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94–158 2015

TAX REFORM: ENSURING THAT MAIN STREET 

ISN’T LEFT BEHIND 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

APRIL 15, 2015 

Small Business Committee Document Number 114–008 

Available via the GPO Website: www.fdsys.gov 

SBREP-219 with DISTILLER


Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

STEVE CHABOT, Ohio, Chairman 

STEVE KING, Iowa 

BLAINE LUETKEMEYER, Missouri 

RICHARD HANNA, New York 

TIM HUELSKAMP, Kansas 

TOM RICE, South Carolina 

CHRIS GIBSON, New York 

DAVE BRAT, Virginia 

AUMUA AMATA COLEMAN RADEWAGEN, American Samoa 

STEVE KNIGHT, California 

CARLOS CURBELO, Florida 

MIKE BOST, Illinois 

CRESENT HARDY, Nevada 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

YVETTE CLARKE, New York 

JUDY CHU, California 

JANICE HAHN, California 

DONALD PAYNE, JR., New Jersey 

GRACE MENG, New York 

BRENDA LAWRENCE, Michigan 

ALMA ADAMS, North Carolina 

SETH MOULTON, Massachusetts 

MARK TAKAI, Hawaii 

KEVIN FITZPATRICK, Staff Director 

STEPHEN DENNIS, Deputy Staff Director for Policy 

JAN OLIVER, Deputy Staff Director for Operation 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Steve Chabot ................................................................................................... 1 

Hon. Nydia Vela ́zquez ............................................................................................. 2 

WITNESSES 

Mr. Scott Lipps, Owner, Sleep Tite Mattress Factory, Franklin, OH, testifying 

on behalf of the National Federation of Independent Business ....................... 4 

Mr. Pete Sepp, President, National Taxpayers Union, Alexandria, VA .............. 7 

Mr. Dan McGregor, Chairman of the Board, McGregor Metalworking Companies, Springfield, OH, testifying on behalf of the S Corporation Association 

of America ............................................................................................................. 8 

Eric Toder, Ph.D., Institute Fellow, Urban Institute, Co-Director, UrbanBrookings Tax Policy Center, Washington, DC ................................................. 10 

APPENDIX 

Prepared Statements: 

Mr. Scott Lipps, Owner, Sleep Tite Mattress Factory, Franklin, OH, 

testifying on behalf of the National Federation of Independent Business ................................................................................................................ 28 

Mr. Pete Sepp, President, National Taxpayers Union, Alexandria, VA ...... 32 

Mr. Dan McGregor, Chairman of the Board, McGregor Metalworking 

Companies, Springfield, OH, testifying on behalf of the S Corporation 

Association of America ................................................................................. 48 

Eric Toder, Ph.D., Institute Fellow, Urban Institute, Co-Director, UrbanBrookings Tax Policy Center, Washington, DC .......................................... 53 

Questions for the Record: 

None. 

Answers for the Record: 

None. 

Additional Material for the Record: 

AEO - Association for Enterprise Opportunity .............................................. 68 

AICPA - American Institute of CPAs .............................................................. 73 

CFETR - Coalition for Fair Effective Tax Rates ............................................ 91 

IFA - International Franchise Association ..................................................... 97 

Letter from Hon. Orrin Hatch, Chairman, Committee on Finance, United 

States Senate, and Paul Ryan, Chairman, Committee on Ways and 

Means, U.S. House of Representatives ....................................................... 99 

WIPP - Women Impacting Public Policy ........................................................ 101 

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(1) 

TAX REFORM: ENSURING THAT MAIN STREET 

ISN’T LEFT BEHIND 

WEDNESDAY, APRIL 15, 2015 

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, Washington, DC. 

The Committee met, pursuant to call, at 11:00 a.m., in Room 

2360, Rayburn House Office Building. Hon. Steve Chabot [chairman of the Committee] presiding. 

