    [Senate Hearing 115-101]
    [From the U.S. Government Publishing Office]

                                                           S. Hrg. 115-101

             TAX REFORM: REMOVING BARRIERS TO SMALL BUSINESS GROWTH

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

                                    HEARING

                                   BEFORE THE

                          COMMITTEE ON SMALL BUSINESS
                              AND ENTREPRENEURSHIP
                              UNITED STATES SENATE

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 JUNE 14, 2017

                                   __________

        Printed for the Committee on Small Business and Entrepreneurship

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             Available via the World Wide Web: http://www.fdsys.gov

                                  __________

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               COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                         ONE HUNDRED FIFTEENTH CONGRESS

                                  ----------
                        JAMES E. RISCH, Idaho, Chairman
                 JEANNE SHAHEEN, New Hampshire, Ranking Member
    MARCO RUBIO, Florida                 MARIA CANTWELL, Washington
    RAND PAUL, Kentucky                  BENJAMIN L. CARDIN, Maryland
    TIM SCOTT, South Carolina            HEIDI HEITKAMP, North Dakota
    JONI ERNST, Iowa                     EDWARD J. MARKEY, Massachusetts
    JAMES M. INHOFE, Oklahoma            CORY A. BOOKER, New Jersey
    TODD YOUNG, Indiana                  CHRISTOPHER A. COONS, Delaware
    MICHAEL B. ENZI, Wyoming             MAZIE K. HIRONO, Hawaii
    MIKE ROUNDS, South Dakota            TAMMY DUCKWORTH, Illinois
    JOHN KENNEDY, Louisiana
              Skiffington E. Holderness, Republican Staff Director
                     Sean Moore, Democratic Staff Director

                                C O N T E N T S

                                  ----------

                               Opening Statements

                                                                       Page

    Risch, Hon. James E., Chairman, and a U.S. Senator from Idaho....     1
    Shaheen, Hon. Jeanne, a U.S. Senator from New Hampshire..........     3

                                   Witnesses

    Nellen, Annette, Chair, AICPA Tax Executive Committee, San Jose,
      CA.............................................................     3
    Reardon, Brian, President, S Corporation Association, Washington,
      DC.............................................................    25
    Mazur, Mark J., Director, Urban-Brookings Tax Policy Center,
      Washington, DC.................................................    37

                              Alphabetical Listing

    American Farm Bureau Federation
        Statement Dated June 14, 2017................................    79
    American Institute of CPAs
        Letter Dated June 12, 2017...................................    86
    Coalition to Preserve Cash Accounting
        Letter Dated June 28, 2017...................................    87
    Kogod Tax Policy Center
        Statement Dated June 28, 2017................................    93
    Mazur, Mark J.
        Testimony....................................................    37
        Prepared statement...........................................    39
        Responses to questions submitted by Chairman Risch...........    78
    Nellen, Annette
        Testimony....................................................     3
        Prepared statement...........................................     6
        Responses to questions submitted by Chairman Risch...........    70
    Reardon, Brian
        Testimony....................................................    25
        Prepared statement...........................................    27
        Responses to questions submitted by Chairman Risch...........    74
    Risch, Hon. James E.
        Opening statement............................................     1
    Shaheen, Hon. Jeanne
        Opening statement............................................     3
    Small Business Investor Alliance
        Letter Dated June 14, 2017...................................    96
    Tax Aggie Coalition
        Letter Dated June 28, 2017...................................    98
    The Like-Kind Exchange Stakeholder Coalition
        Letter Dated June 28, 2017...................................   111
    Tomasky, Michael
        Article titled ``Finally, Something Isn't the Matter with
          Kansas.....................................................    57

                         TAX REFORM: REMOVING BARRIERS
                            TO SMALL BUSINESS GROWTH

                                  ----------

                            WEDNESDAY, JUNE 14, 2017

                          United States Senate,
                            Committee on Small Business
                                          and Entrepreneurship,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 3:04 p.m., in
    Room 428A, Russell Senate Office Building, Hon. James Risch,
    Chairman of the Committee, presiding.
        Present: Senators Risch, Ernst, Inhofe, Young, Kennedy,
    Shaheen, Cantwell, Heitkamp, Booker, and Duckworth.

    OPENING STATEMENT OF HON. JAMES E. RISCH, CHAIRMAN, AND A U.S.
                           SENATOR FROM IDAHO

        Chairman Risch. Well, this meeting now will come to order,
    and welcome, everyone, this afternoon, and thank you so much
    for coming.
        Before we get started I would like to recognize that--and I
    speak for both myself, I am sure the Ranking Member also, that
    our thoughts and prayers are with our colleagues who were
    injured in this morning's horrific attack, as well as with the
    heroic Capitol Police officers who sustained injuries as they
    took the necessary measures to protect our colleagues and the
    public. I have had an opportunity to talk to our colleagues
    from the Senate who were there, and they said if it was not for
    the Capitol Police this thing would have been much, much worse
    than what it was. So our thoughts and our prayers go out to all
    who were involved and to their families.
        With that, again, I would like to welcome everyone to our
    hearing today, and we are going to talk about tax reform,
    removing the barriers to small business growth. Myself, and I
    know the Ranking Member, likewise, has been in government
    virtually all of our adult lives, and have dealt with business,
    both small and big business, from both sides, and as a result
    of that we have come to understand the many, many challenges
    that face small businesses in America today.
        Small business owners want to spend their time growing
    their businesses and not taking time away from that effort to
    figure how to comply with the tax code and, more often than
    not, hiring outside tax help to make sure they are doing what
    they are supposed to do.
        Here is what we know. Tax compliance costs are 67 percent
    higher for small businesses than they are for big businesses,
    and roughly 89 percent of small owners have to rely on outside
    tax preparers. Small businesses spend a lot of time and money
    that could be spent on their businesses trying to understand
    and comply with the law. If Congress is going to take a serious
    look at reforming the tax code, we certainly should look at
    ways it can be simplified, and how compliance costs can be
    decreased, and permanency provided so that small business
    owners know what rules they are playing by, and can do so with
    decreased cost to their business and, obviously, more
    productivity.
        Another significant issue for small businesses is whether
    tax reform will reduce rates for pass-through entities. Today,
    more than 90 percent of businesses are considered sole
    proprietorships, or pass-through entities, while more than half
    of business income in the United States is earned through small
    businesses identified as one of these types of businesses.
        When we look at these numbers it is clear that if we want
    tax reform to bring growth to our economy, we must look at the
    individual tax code under which pass-through entities are
    taxed. We have to ensure that the reforms that could provide
    the most small business growth do not get lost in the
    discussion about tax reform, and that is one of the reasons why
    we are here today, and both the Ranking Member and I are
    absolutely committed to see that we hold the people's feet to
    the fire that are going to be working on tax reform.
        I would like to introduce two of the witnesses and then I
    am going to yield to Senator Shaheen.
        I would like to welcome Ms. Annette Nellen, the Chair of
    the American Institute of CPAs Tax Executive Committee. This
    committee is the most senior committee of the tax division of
    the organization, and speaks for them on all matters related to
    taxation, including tax policy and legislation. She is also a
    professor at San Jose State University, where she teaches a
    number of tax-related courses and directs the graduate tax
    program. Ms. Nellen is a CPA herself, and will bring a wealth
    of knowledge and expertise to our discussions about the
    compliance issues small businesses face with our current tax
    system, and we are pleased to have her here today.
        I am also pleased to welcome Mr. Brian Reardon, President
    of the S Corporation Association. Mr. Reardon has, through his
    position with the association, a long history of advocating for
    4.6 million S corporations across the country, to make sure
    their voices are heard when it comes to tax issues, and the
    implications of government mandates for small businesses. He
    will be able to provide the voice of small businesses across
    the country, across industry, of varying sizes, when it comes
    to the difficulties they have with the current tax system.
        I also wanted to recognize Mr. Mazur, the Director of the
    Urban-Brookings Tax Policy Center, who will be further
    introduced by Ranking Member Shaheen.
        Thank you all, again, for coming here today to join us on
    this important hearing, and with that, I want to turn the time
    over to our Ranking Member, Senator Shaheen.

