeholder Partnerships, 
Education and Communication (SPEC) Office should improve the 
support that the program delivers to microbusiness owners. The 
program's capacity to serve microbusiness owners is limited by 
program rules that preclude VITA sites from preparing all but 
the simplest Schedule C forms. The Corporation for Enterprise 
Development (CFED) found that VITA sites are ready and willing 
to do more for microbusiness.\6\ The IRS has the authority to 
lift the restrictions on Schedule C preparation at its 
discretion, without initiating the lengthy process of proposing 
a regulation for public comment.
---------------------------------------------------------------------------
    \6\ Corporation for Enterprise Development, ``Innovations in 
Microbusiness.'' 2014. Available online at: http://cfed.org/assets/
pdfs/Innovations--in--Microbusiness.pdf

    The Entrepreneur Start-Up Growth Act (H.R. 3571), 
introduced in 2011 by Committee Member Judy Chu, proposed a 
pilot program to test the feasibility of expanding VITA support 
to self-employed tax filers. AEO hopes that similar legislation 
will be reintroduced in the 114th Congress. New provisions 
could consider authorizing VITA sites to implement pay-as-you-
---------------------------------------------------------------------------
go fees for the most complex tax filings.

    Aiding Underserved Communities through Proven Tax Policy

    The Earned Income Tax Credit (EITC) is an important tax 
credit for low-income workers and allows entrepreneurs to 
reinvest their EITC back into their business. Research has 
shown that the EITC promotes work, reduces poverty, and 
benefits microbusinesses.\7\
---------------------------------------------------------------------------
    \7\ Center on Budget and Policy Priorities, ``EITC and Child Tax 
Credits Promote Work, Reduce Poverty, and Support Children's 
Development.'' (2015). Available online at http://www.cbpp.org/cms/
?fa=view&id=3793

    The EITC can be strengthened to continue to aid underserved 
communities. Interestingly, the current structure of the EITC 
(withholding credit in U.S. Treasury) has increased savings 
---------------------------------------------------------------------------
among low- and moderate-income individuals--a lauded goal.

    Create and Expand Credits Needed by Microbusiness

    AEO believes a New Entrepreneur Tax Credit would 
incentivize business creation. Studies have consistently found 
that underserved communities and individuals benefit from self-
employment and new business ventures.\8\ AEO encourages 
Congress to look further at small business tax provisions 
already in the tax code and how they could benefit new 
businesses during its time of greatest challenge.
---------------------------------------------------------------------------
    \8\ Brookings Institution, ``Minority and Women Entrepreneurs: 
Building Capital, Networks, and Skills.'' (2015). Available online at 
http://www.brookings.edu/ /media/research/files/papers/2015/03/11-
hamilton-project-expanding-jobs/
minority--women--entrepreneurs----
building--skills--barr--final.pdf

    Established microbusinesses should also be supported to 
save for their retirement. The SBA Office of Advocacy found 
that microbusinesses, especially those owned by minorities, are 
the least likely to have retirement savings. Currently, the 
Saver's Credit exists to address this issue. That credit, 
however, is nonrefundable, needlessly complex and is defined by 
sharp income eligibility cliffs. These shortcomings mean that 
only a very small percentage of low-income tax filers qualify 
for the credit, and an even smaller number actually claim the 
credit. By simplifying how microbusiness owners claim the 
credit and by making it refundable, Congress can improve the 
---------------------------------------------------------------------------
Saver's Credit's ability to aid saving for retirement.

    The need for action on comprehensive tax policy is clear. 
In our view, addressing the corporate rate alone would be 
unfair for the microbusiness community at the very backbone of 
the American economy. Reforms should be enacted, based on the 
ideas of a simpler and fair tax code. Finally, should a tax 
overhaul not be viable this Congress, there are still small, 
but important, tax changes for policymakers to consider to 
strengthen the community AEO serves.

    Thank you for consideration of these views and for this 
Committee's efforts to support microbusiness.
    About AEO

    The Association for Enterprise Opportunity (AEO) is the 
voice of microbusiness in the United States. For two decades, 
AEO and its more than 400 member organizations have helped 
millions of entrepreneurs contribute to economic growth while 
supporting themselves, their families and their communities. 
AEO members and partners include a broad range of organizations 
that provide capital and services to assist underserved 
entrepreneurs in starting, stabilizing and expanding their 
businesses. Together, we are working to change the way that 
capital and services flow to underserved entrepreneurs so that 
they can create jobs and opportunities for all.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

    On behalf of women entrepreneurs nationwide and our diverse 
group of Coalition Partners, Women Impacting Public Policy 
(WIPP) submits the following statement identifying the need for 
tax reforms to benefit women business owners.

