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

                                                       S. Hrg. 115-101




                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP
                          UNITED STATES SENATE


                             FIRST SESSION


                             JUNE 14, 2017


    Printed for the Committee on Small Business and Entrepreneurship


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                    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
          Skiffington E. Holderness, Republican Staff Director
                 Sean Moore, Democratic Staff Director
                            C O N T E N T S


                           Opening Statements


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


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.

                       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 
    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.


    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 
    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 
    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.


    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 
    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 
    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 
    [The prepared statement of Ms. Nellen follows:]
    Chairman Risch. Thank you very much. Mr. Reardon.


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

                         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 
    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:]
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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:]
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    Senator Heitkamp. Annette, have you seen any proposal out 
there that you say, ``There is something everybody can get 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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.]