    OPENING STATEMENT OF HON. JEANNE SHAHEEN, RANKING MEMBER, AND A
                    U.S. SENATOR FROM NEW HAMPSHIRE

        Senator Shaheen. Thank you very much, Mr. Chairman. This is
    an important hearing as we look at how we can remove burdens of
    our tax code on small business. As we all know, our tax code is
    in desperate need of reform. It is too long, too complex, and
    it creates a burden on middle-class families and small
    businesses across this country. Today's hearing is an important
    opportunity for us to discuss how we might relieve some of
    these tax burdens on small businesses.
        As I travel around New Hampshire, and talk to small
    business owners, what I hear is that they are concerned about
    the red tape, mostly related to our tax code. According to the
    National Taxpayer Advocate Service, small businesses spend 2.5
    billion, with a B, hours complying with the IRS rules each
    year, and, of course, for entrepreneurs, time is one of their
    most valuable resources, so every hour spent filling out forms
    is an hour they do not have to think about growing their
    businesses.
        So as we consider tax reform, we need to put the needs of
    small businesses front and center. We can do that, I think, by
    taking some common-sense steps to simplify taxes for small
    businesses, to relieve the burden that the tax code places on
    them, and we should look at closing loopholes that allow large
    businesses to avoid paying their fair share of taxes. We must
    ensure that our tax code is up to date, so that it encourages
    economic growth and competitiveness in emerging sectors of our
    economy.
        A lot has changed in the last 30 years since we last
    updated the tax code. As Congress considers tax reform, we need
    to make sure that our 29 million small businesses have a seat
    at the table, and so that is why we are looking forward to
    hearing from our witnesses today. We thank you for being here.
        And I will just point out that Mr. Mazur, who is Director
    of the Urban-Brookings Tax Policy Center is the Director of
    that center. From 2012 until 2017, he was the Assistant
    Secretary for Tax Policy at the U.S. Department of the
    Treasury, and he has served in the Federal Government for 27
    years in various positions that relate, in some way, to our
    economy and to our tax code. So we are delighted to have you
    here and look forward to hearing your testimony.
        Thank you all, very much.
        Chairman Risch. Thank you. What we would--I am going to
    recognize each of you to make an opening statement, if you
    would, please. Please try to keep it to about five minutes.
    Obviously, any remarks that you have we will accept for the
    record and publish it in the record of these proceedings. The
    members are anxious to get to questions that they want to drill
    down on, so with that, Ms. Nellen, we will recognize you first.

        TESTIMONY OF ANNETTE NELLEN, CHAIR, AICPA TAX EXECUTIVE
                               COMMITTEE

        Ms. Nellen. Thank you. Chairman Risch, Ranking Member
    Shaheen, and members of the Senate Committee on Small Business
    and Entrepreneurship, thank you for the opportunity to testify.
    The AICPA appreciates your leadership in ensuring that tax
    reform considers ways to reduce the burden and complexity of
    tax compliance for small businesses and how that burden can
    hinder business growth.
        Today I would like to highlight a few tax reform issues
    that directly impact small businesses and their owners. First,
    tax relief should not mean a rate reduction for C corporations
    only. Congress should continue to encourage, or at least not
    discourage, the formation of sole proprietorships and pass-
    through entities. If Congress decides to lower corporate income
    tax rates, small businesses should receive a lower tax rate as
    well.
        We recognize that providing a reduced rate for income of
    small businesses will place additional pressure on the need to
    distinguish between profits of the business and compensation of
    the owner-operators. We should continue to use traditional
    definitions of reasonable compensation for this purpose.
    Partnerships and sole proprietorships should be required to
    charge reasonable compensation. We should not treat partners
    and sole proprietors as employees but rather as owner-operators
    whose labor is subject to appropriate withholding taxes.
        If Congress decides to use a 70/30 rule, treating 70
    percent of pass-through income as employment income and 30
    percent as return on capital, we urge you to make this proposal
    a safe harbor, rather than a hard and fast rule. A safe harbor
    would promote simplicity for many businesses without
    sacrificing fairness for others. To minimize controversy, the
    IRS should take additional steps to improve compliance in this
    area. Reporting requirements to disclose the factors considered
    and determining compensation would help address the enforcement
    challenges currently faced by the IRS. These new reporting
    requirements would only apply to owner-operators who believe
    their particular situation warrants treating a higher
    percentage of pass-through income as active business income
    than is allowed under the safe harbor.
        Next, we are concerned with, and urge you, to oppose any
    new limitations on the use of the cash method of accounting.
    The cash method is simpler in application, has fewer compliance
    costs, and does not require taxpayers to pay tax before
    receiving their income, which is why entrepreneurs often choose
    the cash method. Forcing more businesses to use the accrual
    method unnecessarily discourages business growth, increases
    compliance costs, and imposes financial hardship on cash-
    strapped businesses.
        Another important issue is the ability to deduct interest
    expense. Owners borrow to fund operations, working capital
    needs, equipment acquisition, and even to build credit for
    future loans. We should not take away or limit this critical
    deduction for many small businesses who with little or no
    access to equity capital are often forced to rely on debt
    financing.
        Another issue involves taxation of compensation. Congress
    should not reduce an employer's ability to deduct a
    compensation pay to its employees, whether in the form of wages
    or fringe benefits. At the same time, it is important to retain
    the employee fringe benefit exclusion. Changes in this area
    would impact the ability of small businesses to attract and
    return a competitive workforce.
        Just quickly, a few additional items include increasing the
    start-up business deduction to give entrepreneurs the support
    they need in the early years, simplifying laws for qualified
    retirement plans, and simplifying the penalty system. Also, the
    AMT should be repealed for individuals and corporations,
    thereby making the system simpler and more transparent.
        Small business owners must deal with many business
    decisions and concerns. They have expertise in their business
    product and services but rarely are they experts in the areas
    of capitalization, retirement plan rules, and alternative
    income tax regimes.
        Improvement of IRS services would also help small
    businesses. We recommend modernizing IRS business practices and
    technology. For example, a new executive-level practitioner
    services unit that includes an online tax professional account
    with access to client information should be created. Enhancing
    the relationship between the IRS and practitioners benefits
    both the IRS and the millions of taxpayers, including small
    businesses, served by the practitioner community.
        Finally, we encourage you to enact mobile workforce
    legislation such as S. 540, introduced by Senator Thune. The
    burden of tracking and complying with all the different State
    payroll tax laws is complex and costly, particularly for small
    employers. S. 540 provides a uniform national rule for non-
    resident State income tax withholding, and a de minimis
    exemption from State income tax for non-resident employees.
        We provide more details on our tax reform ideas in our
    written testimony. Thank you. I would be happy to answer your
    questions.
        [The prepared statement of Ms. Nellen follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Risch. Thank you very much. Mr. Reardon.

