Text: S.Hrg. 115-101 — TAX REFORM: REMOVING BARRIERS TO SMALL BUSINESS GROWTH
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[Senate Hearing 115-101]
[From the U.S. Government Publishing Office]
S. Hrg. 115-101
TAX REFORM: REMOVING BARRIERS TO SMALL BUSINESS GROWTH
COMMITTEE ON SMALL BUSINESS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
JUNE 14, 2017
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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
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,
Reardon, Brian, President, S Corporation Association, Washington,
Mazur, Mark J., Director, Urban-Brookings Tax Policy Center,
Washington, DC................................................. 37
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.
Prepared statement........................................... 39
Responses to questions submitted by Chairman Risch........... 78
Prepared statement........................................... 6
Responses to questions submitted by Chairman Risch........... 70
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
Article titled ``Finally, Something Isn't the Matter with
TAX REFORM: REMOVING BARRIERS
TO SMALL BUSINESS GROWTH
WEDNESDAY, JUNE 14, 2017
United States Senate,
Committee on Small Business
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
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.
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
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.
TESTIMONY OF ANNETTE NELLEN, CHAIR, AICPA TAX EXECUTIVE
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-
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:]
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Chairman Risch. Thank you very much. Mr. Reardon.
TESTIMONY OF BRIAN REARDON, PRESIDENT, S CORPORATION
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
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:]
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Chairman Risch. Thank you very much.
TESTIMONY OF MARK J. MAZUR, DIRECTOR, URBAN-BROOKINGS TAX
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
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
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:]
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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
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
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
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
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
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. 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,
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
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
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
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
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
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 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. 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
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
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
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
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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