Present: Representatives Chabot, Luetkemeyer, Rice, Gibson, 

Brat, Knight, Curbelo, Bost, Hardy, Vela ́zquez, Chu, Hahn, Meng, 

and Moulton. 

Chairman CHABOT. The Committee will come to order. 

Good morning. I want to thank everyone for being here. A special 

thanks to our witnesses, who have taken time away from their undoubtedly busy schedules to be with us. Today is the day that nobody looks forward to, except maybe the IRS, Tax Day. I expect 

most of us have already filed our returns while struggling to figure 

out our liabilities and deductions and credits. We do this all the 

while trying to discern what, exactly, the terms ‘‘adjusted basis’’ 

and ‘‘imputed interest’’ mean and sifting through a myriad of instructions or even the most basic of tax returns. Without question, 

the middle of April can be miserable for a lot of us. Taxpayers face 

a tax code that has become intensely complex and truly temporary 

with tax relief being extended for one year, months at a time, or 

even retroactively sometimes. 

America’s 28 million small business owners, taxpayers themselves, repeatedly complain that this uncertainty has made it difficult to plan and grow their companies. In fact, a recent survey by 

the National Small Business Association found that the pure complexity of the tax code is actually a more significant problem for 

America’s small businesses than the overall tax liability. Imagine 

that. Businesses are so fed up with not knowing what to do and 

how to do it that they care less about what they have to pay the 

IRS. Unfortunately, the current U.S. tax code has become one of, 

if not the most significant hurdles to the growth of existing businesses and creation of new firms. 

But it does not have to be that way. Over the past few years, 

there has been a renewed effort in Congress to reform our tax code 

to make it easier, fairer, and more stable. Here in our Committee, 

we are working to identify the aspects of the code that are most 

troublesome to small business formation. We have already held 

hearings, met with trade associations, and most importantly, we 

have talked with our constituents back home. The message we hear 

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2 

is always the same. We have got to make it simpler, and flatter, 

and fairer. And taxpayers want Congress to enact changes in the 

code earlier in the year, or better yet, make certain beneficial tax 

provisions permanent so they can plan ahead. Unfortunately, 

Washington usually does things at the last minute or even makes 

changes sometimes retroactively. 

Another critical aspect of the tax reform debate is making sure 

we are not leaving Main Street behind. Some people may not realize that the vast majority of small businesses in the United States 

are organized as pass-through entities, meaning they pay no corporate income tax. Instead, business profits are passed through to 

the owner or owners to be reported and taxes paid on their individual returns. Our entire tax system needs to be revamped, not 

just half of it. 

There is no doubt that we must reform our corporate tax structure. We have the highest corporate income tax rates in the industrialized world, but as our Committee has identified numerous 

times before, our small businesses are the backbone of our economy. They create 70 percent of the new jobs in this country and 

represent over 99 percent of all employers in the United States. Because so many of these enterprises file and pay their taxes on their 

individual return, we cannot, and must not, ignore them as we 

move forward with any tax reform debate. 

It is time for Washington to get serious about helping American 

families and small businesses. It is not just about helping them 

keep more of their hard-earned money, as important as that is, but 

about making April 15th not such a nightmare. Nobody likes to pay 

taxes, but the convoluted system we have now is simply too much 

of a burden. Reforming our tax code in its entirety will unleash the 

true potential of our economy. Our constituents deserve better than 

the mess Washington has given them. 

Again, I want to thank each of our witnesses for taking the time 

to be with us today, especially my constituent, Scott Lipps, who is 

from Franklin, Ohio, which is in the First Congressional District, 

my district, and another Ohioan, Dan McGregor. And we will do 

further introductions in a few minutes, but I would now like to 

yield to the ranking member, Ms. Vela ́zquez, for her opening statement. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. And I, too, want 

to thank all the members of the panel for being here, especially Dr. 

Toder, our witness. 