         TESTIMONY OF BRIAN REARDON, PRESIDENT, S CORPORATION
                              ASSOCIATION

        Mr. Reardon. Thank you, Chairman, Ranking Member Shaheen. I
    appreciate the opportunity to testify here today.
        I have managed the S Corp Association for the past 12
    years, and during that time we have developed a number of
    research pieces, a number of themes to help education
    policymakers on the importance of the pass-through community
    and on the priorities of the pass-through community and tax
    reform, and I would like to hit a couple of those themes here
    today.
        The first theme is that small business is really big. The
    pass-through sector--that is S corporations, partnerships,
    LLCs, and sole proprietorships--they employ more people, they
    employ the majority of private-sector workers in the country,
    and they earn the majority of business income in the country.
    In fact, 57 percent of private-sector workers get up every day
    and they go to work at a pass-through business. In some states,
    some of the states that you guys actually represent, they
    employ nearly 7 out of 10 workers.
        So if tax reform is going to be successful at returning
    jobs and money to the United States, it needs to include pass-
    through businesses at the beginning of the conversation, and
    not just as an afterthought.
        Second, the business tax base is getting bigger. We hear a
    lot about erosion of the corporate tax base, and the
    implication is that this is a bad thing. But the reality is
    that since 1986, the business tax base, the corporate sector
    and the pass-through sector, is bigger today than it was back
    in 1986, and growth is completely due to the growth of the
    pass-through sector, and that growth is a good thing. It is
    something to be celebrated. It is not something to be worried
    about.
        The reason that it is something to be celebrated is point
    three, which is moving business activity away from the harmful
    double corporate tax and towards pass-through treatment is good
    for the economy. We hired Ernst & Young back in 2011 to give us
    a sense of both the economic footprint of the pass-through
    community but also the economic contribution, and what they
    found is that there are more jobs and more investment in the
    economy with the current system, with pass-throughs being a
    robust part of the economy, than if all businesses were
    structured as C corporations.
        The fourth point is that pass-throughs pay their fair
    share. They may not pay the corporate tax but they do pay
    taxes, they do pay it when it is earned, and they pay a lot of
    taxes. We hired a firm back in 2013 to measure the effect of
    tax rates of all businesses by structure, so S corp,
    partnerships, C corp, et cetera. What they found is that S
    corps pay the highest effective tax rate, 32 percent. Large S
    corps, those with more than $10 million in income, pay over 35
    percent effective tax rate. That is no margin rate. That is the
    effective. That is how much they actually pay. That compares to
    29 percent for partnerships, 15 for sole proprietorships, and
    27 percent for C corps. The bottom line is the pass-through
    community is paying its fair share in taxes.
        And then, finally, the last statement is that taxes on
    those pass-through businesses just went up, starting in 2013.
    One of the reasons that the effective rate for S corporations
    and partnerships is so high is that they pay higher rates. As a
    result of the fiscal cliff and the Affordable Care Act taxes,
    the top rates on pass-through businesses increased from 35
    percent in 2012, to 44 percent in 2013. When you combine those
    taxes with State and local taxes, some pass-through businesses
    face marginal rates of over 50 percent, and in the back of my
    written testimony we have a chart showing the marginal rates
    for each state when you add in the local and State taxes.
        With those facts in mind, the Main Street business
    communities coalesced around the following three principles for
    tax reform. First, it needs to be comprehensive. That is,
    individual, pass-through, and corporate. Second, it needs to
    lower rates for pass-through and C corps alike, to try to
    restore the rate parity that we had from 2003 to 2012. And
    then, finally, it should seek to reduce or eliminate the double
    tax on C corporations. Last year, 120 trade associations signed
    on to those three pass-through principles. It includes the Farm
    Bureau, NFIB, the restaurant associations, most of the major
    national groups.
        The good news is that most of the plans that are under
    consideration right now embrace those principles. They are
    comprehensive, they all seek to restore rate parity, and they
    all seek to reduce the double tax on C corporations.
        They also include a number of provisions that are important
    to Main Street businesses that Annette mentioned. One is repeal
    of the estate tax, the second is repeal of the AMT, the third
    is repeal of the ACA surtax, and the final one is to increase
    small business expensing beyond its current limits. When you
    couple those provisions with rate reduction, these provisions
    would sharply reduce the effective tax rates paid by pass-
    through businesses while dramatically simplifying the tax code.
        So that is it. Those are the priorities for the pass-
    through community. I really appreciate the opportunity to
    testify here today and I am happy to take any questions.
        [The prepared statement of Mr. Reardon follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Risch. Thank you very much.
        Mr. Mazur.