    As the advocate for the women's business community, WIPP 
has always supported a simpler and fairer tax code. Nearly 90% 
of women-owned firms are small businesses that, as this 
Committee has noted, face increased burdens and costs from an 
outdated tax system.\1\ Most important to women business 
owners, though, is the need for comprehensive reform.
---------------------------------------------------------------------------
    \1\ U.S. House of Representatives Committee on Small Business, 
Memorandum on Tax Reform: Ensuring that Main Street Isn't Left Behind. 
2015. Available online at http://smallbusiness.house.gov/uploadedfiles/
4-15-2015--hearing--memo.pdf

    In the current environment of tax reform proposals, 
agreement is building on the need to lower the corporate tax 
rate to be globally competitive. Doing so without consideration 
for the millions of pass-through entities paying business taxes 
as individuals would be unfair. Tax reform must be done 
comprehensively. Raising or lowering the corporate or 
individual rate independent of the other would shift the 
balance between business types more than three decades in the 
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making.

    Change, however, is needed. Not only has the business 
environment noticeably evolved since the last tax overhaul in 
1986, but also the American economy. Simply put, now is the 
time for reform.

    WIPP believes that two overarching themes should guide a 
re-write of the tax code: simplicity and fairness. The current 
system is too complex, creating confusion and frustration for 
women-owned businesses. The system is also unfair to the vast 
majority of women-owned firms that are small businesses, 
because they do not have the same capabilities and resources as 
larger corporations that take advantage of the code's 
complexity.

    Bringing Simplicity to the Tax Code

    Part of making tax reform simple is making tax reform 
permanent. Tax laws changed the Internal Revenue Service's 
(IRS) tax code on two different occasions in 2013, and the IRS 
National Taxpayer Advocate stated that these changes often 
generate taxpayer confusion.\2\ In addition, Congressional 
action on business deductions on a piecemeal basis makes 
planning difficult. Permanent tax reform will lead to more 
certainty, and as a result, better-informed business decisions.
---------------------------------------------------------------------------
    \2\ Internal Revenue Service, National Taxpayer Advocate: 2014 
Report to Congress. 2015. Available online at http://
www.taxpayeradvocate.irs.gov/media/default/documents/2014-annual-
report/volume-one.pdf

    Complexity has costs for the government as well. It 
increases the ability of firms and individuals to hide 
revenues. A simpler code and filing system would make 
perpetrators of tax evasion more obvious to an IRS struggling 
with diminished resources. The annual tax gap--the significant 
amount of revenue owed but not collected--is partially caused 
by the code's complexity. In 2001, the most recent year 
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analyzed by the IRS, the tax gap was $345 billion.

    The view of the tax code with regard to complexity is best 
summarized by the National Taxpayer Advocate in its most recent 
report to Congress: ``We have to face up to the fact that we 
have an incredibly complex tax system that, by virtue of its 
complexity, creates burden, confusion, and unfairness.'' \3\ 
WIPP agrees, and urges Congress to address these challenges.
---------------------------------------------------------------------------
    \3\ Internal Revenue Service, National Taxpayer Advocate: 2014 
Report to Congress Executive Summary (2015), available online at http:/
/www.taxpayeradvocate.irs.gov/Media/Default/Documents/2014-Annual-
Report-to-Congress-Executive-Summary.pdf

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    Ensuring the Tax Code is Fair

    American women-owned businesses come in all shapes and 
sizes, including partnerships, S-corps, C-corps, LLCs, and 
sole-proprietorships. Having different rules for different 
businesses only increases complexity (see above). Such a tax 
system hinders growth and discourages businesses to grow in a 
way that is best suited for their efforts and development.