Spurred largely by Main Street growth, the American economy is 

as strong as it has been in years. However, our nation has also 

managed to outgrow many tax policies. For small firms, these outdated and increasingly complex provisions create an obstacle to 

success, rather than a means of fostering expansion and job creation. This committee is well aware of the challenges created by 

the Internal Revenue Code and the major complications it has on 

business planning. 

Modernizing our code to reflect new business reality will assist 

in providing simplicity, fairness, and permanency to businesses of 

all sizes. The last major reform of the code took place in 1986, making an overhaul long overdue. 

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3 

But we cannot go forward without input from small business 

owners. These entities are a vital part of that equation as they are 

responsible for most new job growth and business income. As such, 

they are a major part of our economy, and an important aspect of 

today’s discussion, but too often, their tax reform concerns are lost 

in broader debates. Today’s hearing will allow us to start a dialogue between the small business community and policymakers regarding the best tax policies supporting the success of small firms. 

They are the drivers of the nation’s economy, and we cannot afford 

to put the cost of collecting taxes on them, which is what a corporate-only approach will do. It is clear that small businesses can 

thrive and continue to improve our economy if we approach tax reform in a comprehensive manner, rather than a piecemeal approach. Comprehensive reform will have immediate benefits for 

small businesses, while also serving our nation’s economic objective 

of promoting pro-growth policies. 

Focusing reform efforts to a complete overhaul of the code ensures the small business community no longer has to worry about 

keeping up with constant tax changes. It also guarantees small 

business owners will not be the cause of lowering corporate rates 

alone. Such an approach also reflects the growth of tax reform simplicity, certainty, and fairness. 

I stand committed to working in a bipartisan way to revise policies that stifle entrepreneurship and innovation. A real opportunity 

exists to implement long-lasting reforms, and doing so will have 

immediate benefits for small businesses. 

With that, Mr. Chairman, I yield back. 

Chairman CHABOT. Thank you very much. The gentlelady 

yields back. 

If Committee members have opening statements, we would ask 

that they submit them for the record. 

And I will just briefly explain the five-minute rule, which is you 

get five minutes. We will give you a little bit of leeway there. But 

there is a lighting system. The yellow light will come on when you 

have a minute to wrap up, and the red light, we would ask you to 

wrap up as close to that as possible. As I say, there is a little flexibility. 

And I would now like to introduce our panel. I will begin with 

our first witness this morning. Our first witness will be Scott 

Lipps, who is the owner of Sleep Tite Mattress Factory in Franklin, 

Ohio. He happens to be a constituent, as I mentioned before, in the 

First Congressional District. Scott started a business manufacturing institutional mattresses in 1989, and after four successful 

years, he and his wife, Debbie, and their five employees, merged 

with Sleep Tite, a company that was founded in 1947. Now producing both institutional and home bedding, Sleep Tite has grown 

to 18 total employees. In addition to running Sleep Tite, Scott also 

served for 15 years on the Franklin City Council and two terms as 

the city’s mayor. 

Scott, thank you for being here today. 

And our second witness will be Pete Sepp, who is the president 

of the National Tax Payers Union. In this role, he leads the NTU’s 

government affairs, public relations, and development activities. He 

also oversees the research and educational operations of the NaSBREP-219 with DISTILLER

4 

tional Tax Payers Union Foundation. He has been with the NTU 

since 1988. He received his degree in History and Political Science 

from Webster University, and we thank you for your testimony 

here shortly. 

And our third witness is Dan McGregor, chairman of the board 

of McGregor Metalworking Companies in Springfield, Ohio. Also a 

Buckeye. Dan started his career with Morgal Machine Tool. Machine Tool Company in 1968, the first of the McGregor Metalworking Companies. Dan worked with other family members and 

created five different business units, focusing on six metalworking 

specialties. In June 2010, Dan retired as president of McGregor 

Metalworking Companies and now serves as Chairman of the 

Board. He graduated from Lehigh University in 1965 and served 

three years in the Navy, and we thank you for your service to our 

country. And thank you for being with us today. 