       TESTIMONY OF MARK J. MAZUR, DIRECTOR, URBAN-BROOKINGS TAX
                             POLICY CENTER

        Mr. Mazur. Thank you, Chairman Risch, Ranking Member
    Shaheen, members of the Committee. Thank you for inviting me
    here today to discuss tax reform in small business. I just want
    to emphasize that the views I express are my own and should not
    be attributed to Tax Policy Center, the Urban Institute, their
    boards, or their funders.
        There is broad consensus that the current system for taxing
    businesses is in dire need of reform. The U.S. tax system was
    last overhauled in 1986, and the current system, especially as
    it applies to business income, is woefully out of date. Three
    decades of changing business practices, increased
    globalization, and expanding aggressiveness of tax planning
    activities have led to the current situation.
        If you look at the U.S. tax system, it is characterized by
    high statutory marginal tax rates for corporations; a large
    number of special tax provisions in the code that ensure most
    businesses do not pay at that top rate, incentives for
    multinational firms, both U.S.-based and foreign-based, to
    locate deductions in the United States, and locate income in
    lower-tax jurisdictions; incentives for certain firms to
    organize as pass-throughs and to escape corporate-level
    taxation; and substantial complexity throughout the tax system
    to the point where some taxpayers cannot even understand what
    their obligations are. Tax reform should seek to address some
    or all of these issues related to business taxation.
        Tax policies we think of as guided by three basic notions:
    efficiency, equity, and simplicity. Efficiency means the tax
    system that raises the appropriate amount of revenue with as
    little economic distortion as possible. It is often
    characterized as relatively low tax rates, broad tax base, a
    portfolio of revenue sources, and a deep understanding of the
    incentives that are associated with the tax system.
        Equity, the second principle, has two components:
    horizontal equity, treating similarly situated taxpayers in a
    similar manner, and vertical equity, that taxpayers who have a
    greater ability to pay taxes should shoulder a larger share of
    the provision of public services.
        And the third component, simplicity, is important because
    if the tax code is too complex, taxpayers cannot understand
    their obligations, cannot comply with the tax law.
        A lot of complexity just reflects our complex economic
    system. There are an infinite number of transactions people in
    businesses can enter into. But another large part represents
    the decisions, deliberate decisions, to run substantial
    portions of our social policy through the tax code, and each of
    those brings in their own set of qualifications and rules and
    so on.
        An important thing to keep in mind is all three of these
    principles matter, and all come into play when you are
    designing tax policy, and really the art of policymaking is
    figuring out the right balance between these principles.
        What I want to do is turn to just a few facts on
    businesses. As pointed out by some of the other witnesses,
    business can be organized by sole proprietorships,
    partnerships, limited liability companies, traditional C
    corporations, or S corporations. The traditional C corporation
    is subject to a separate level of tax, so two levels of tax,
    one at the entity level, one when those earnings are passed on
    to the owner. All the other types are pass-through businesses,
    where the income or loss is passed through to the tax return of
    the owners. All these business types can be small, large, or
    very large.
        The most prevalent form of business is sole proprietorship.
    That is responsible for the largest number of returns of
    businesses. However, it is responsible for the smallest
    fraction of business activity. One thing to keep in mind is the
    largest share of this activity is attributable to traditional C
    corporations. So an important takeaway here is most businesses
    are small, most business activity, whether in corporate form or
    pass-through form, is in big businesses.
        It is not the case that pass-through businesses equal small
    businesses, and that is one takeaway that you all should get
    from today. There are many types of large pass-through
    businesses, well-known companies, pipelines, accounting firms,
    law firms, that engage as pass-through businesses and are not
    really a small business.
        When we look at who owns pass-through businesses, we see a
    similar fact. Most pass-through businesses are small, owned by
    taxpayers of modest means, but the largest and most profitable
    are owned by very high income tax payers, and just one takeaway
    here is about two-thirds of the income of S corporations and
    partnerships accrues to the top 1 percent of the income
    distribution. So a tax cut for large pass-throughs is a tax cut
    for the top 1 percent.
        And a final point I want to make today is when you look at
    base broadening as part of tax reform, that affects both the
    tax base of corporate taxpayers, traditional corporate
    taxpayers, and pass-throughs. And so it is a difficult
    balancing act to say what are we going to do if we broaden the
    tax base, lower the corporate rate, what happens to pass-
    through businesses compared to today? Left untouched, they
    would have a slightly higher, or a larger tax burden.
        However, there are some specific steps you can take, and
    Ms. Nellen referred to a couple of these, that would provide
    simplicity for smaller businesses and lower their tax burden
    essentially giving you a double benefit for smaller businesses,
    and these are things like expanded cash accounting and expanded
    expensing.
        I want to thank you all for your attention today. I would
    be happy to take your questions.
        [The prepared statement of Mr. Mazur follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Risch. Thank you very much. Mr. Reardon--we will
    now have a round of questions. Mr. Reardon, you made a
    reference that I would like you to maybe put a little meat on
    the bones. You made reference to expense deductions and the
    limits on them that should be expanded, that is limits should
    be withdrawn or raised or something like that.
        Mr. Reardon. Mm-hmm.
        Chairman Risch. Did I pick that up correctly?
        Mr. Reardon. Yes.
        Chairman Risch. What were you referring to there? Could you
    do a--just----
        Mr. Reardon. I think under current law, there is Section
    179, which allows businesses to expense immediately capital
    investments up to a certain level.
        Chairman Risch. I see. Okay. So you are talking about
    capital expenditures.
        Mr. Reardon. Capital expenditures.
        Chairman Risch. Okay.
        Mr. Reardon. And most of the proposals that are out there
    would either increase that limit or simply move to pure
    expensing, so that, you know, if businesses invest in, you
    know, equipment, inventory, et cetera, they could write it off
    immediately. I think the House plan includes real estate and
    other things as well. So it is very dramatic in the ability of
    companies to write off immediately what they are investing in.
        The Tax Foundation, just today, put a nice blog post up,
    talking about the economic benefit of that, and I think the Tax
    Foundation argues that moving towards expensing is actually
    more beneficial to the economy than a significant rate
    reduction in C corporations. It is pretty powerful stuff.
        Chairman Risch. And is that--is the advocacy for that small
    businesses as well as large businesses?
        Mr. Reardon. So I used to work at the National Economic
    Council, back in 2003, when we were cutting taxes, and we went
    around the country talking to businesses, and that is when we
    were doing the 50 percent bonus depreciation in expanding the
    expensing opportunities for businesses. And what I found was
    that while most businesses would take expensing if they could
    get it, it is the non-public sector, it is the private
    companies that really seem to value it more, and I think that
    is because they do not have access to the capital markets, cash
    flow is much more of a challenge to smaller businesses than it
    is to larger businesses. And so the ability to go out and buy a
    piece of equipment, write it off immediately, start getting
    returns on that equipment before you have to start making, you
    know, real payments, real cash outlays, is a significant
    advantage to that.
        Chairman Risch. I understand the argument and I subscribe
    to that argument. I suspect somewhere along the way they are
    going to find some example that somebody that should be paying
    taxes will not be, because they are able to do this, perhaps
    even on an ongoing basis, and that will cause people's hair to
    catch on fire around here, has been my experience.
        Mr. Reardon. Yeah, I think the House has run into that with
    the blueprint, where, you know, they are moving from an income
    tax base to a cash flow tax base, and yet people in there are
    analyzing the plans to look at it as if it is income. Well, why
    are you not paying taxes if you have income? Well, it is a
    different base, and so you have to look at it differently.
        Chairman Risch. Thank you very much. Senator Shaheen.
        Senator Shaheen. Thank you, Mr. Chairman, and thank you all
    for your thoughtful testimony.
        I recently talked to New Hampshire Small Business Person of
    the Year, a man named Jake Reder, who is the CEO of Celdara
    Medical, which is an innovative biomedical company in Lebanon,
    New Hampshire, and right now Jake's firm pays Federal taxes but
    it also pays taxes in New Hampshire, Maryland, New York City,
    New York State, and Massachusetts. And Jake said, ``This is not
    about paying less taxes. This is about spending less time and
    energy on taxes and knowing we are doing them right.'' I
    thought that was a very--that comment reflected what I hear
    from other small businesses.
        So you all have suggested some ways that we might simplify
    the tax code. Can you also talk about how much of the burden on
    small businesses is the result of having to comply with
    multiple jurisdictions, and if there are any ways that we could
    encourage states and local governments to help small businesses
    with filing their taxes. As we think about what we need to do
    here, what else should we be looking at?
        Chairman Risch. Jump ball.
        Ms. Nellen. Okay. Thank you. You are getting at the point
    of certainty and people would like to have certainty, because
    having this sense of doubt, did I do it correctly, is costly in
    many ways, because you have the risk of error, plus sometimes
    you might not do a transaction because you might not feel