    Whether caused by different compliance costs, business 
structures, or accounting methods, the reality is, 
entrepreneurs are paying more than big business. American 
corporations only pay an effective tax rate of 12.6%, which is 
nowhere near the statutory 35%, while small businesses 
operating as S-Corps pay an effective tax rate of nearly 
27%.\4\ All the while, small firms are paying 67% more in tax 
compliance.\5\ Resolving this inequity should be a goal of the 
next revision of the tax code.
---------------------------------------------------------------------------
    \4\ U.S. Government Accountability Office, ``Corporate Income Tax: 
Effective Tax Rates Can Differ Significantly from the Statutory Rate.'' 
2013. Available online at http:www.gao.gov/assets/660/654957.pdf
    \5\ Small Business Administration, ``The Impact of Regulatory Costs 
on Small Firms 7-8.'' 2010. Available online: https://www.sba.gov/
sites/default/files/
The%20Impact%20of%20Regulatory%20Costs%20on%Small%20Firms%20%28Full%29.p
df

    While WIPP is optimistic that the 114th Congress can lead 
on tax reform, smaller tax policies can aid women entrepreneurs 
without a broader overhaul. In the absence of comprehensive 
reform, there are steps Congress can take to further support 
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women entrepreneurs.

    Incentivize New Businesses

    Both chambers of Congress search, almost annually, for ways 
the tax code can support start-up companies and newly found 
businesses. WIPP recommends making many of the tax credits and 
deductions already proven to support small businesses available 
to newly formed businesses in their first three years. In the 
event of an overhaul that removes ``tax extenders,'' they could 
still be offered to the newest small businesses.

    Employee-owned Businesses

    Businesses with employees who are financially invested in 
the company's success often produce impressive results. That is 
why WIPP recommends that any tax reform avoid modifying the 
provisions that support Employee Stock Ownership Plan (ESOPs). 
ESOPs have been a valuable option for employees to be rewarded 
for hard work and to move on after the departure of an owner. 
Even more important, they represent another way for small 
businesses to access capital at low cost. These plans should 
carry protections to prevent undue risk to employees, but have 
also demonstrated an increase in production and profitability 
of many small businesses.

    Simplify and Expand Cash Accounting Method

    Most small businesses operate in a pretty simplistic 
manner: income and expenses run through the same bank account--
similar to a personal checking account that most Americans use. 
Currently, the tax code does not reflect this practice--instead 
holding many small businesses to the same accounting standards 
as global corporations and publicly traded companies.

    This does not have to be the case. Expanding the cash 
accounting method to a larger threshold would give more women 
entrepreneurs a simpler income reporting mechanism, allowing 
them to run their businesses and focus on growth.

    Moreover, as the Kogod Tax Center has noted, the cash 
accounting method should be simplified as well. There is no 
benefit to the IRS, and certainly a detriment to small 
businesses, by keeping unnecessary complications in this 
accounting method.\6\
---------------------------------------------------------------------------
    \6\ Testimony of Donald Williamson to the House Small Business 
Subcommittee on Economic Growth, Tax and Capital Access, ``Cash 
Accounting: A Simpler Method for Firms?'' (2014), available online at: 
http://smallbusiness.house.gov/uploadedfiles/7-10-2014 williamson 
testimony.pdf.

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    Expand the Small Business Health Care Tax Credit

    The Affordable Care Act included a tax credit for small 
businesses that provided health insurance to their employees. 
Currently, the tax credit is only available to businesses with 
fewer than 25 employees and average wages of less than $50,000. 
Moreover, to receive the full tax credit, which covers up to 
50% of employer-paid premiums, businesses must have 10 or fewer 
employees and average wages of up to $25,000. Women business 
owners have shared with WIPP that the credit is too restrictive 
to be valuable.

    WIPP recommends expanding eligibility for the tax credit. 
Under legislation in this Congress, the Small Business Tax 
Credit Accessibility Act (S. 379), these restrictions would be 
relaxed to make businesses with up to 50 employees and average 
wages of up to $80,025 eligible for the tax credit. 
Additionally, it would extend the number of consecutive years a 
small business can claim the tax credit from two (current law) 
to three years. It also removes the requirement that employers 
claiming the credit must contribute the same percentage of the 
cost for each employee's health insurance. Women business 
owners want to provide coverage to their employees. Accessing 
that help should be easy, and not limited to a few businesses.

    Thank you for the consideration of these views. WIPP has 
long appreciated the role of the House Small Business Committee 
as an advocate for the diverse business community, including 
women entrepreneurs.

                                 [all]