    confident you know what the answer is. So it can be costly in
    many ways.
        As far as simplification, I think many things that AICPA
    has been promoting for some time, keeping and expanding the use
    of the cash method of accounting; expensing, so you do not need
    to keep records in expense, I think, as widely as you can. Yes,
    expensing does primarily benefit those with high capital needs,
    you know, equipment and all of that. We have a lot of service-
    based businesses today as well. But the simplification of the
    expensing, that would include the startup costs, organizational
    costs, an increasing of the 179. We know we just expense it.
    That makes it easy to not worry about how to classify for
    depreciation purposes. That all goes away.
        Repeat of the AMT, because you are just doing extra
    calculations. There is extra record-keeping. You have separate
    record-keeping for, you know, any NOL you had, the passive
    activities, and just trying to explain to the small business
    owners, just trying to pay their taxes correctly, why they
    thought they were going to get a deduction for something, and
    then they did not because it is not allowed for AMT and they
    owe AMT. And obviously a lot of pass-throughs and sole
    proprietors are paying AMT and it is just a confusing state,
    and a lot of time involved in dealing with the AMT as well.
        I think making sure there is sufficient guidance, you know,
    some way that, you know, we know that, you know, IRS the
    resources to provide the guidance for items. We have actually
    seen that where, you know, changes come up and we actually
    sometimes saw the initial instruction from the IRS was actually
    in the instructions to the forms, when it really should be in
    regulations with public comment first, many times. So that can
    delay, and then you are asking your practitioner, ``How do I
    use, for example, this credit--research credit against my
    payroll tax?'' The practitioners, like we do not have all the
    guidance yet, yet it is time to file the return and take
    advantage of that.
        Senator Shaheen. Right. And one of the things that we know
    is that the resources available to the IRS are significantly
    less than they were 10 or 20 years ago, in terms of the ability
    to respond to phone calls and to actually provide that kind of
    guidance.
        Let me go to another question, because when we last updated
    the tax code in 1986, there were approximately 4 million women-
    owned businesses. Today there are more than 11.3 million women-
    owned businesses. They represent about 38 percent of all firms
    in this country. But there are institutional barriers,
    especially in our tax code, that really affect women-owned
    businesses.
        There was a report that was done by the American
    University's Tax Policy Center, and it showed that Congress and
    the Administration do not have sufficient information about how
    the tax code treats women-owned firms in order to put in place
    reasonable policies that would encourage them to grow.
        Can any of you comment on what you have seen in this area?
        Mr. Reardon. Sure. I think it is part of the good-news
    story that we have seen since 1986. You know, the big reform in
    1986 was that it brought down top rates on pass-through
    businesses, down to, and actually, at that time, below where
    the C corporate rate was, which is the reverse of where it was
    before. Prior to 1986, C corps paid significantly less, and
    most business activity was under the C corp structure, which
    was not a good thing because the C corp structure is not a very
    efficient structure with a double tax.
        What it meant was that people would set up C corps, they
    would try to stick as much income as they possibly could in the
    C corps, and then they would try to figure out ways to get
    value of the C corp without having to pay the second layer of
    tax. There was a lot of gaming going on. And the beauty of the
    pass-through structure is that it eliminates that gaming. You
    know, you make money, you pay the tax when it is owed, and then
    that is it. You can do whatever you want with the earnings
    after that, and you do not have to worry about the tax
    consequences.
        And the net result of that, we saw an explosion in the
    number of LLCs and in S corporations. It just made
    entrepreneurship easier, and which meant that you had an
    opportunity for, you know, people of all genders to go out and
    start businesses. It reduced the barrier to starting a business
    significantly, and the net result is you have a bigger business
    community today than you did back then.
        Senator Shaheen. Well, except that one of the contentions
    in this report is that what we have in our current tax code are
    institutional barriers to those women-owned firms. So I do not
    know. Does any--Mr. Mazur.
        Mr. Mazur. I think this is just an area where additional
    research and work could be done. This is an area where I
    think--you mentioned the IRS has been under-funded. The IRS has
    an opportunity to do research on the tax information that there
    is and determine what the barriers are, and then essentially
    propose either legislative changes or administrative changes to
    address those barriers. But given kind of a lack of funding,
    that never gets to the top of the to-do list for the agency.
        Senator Shaheen. Thank you all.
        Chairman Risch. Senator Kennedy.
        Senator Kennedy. Thank you, Mr. Chairman. Can you hear me
    okay?
        Tell me--I want to talk about a solution in a second but
    first I am going to talk about the problem. How did we get the
    worst tax code in the world? Anybody.
        Mr. Reardon. Well, I will start. By sitting still. Back in
    1986, when we last reformed the code, we brought the corporate
    rate down form the high 40s down to 35 percent. At the time,
    that was one of the lower tax rates in the developed world. I
    think the average for the OECD at that time was about 44
    percent. Today the average for the OECD is down in the low 20s,
    I believe. We are still at 35. So we have been----
        Senator Kennedy. Before or after the exemptions?
        Mr. Reardon. Those are the marginal rates, but even when
    you look at effective tax rates, when you take those into
    account, we are still at the very high end of the worldwide
    average.
        So we have been sitting still, both on rates and also this
    idea of, you know, there is this concept of, you know, now we
    have a worldwide tax system. We tax, you know, our businesses
    on their earnings wherever they are made. Most countries in the
    last 10, 15 years have moved to a territorial system. England
    did. You know, 10 years ago, England, the UK had the same
    problems we did. They had inversions. They had companies moving
    overseas. They were losing out to other countries, in terms of
    when companies were up for sale, or you had competition in
    markets.
        They completely revamped their rates. They cut their rates
    down. They moved to territorial, and now companies are moving
    to the UK, not away from the UK. So we sat still; everybody
    else got busy reforming their tax code.
        Ms. Nellen. We also added more rules to the law since 1986,
    of multiple--added more rules, you know, multiple education
    provisions, just retirement plans, a child credit. So
    additional rules, we have to figure out what those mean, so
    that adds to the complexity as well.
        Senator Kennedy. Okay.
        Mr. Mazur. I just think one thing, as Brian mentioned, if
    you look at the 1986 Tax Reform Act, that was where the U.S.
    actually reformed its tax system and got to a reasonably good
    place. The 30 years since then, essentially, we have been going
    the wrong direction, adding a number of special interest
    provisions to the law that are complex, hard to navigate, and,
    as Brian pointed out, having--keeping our tax rate--corporate
    tax rate higher.
        So instead of broadening the tax base and lowering the
    rate, we have been narrowing the tax base and keeping the rate
    higher, and it just means that in a complex world where there
    is lots of globalization, companies and their advisors take
    advantage of many of these opportunities or mismatches, and it
    makes it incredibly complex for everybody to comply with.
        Senator Kennedy. Secretary Mnuchin testified the other day,
    in our Banking Committee, and I asked him what he thought about
    going to the companies overseas that have made money, but if
    they bring it back, under our--what I will call our non-
    territorial system of taxation--if they bring it back they have
    got to pay tax on it. I asked him what he thought about the
    idea of going to them and giving them an incentive, a lower tax
    to bring it back, and then using that money for infrastructure.
    He was polite but he did not seem to think that was too good of
    an idea.
        I kind of like it. What do you think about it?
        Mr. Reardon. I do not really get into the spending side of
    things. I am more on the tax side of things, so I will leave
    the----
        Senator Kennedy. Well, a tax exemption is an expenditure.
    You are aware of that.
        Mr. Reardon. It is not collecting tax that you might
    otherwise receive. That is correct. But I am a big believer in
    the idea that, you know, until we take it from somebody it is
    their money, right?
        Senator Kennedy. I agree with you. Radical. Radical.
        Mr. Reardon. Yeah. Radical. Yeah. You know, the first time
    we did repatriation was when I was at the NEC, and the White
    House was divided on it. I think, at the end, we did not
    support it. I personally, you know, I would much rather that
    the companies have full access to this money by bringing it
    back, you know, and you have to put air quotes around that
    because sometimes the money is right here in a U.S. bank. It is
    just not in the bank account of the parent rather than the
    subsidiary--and have full access to that, and be able to do
    whatever they want with it, and there is concern, well, maybe
    they will just pay dividends to their shareholders. Well, fine.
    They will give it to the shareholders and the shareholders put
    it in the bank, and then it is available to somebody else to do
    stuff with.
        I do not have a problem with that, but I do know that, you
    know, we do need to eliminate the incentive for companies to
    make money overseas and then just sit on it overseas. It makes
    no sense. We need to move away from the worldwide system.
        Chairman Risch. I think the division has kind of
    disappeared here. Most people want to bring it back. The
    problem is, what do you do with it when you get here.
        Senator Kennedy. Yeah.
        Chairman Risch. As Senator Kennedy suggested, the people
    who want it for infrastructure are interested in that, but I
    have heard at least--that it has been spent six times and it
    has not even shown up yet.
        Mr. Reardon. Yes. Right.
        Chairman Risch. I am sorry I cut into your time, Senator
    Kennedy. Go ahead. Senator Kennedy, you are still up.
        Senator Kennedy. I think I am over, Mr. Chairman. Thank you
    for your time.
        Chairman Risch. All right. Thank you. We appreciate it.
    Those are good thoughts.
        Senator Booker.
        Senator Booker. Thank you very much, Mr. Chairman. I am
    blessed to hold a seat from somebody that is kind of a
    political hero of mine, Bill Bradley, and I am really proud of
    the work he did in 1986. But since then, we have screwed things
    up, remarkably, and you all put it right. We have seen a lot of
    special interest groups come in here, narrowing our tax base,
    keeping it where it was, which is the highest corporate tax
    rate, as far as I know, on the planet Earth, and it is
    ridiculous. And you have some businesses paying extraordinary
    taxes, others who have had great lobbyists come down here and
    champion ways to create loopholes, have effective tax rates of
    zero.
        And, you know, I, like many of my colleagues, have come
    from local government or being governors, where you do not have
    the privilege of doing the kind of games we play here. You have
    got to balance your budget every single year, and create
    reasonable tax policy.
        And I represent, before I came to the Senate, a poor city,
    struggling, population was decreasing for 60 years, its tax
    base was disappearing. We had to figure out a way, through a
    storm, and effectively we were just as bankrupt as the Federal
    Government is, and we made tough decisions.
        I actually challenge that. I wonder if my colleagues can
    beat this, but I do not think anybody in the United States
    Senate right now has cut government more than I had to do, the
    painful, gut-wrenching cuts, but we cut my government 25
    percent, but we also strategically raised taxes.
        I watched, in astonishment as the first time in the history
    of our Nation we went to an expensive war and we cut taxes at
    the same time, creating massive deficits. I could not
    understand why basic economics did not work here, that you have
    got to pay for what you do.
        And so I think tax policy here has been screwy and the
    American people are paying for it, and we cannot compete now
    with our global competitors who make strategic investments that
    we do not make anymore. They are out-America-ing America.
        If you look at the World Economic Forum, they said that
    this country was the best competitive democracy--we were the
    best leading up until recent time. We were the best in
    investing in our infrastructure. China and Europe outdo us now.
    We were the best in investing in education. Now other countries
    are outperforming us in education. We were the best investing
    in research and development. Heck, private sector gains in this
    country, just the device I am holding, all comes from battery
    life, touch screen, GPS, all from government strategic
    investments that fueled our economy.
        And so it is outrageous to me that we still have philosophy
    controlling our government and our tax policy here, and not
    what actually works. And who is suffering from it? Small
    businesses in my city of Newark and my State.
        And so, Mark--I have now lectured too long, but I would
    like for you to just respond to something to me that was a
    philosophy that was put in place that just did not work. I
    would like to submit, for the record, a New York Times article
    on the so-called Kansas Experiment, where you have folks with
    their philosophy coming in and saying, ``Let us cut all
    taxes.'' Massive tax cuts. The cumulative cut was $3.9 billion,
    biggest of any State.
        And I just want you to comment in the minute and a half I
    have left you, Mark, you know, when you have this--what was the
    result of this experiment, in terms of just--because I wish we
    could get back to a pragmatic, basic balance sheet analysis of
    how to run this country, because we are running it really
    irresponsible now, but how to create growth, how to create
    opportunity, how to create jobs. Can you talk about how the
    Kansas Experiment, based on philosophy, went tragically wrong,
    and your thoughts on it?
        Mr. Mazur. Sure. So I think just some of the facts on the
    Kansas Experiment. In 2012, Kansas reduced its individual tax
    rates across the board, but it reduced its taxes on pass-
    through businesses to zero, from 5 or 6 percent to zero.
    Predictably, what happened is you got more pass-through
    businesses, but you got way less in revenue, because ordinary
    taxpayers created a pass-through business to shelter some of
    their income. Whether you were an accountant or a sports coach,
    or whatever you could do, you would put your activity in a
    limited liability company and claim that you were tax exempt.
        And so the situation in Kansas was you reduced a lot of the
    investments that they made, across the board in education,
    infrastructure, and so on, to the point where I think the
    Kansas citizens thought that was a bad tradeoff. They would
    prefer to have slightly higher taxes and better services--
    better education, better infrastructure, better health care,
    better public protection.
        Senator Booker. So I will end with just this statement. But
    whatI failed to mention was the growth of that statement.
        Mr. Mazur. Oh, if you compare to other states, neighboring
    states, Kansas is not as good as the neighboring states. So you
    have almost a natural experiment there.
        Senator Booker. And so I am a pro-growth guy. I want this
    economy to grow, and I just want to point to Kansas as an
    example that we have to start thinking of a balance sheet
    analysis of our country--where we should be investing, how we
    should be doing this, to create growth, and a country that does
    not invest in infrastructure, that does not invest in science
    or technology, who does not invest in education, is not going
    to grow compared to what our competitor peers are doing. We
    have got to find the right balance. Taxes are too high--I will
    admit that--but we have got to find the right balance and focus
    on jobs, because that is what people want, at least my
    constituents in New Jersey. They want jobs, economic growth,
    and opportunity.
        Thank you very much.
        Mr. Reardon. Can I----
        Chairman Risch. Thank you, Senator Booker, and we will
    include that article in the record.
        Senator Booker. Thank you.
        [The article follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Risch. Senator Inhofe.
        Senator Inhofe. Thank you, Mr. Chairman. You know, I came
    from the House to the Senate in 1994, so I have been hanging
    around here for, what 22, 23 years. And I always remember,
    because my House district was in primarily just a metropolitan
    area. It was primarily Tulsa, Oklahoma. And so I got in my
    little plane and I started going out West, and I remember the
    first trip was to Shattuck, Oklahoma. I do not think there is
    anyone in this room who has ever been to Shattuck, Oklahoma, or
    ever heard of Shattuck, Oklahoma.
        But that was when I had my rude awakening of the reality of
    what really is important. We are a farm State. We are a rural
    State, Oklahoma, and in Shattuck I can remember a guy, and,
    John, he had tears in his eyes, and he was talking about how
    his farm has been in their family for so many generations and
    all that, but they were going to lose it. They were going to
    lose it because of the death tax, the inheritance tax.
        Since that time--that has been over 20 years--I cannot go
    into any of our rural areas and have a meeting without that
    rising as the number one issue. I mean, over and above
    everything else it always does. It surfaces. And I think we
    know the arguments there, that, you know, it is an immoral tax,
    we have already paid money on that, and all that.
        So, you know, I would kind of like to get an idea of what
    you think about that. What would be the effect--the President
    now has in his budget to eliminate that tax. What would be the
    results of that, do you think?
        Mr. Reardon. I think, particularly for family businesses
    and large family businesses it would be significant. I think
    there is an under-appreciation for how much of American
    economy, how much employment is based in family controlled
    businesses. We just put out a study, based on the 2704 regs,
    that Treasury proposed back in August, to highlight the
    contribution of family controlled businesses. It is
    significant.
        Senator Inhofe. It is.
        Mr. Reardon. And the reality is that if the business is
    large enough, they have to go and buy back a certain portion of
    that business from the Federal Government every generation that
    it survives. Public companies do not have to do that. And what
    that means is that their planning for succession is just a
    continuous process. You know, some of our they have got, you
    know, hundreds of family members who are shareholders in these
    companies and they are just continuously planning for
    succession, succession, succession. And what that means is that
    they are draining off revenue from the company, not to go buy
    boats or do something like that. They are certainly not hiring
    or building the business. They are doing it just to pay the tax
    that they know is going to come due the next generation.
        Senator Inhofe. Any other thoughts on that? That is really
    a significant thing, and anymore, that is the only question I
    get when I am in rural areas, in terms of tax policy.
        Another one I keep hearing, and fortunately I do not mean
    this offensive to anyone, but I am glad that Obama is gone and
    the war on fossil fuels is officially over, I hope. So when
    people are talking about the various deductions that are out
    there as maybe a way to pay for some of this stuff, I like to
    bring up the intangible drilling costs and the expensing of
    that.
        You know, I have heard, and I have heard their arguments,
    and you folks probably have some thoughts on this too, that it
    really is not going to have any positive effect in
    accomplishing--if you are doing it for the purpose of
    offsetting some of the other deductions by doing away with
    that, until you are against a rate of 20 percent or less, and,
    of course, the chances of that happening are very remote.
        Any thoughts on that particular thing? That is the number
    one concern, the deduction of the intangible drilling costs for
    the oil and gas industry.
        Mr. Reardon. Sure. I appreciate that that is a priority for
    the industry. I cannot speak directly to that. I can say that,
    you know, sort of one of the positive aspects of this
    discussion right now is that we seem to be moving towards
    faster cost recovery, not slower cost recovery, which would,
    you know, suggest that they would preserve that maybe and
    enhance it.
        One of my complaints with the Kemp draft that came out
    several years ago, we worked with them extensively, was that,
    you know, after all the work that they put into it, at the end
    of the day the cost of capital under their plan was higher.
    That is, the cost of investing in the United States was higher
    than it was under the existing code. So they did all that work
    to reform the tax code and they made it more expensive to
    invest in the United States.
        In my mind, that is the bottom line measure. I mean, either
    we make it so that companies and investors want to invest here
    and want to create jobs here, or we have failed, and, you know,
    eliminating or making it more difficult to recover your costs
    is not going to move in the correct direction.
        Senator Inhofe. That is a good argument. Ms. Nellen, you
    were talking a little bit about the complicated system that we
    have, and I have always thought of that as being discriminatory
    against small businesses. They cannot afford to have the
    resources to handle the complicated system, and, consequently,
    they do not do a lot of the expanding and normal things that
    they would be doing.
        Has anyone ever put together a study to determine just what
    we are losing by--with this overly complicated system that is,
    in my opinion, discriminatory against small business?
        Ms. Nellen. There probably have been studies and certainly,
    you know, the data that was mentioned here, about the number of
    hours spent on complying, you know, the National Taxpayer
    Advocate talks about that if they put that into an industry it
    would be like the sixth largest industry in the country, so far
    as the compliance. So that is one way to quantify what is lost
    on that.
        I think, also, the time they are spending. AICPA has been a
    long-time advocate of simplification, and sometimes people
    might wonder, well, is not that against your interests?
        Senator Inhofe. Yeah, because you guys that are CPAs, you
    know, you make it simpler and they do not need you as much.
        Ms. Nellen. Well, but I think you would--we would use our
    resources to help them grow their business. So I think it is
    looking at what they are losing in compliance as well as what
    they are losing by not being able to spend that money on
    someone that can help them to grow and make their business more
    effective.
        Senator Inhofe. Thank you.
        Chairman Risch. Thank you very much, Senator Inhofe. I
    doubt the CPAs are worried that we are going to put them out of
    business.
        Senator Inhofe. No, and I will tell you what surprises me.
    I know a lot of CPAs. I have not met one CPA that does not want
    it simplified. I always kid them, and I say, ``Oh, you do not
    really want that. You know, why do we need you?''
        Ms. Nellen. Well, it is also risk of complexity too, risk
    of getting the wrong answer for a client, and all that.
        Senator Inhofe. Yeah. Good point.
        Chairman Risch. Senator Heitkamp.
        Senator Heitkamp. Thank you, Chairman Risch and Ranking
    Member Shaheen for holding the hearing. North Dakota is a small
    business State. Small firms account for 96 percent of
    businesses and they employ over 200,000 workers, spanning a
    variety of industries, including farming, manufacturing, and
    health care services.
        When we talk about tax reform, I believe we should start
    and end the conversation on how it is going to affect small
    businesses in America. That makes sure we are simplifying
    compliance, and including the right mix of tax incentives for
    entrepreneurs to take risk and innovate and grow. I think most
    importantly, we should be doing tax reform in a bipartisan way
    so that we have a lasting structural change to the code that
    can provide small firms with the certainty they need to grow
    their business.
        I do not think there is any doubt about it. I think, just
    kind of for the record, I used to be on the other side of this.
    I was actually North Dakota State Tax Commissioner for six
    years, and before that I was a tax attorney, and I just want to
    point out one thing, Mr. Reardon. Interestingly enough about
    the President's budget, where he professed to eliminate the
    estate tax, he kept the revenue from it. I do not know how that
    works, but it certainly would make you scratch your head, would
    it not?
        Mr. Reardon. Yes, on many things.
        Senator Heitkamp. The other thing I want to just point
    out--the other thing I do want to point out is the basis
    adjustment that would go with elimination of the estate tax,
    and the need to actually have an honest conversation with small
    businesses. A farmer in my State may actually find the basis
    adjustment to be more onerous by having to take it at a basis
    which their grandfather held that property, might be more
    onerous to them, looking forward, than actually an estate tax
    liability. And so we need to be really careful about how we
    approach the estate tax. But that is neither here nor there.
        I am interested in the definition of what is a small
    business for tax reform purposes. Can anyone want to take that
    challenge?
        Mr. Mazur. So there is no obvious definition that is in the
    tax code where you can look and say here is a small business.
    But if you just look at the distribution of businesses across
    the spectrum, you would probably land somewhere around $10
    million gross receipts, maybe a little more, but not a lot more
    than that. And that really would be sort of the smaller, not
    quite mom-and-pop, but bigger than mom-and-pop business, but
    not a giant business, by any stretch of the imagination.
        Senator Heitkamp. There are varying definitions, whether
    based on the number of shareholders, number of--dollar amount
    of assets. One thing I also want to point out, as far as what
    the dollar amount is, it is--I would say it is actually
    probably more than $10 million. But something also to bear in
    mind, some places in the law, where we actually, years ago,
    defined a small business, those dollar amounts are not adjusted
    for inflation.
        For example, under Code Section 448, that $5 million
    threshold for when a C corp can--has to move on to an accrual
    method, that is about $11 million today if it was inflation-
    adjusted. So I think we also have to factor in any dollar
    amount we come up with, it should be inflation-adjusted so it
    can remain relevant for--continue to help small business.
        Mr. Reardon.
        Mr. Reardon. Yeah. I think any effort to sort of draw a
    bright line is going to be necessarily artificial. So, for
    instance, you know, Mark's $10 million threshold, you know,
    what is the difference between a company that makes $9 million
    and a company that makes $11 million? Do they behave
    differently? Are they managed or governed differently? Not
    really.
        Plus, if you do a revenue threshold----
        Senator Heitkamp. Well, Koch Petroleum, maybe under your
    definition, would be a family held business. Are they a small
    business?
        Mr. Reardon. No. They are not a small business, but they
    are family held, and that gets to my point, which is, I think
    the one bright line that is out there is the distinction
    between public companies and private companies, because public
    companies do, in fact, behave differently than private
    companies do. They have different regulatory obligations. They
    have access to markets that private companies do.
        So in my mind, you know, I think there is a reason why, for
    instance, NFIB, the big small business group in town, is called
    the National Federation of Independent Business, not the
    National Federation of Small Business. It is because private
    companies are distinct from public companies, and I would draw
    the line there.
        Senator Heitkamp. Yeah. I just think that we need to be
    really careful. I mean, I want--I think we all can recognize
    that at a certain level, incentivizing behavior, incentivizing
    investment is a goal of all of ours in helping small businesses
    grow, helping especially family owned small businesses grow.
    But at some point we cross the line, whether it is Cargill,
    whether, you know, Hess. I mean, I can give you any number,
    especially in the oil and gas industry, which I am well
    familiar with, where you would not consider them small business
    but they are independent businesses.
        I want to just associate myself with Senator Shaheen's
    comments about compliance costs. I think it is something that
    maybe Jean and I sometimes feel lonely in our caucus, talking
    about this, because I think if you have never done this the way
    I have, you have no understanding or appreciation for the
    complexities. And I would maintain today that without tax
    preparation software, it would be really hard for a small
    business or for even a sole proprietor, filing a Schedule C, to
    actually file their own tax returns.
        How do we solve that problem without--just for a minute,
    you know, when you look at the social engineering and the cost
    of providing tax benefits, which incentivize behaviors, which
    is another way of expenditure of Federal money, right? We would
    all agree tax expenditures are included in the challenges that
    we have, and there has been a recent report saying tax
    expenditures are not exceeding regular expenditures on domestic
    policy.
        And so, you know, we understand that there is a whole lot
    of public policy that is embedded. How do we unravel that
    history to get to a rate and a formula that is simple and that
    is fair?
        Yeah, Mark.
        Mr. Mazur. I think the example of the 1986 Tax Reform Act
    was one that is instructive there, that, at that time, in a
    bipartisan way, Congress and the Administration made a huge
    effort to get as many of the special provisions out of the tax
    code as they could, in an effort to lower rates. But you need
    to do something like that. It is almost a Herculean effort but
    it takes a lot of people working together to make those
    tradeoffs.
        Senator Heitkamp. Annette, have you seen any proposal out
    there that you say, ``There is something everybody can get
    behind?''
        Ms. Nellen. As far as a tax reform, I think probably bits
    and pieces, but, again, it is probably a work in process.
        One comment I want to make is also we should not forget how
    technology might help on some of the compliance. You had
    mentioned before about the multistate compliance. You know,
    technology would help sometimes, perhaps, the tax agency needs
    that upgrade in the technology as well, to help the
    practitioner be able to use the technology that is out there.
    That could streamline a lot of the compliance and the cost.
        Senator Heitkamp. Brian.
        Mr. Reardon. So your comment about, you know, technology is
    right on point. I think without, you know, sort of TurboTax and
    the other software out there we would have a taxpayer revolt. I
    know I could not do my taxes without it.
        I do not have any specific, kind of other than, you know,
    sort of one of the reasons why, you know, we have been pushing
    for sort of rate parity in terms of the top rate, and not just
    for businesses but for individuals, and also if you eliminate
    the double tax on corporations you could have dividends and cap
    gains all at the same rate. If every type of income paid the
    same top rate, you could eliminate dozens and dozens and dozens
    of sections of the tax code, and you would make the tax
    compliance, the tax forms so much shorter, for people with that
    type of income, because it would not matter anymore if, you
    know.
        Right now, you know, one of the things we struggle with is
    this idea that, you know, people who own S corps and work there
    can have their income look like profits as opposed to wages,
    and they save some--you know, they save their HI taxes. Right?
    And it is a huge problem, and it is something we struggled
    with.
        Well, if you did not have that differential, you would not
    have that issue, and you would not have to do the enforcement
    and all the other stuff. You would not have to have all the C
    corp, you know, personal holding company rules. You could
    eliminate all that stuff. But it would just be by, let us
    decide what the rate is--I do not care, 28, 30, whatever the
    rate is--and let us apply that to all the income, and we could
    eliminate--I guarantee you you could eliminate half of the tax
    code.
        Senator Heitkamp. Mr. Chairman, just with your indulgence,
    I once asked a farmer if he would agree to a 2 percent rate per
    gross receipts--not profitability but just gross receipts, 2
    percent. He said, ``Sounds like a good idea.'' I said, ``Tell
    that to Wal-Mart.'' Right? Because obviously Wal-Mart operates
    on a very small margin. And so the complexity of American
    business makes this so much harder, and I think it is going to
    take good-thinking people, at this table and hopefully at
    podiums like this, to come up with that dialog and to do the
    back-and-forth. And the frustration that I have is that I do
    not--I mean, I see a lot of pie in the sky and not a lot of
    hard work.
        So thank you, Mr. Chairman, for indulging me the extra
    minutes.
        Chairman Risch. Yes. That is no problem, but let me say
    this. In our caucus, that is a lonely position when you are
    arguing for compliance costs, and we have more room, just in
    case----
        [Laughter.]
        Thank you so much, Senator Heitkamp. Good remarks.
        Senator Shaheen, I know you have to be excused to go to
    another meeting. Did you have any remarks you wanted to make?
        Senator Shaheen. No. Just thank you all very much and I
    think it has been a good discussion, and hopefully--the
    challenge I think we have is making sure, as there are serious
    discussions about tax reform, that small businesses are at the
    table, and that is what this committee is here to try and make
    sure, and why we appreciate your voices, so that we can carry
    with us the changes that need to happen to support small
    business.
        Thank you.
        Chairman Risch. One of the purposes--before you leave,
    Senator Shaheen, one of the purposes of this meeting is the
    fact that people are actually starting to talk about tax reform
    at this point. Even though we do not have the first problem
    behind us, they are moving to another one. And, you know, the
    big businesses, there is an army of lawyers in this town that
    are going to represent them at the table, and it is going to be
    up to us, on this committee.
        So we are looking for practical suggestions, and we are
    also looking to prioritize the kinds of things that we need to
    insist are going to be in any tax reform that will help small
    businesses, because the voice for small business is probably
    going to come out of this committee more so than anywhere else,
    and I can assure you this is not a partisan issue. This is a
    bipartisan issue, and Senator Shaheen and I will be working on
    that together. So Senator Shaheen, thank you.
        Senator Duckworth, welcome.
        Senator Duckworth. Thank you. Thank you, Mr. Chairman. I
    too am worried about tax reforms for small businesses, to make
    sure that they also get a part of any type of an effort.
        Mr. Mazur, as you noted in your testimony, more and more
    businesses are choosing to structure themselves as S corps.
    There are many benefits that come with this choice. Liability
    protection and avoiding double taxation. These benefits allow
    small businesses to use capital to hire workers, buy new
    equipment, invest in long-term growth.
        But, unfortunately, pass-through entities are not limited
    to just these Main Street companies, small businesses. Certain
    large businesses that employ hundreds of workers earning
    millions of dollars of profits each year can also be structured
    in this way.
        According to a Washington Post article from August 10 of
    last year, 2016, the Trump organization is made up of over 200
    pass-through entities, all of which enjoy the same Federal tax
    benefits as the mom-and-pop small business owners that I
    represent.
        My question is, how can we make sure that small- and
    medium-sized businesses are receiving the benefits of the S
    corp and pass-through structures provided while making sure
    that large entities such as the Trump organization are paying
    their fair share?
        Mr. Mazur. That is a difficult area, and you have to--it
    involves a number of tradeoffs. Basically, you want to treat
    similarly situated businesses in a similar manner. Typically,
    what we do is we do not look at the size of the organization
    but we look at the income of the organization to determine what
    the tax liability should be. Under current law, we have
    partnerships, LLCs, and S corporations that are pass-throughs,
    and they get taxed at the individual level.
        What has happened over the last three decades is it has
    become easier for larger businesses to set themselves up as a
    pass-through organization, either through legislation that
    Congress has passed, or through State organizational laws, or
    even just through technology, where investors are much more
    comfortable dealing with a 1,000-person partnership than they
    were 30 years ago. So you can have larger businesses in there.
        I think that is one of the things that Congress should
    address, that we just make sure--we should make sure that we
    are aware small business does not equal pass-through business,
    as you say, and make a conscious choice of what policies we
    think are helpful. For smaller business, it seems to me things
    like simplification, in terms of additional access to cash
    accounting, or checkbook accounting is a plus for small
    businesses. Greater expensing limits for capital equipment
    helps them avoid dealing with depreciation and maintaining
    basis of these assets. Those are things that can help small
    businesses actually grow and take away some of their
    complexity. It is probably a step in the right direction.
        Senator Duckworth. Thank you. Ms. Nellen, Chicago is one of
    the largest and most densely populated cities in the United
    States. I represented, when I was in the House, one of the
    largest concentrations of tool-and-die manufacturers in the
    Nation, was in my little congressional district. We had many,
    manufacturing businesses who have skilled job openings to this
    day. In fact, the American Manufacturing Association has said
    that the largest, greatest impediment to them gaining in market
    share is actually access to a skilled workforce.
        At the same time, Chicago and Cook County saw the largest
    population loss than any other county in 2016, with
    unemployment being one of the reasons cited as to why people
    were leaving. This is a dichotomy, particularly troubling as
    Illinois has one of the highest unemployment rates among black
    and brown communities, in particular.
        And so from your extensive experience working with tax
    policy, are there specific tax provisions on the books that you
    would add to incentivize STEM education, technical training,
    hiring of veterans, economically disadvantaged, and those who
    have committed a criminal offense, to allow them to re-enter
    society? Let's take advantage of that workforce that is not
    getting the training that they need. Are there any tax
    incentives you can come up with that would help with that
    educational process?
        Ms. Nellen. Yes. In the line with education provisions and
    the AICPA has commented on mainly the complexity of all of
    those, but, so, yeah, as part of tax reform that would be one
    big area, certainly, to look at, because it is a lot of
    complexity. It is benefiting, actually, for higher education,
    why just higher education so far as college education. If you
    are talking about a skilled workforce that perhaps does not
    need a college education but needs advanced education, perhaps
    if the education credits stay they should be more broadly
    focused on preparing people for jobs out there, as opposed to
    only subsidizing higher education.
        But the whole realm of education provisions does need to be
    simplified, and yes, it would absolutely be a benefit to small
    business if they had a better assurance of seeing a skilled
    workforce available that they can hire in a local area.
        Senator Duckworth. What do the manufacturers do if the
    average starting salary of someone on their assembly line,
    because they are such highly technical manufacturing businesses
    is $60,000, which is a pretty good salary to making for someone
    without a four-year university education. I have run out of
    time. I yield back, Mr. Chairman. Thank you.
        Chairman Risch. Thank you very much, Senator.
        Well, thank you to our witnesses for being here. As I said,
    our charge here, I believe, is to represent small businesses as
    we wade into this, when small businesses will not have the
    voice that some of the larger businesses do. We are committed
    to do that. We want to hear ideas about it. For that reason, we
    are going to keep the record open for another couple of weeks
    for you, or anyone else, really, to provide us with their
    thoughts on how we ought to do this as we wade into tax reform.
        So with that, thank you again, everyone who participated,
    and with that the hearing will be adjourned.
        Ms. Nellen. Thank you.
        [Whereupon, at 4:12 p.m., the Committee was adjourned.]

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