And I will now yield to the ranking member to introduce our 

fourth witness. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

It is my pleasure to introduce Dr. Eric Toder. He is an institute 

fellow at the Urban Institute and co-director of the Urban Brookings Tax Policy Center. Mr. Toder previously held a number of positions in tax policy offices in the U.S. government and overseas, 

including serving as deputy assistant secretary for Tax Analysis at 

the United States Treasury Department, director of Research at 

the IRS, and deputy assistant director for Tax Analysis at the Congressional Budget Office. He is the author and co-author of numerous papers on tax policy, tax administration, and retirement issues. 

Welcome to the committee. 

Chairman CHABOT. Thank you very much. The gentlelady 

yields back. 

And we will now go to our witnesses. And Mr. Lipps, you are recognized for five minutes. 

STATEMENTS OF SCOTT LIPPS, OWNER, SLEEP TITE MATTRESS FACTORY; PETE SEPP, PRESIDENT, NATIONAL TAXPAYERS UNION; DAN MCGREGOR, CHAIRMAN OF THE 

BOARD, MCGREGOR METALWORKING COMPANIES; ERIC 

TODER, INSTITUTE FELLOW, URBAN INSTITUTE, CODIRECTOR, URBAN-BROOKINGS TAX POLICY CENTER 

STATEMENT OF SCOTT LIPPS 

Mr. LIPPS. Good morning, Chairman Chabot, Ranking Member 

Vela ́zquez, and members of the Committee. I am pleased to be here 

on behalf of the National Federation of Independent Business 

(NFIB). 

Our family owns Sleep Tite Mattress Factory and Showroom and 

has been a member of NFIB since 1995. I also currently serve on 

the NFIB-Ohio Leadership Council. Thank you for holding today’s 

hearing, ‘‘Tax Reform: Ensuring that Main Street Is Not Left Behind.’’ The current tax code negatively impacts small and closelyheld businesses in several important ways, so I appreciate the invitation to be here today to discuss these important issues from the 

perspective of a small business owner. 

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5 

The NFIB is the nation’s leading small business advocacy organization. The typical NFIB member employs about 8 to 10 employees 

with annual gross receipts of about $500,000. All of NFIB’s members are independently owned, which is to say none are publiclytraded corporations. While there is no one definition of a small 

business, the problems NFIB members confront, relative to tax 

code, are most representative of small businesses. A few consistent 

concerns are raised regardless of the trade or industry in which the 

small business is engaged. 

As part of representing small business owners, NFIB frequently 

conducts surveys of both NFIB members and small business population as a whole, and taxes consistently rank as one of their greatest concerns. In the most recent publication of the NFIB Research 

Foundation’s Small Business Problems and Priorities, 5 of the 10 

small business concerns are tax-related. In fact, the February 2015 

Small Business and Economic Trends report ranks taxes as the 

number one problem small business owners currently face. Right 

now, taxes are a bigger problem than poor sales, the cost and quality of labor, and government regulation. 

I would like to spend the rest of my time telling you about my 

personal experience. Sleep Tite Mattress Factory and Showroom 

was founded in 1947, by Stan Rothman. In 1990, our family founded an institutional (acute and long-term care) bedding company, 

HomeCare Mattress. In 1992, we merged HomeCare and Sleep 

Tite. We started with four employees and now have 15 full-time 

employees. We are currently structured as a C corporation, but we 

started as a pass-through. While oftentimes a struggle, we are very 

proud to offer our team members health insurance, a 401K program, paid sick leave, paid vacation time, and more benefits. Aggressive tax rates and compliance efforts directed to fulfill intrusive 

regulations severely impact our ability to offer this full-time benefits package that our employees need and deserve. 

We are proud of Sleep Tite Mattress Factory. We think you 

would be, too. As I mentioned, we strive to offer our team members 

a positive work environment that offers a learning experience, the 

ability to make decisions, career opportunities, and full benefits. 

Beyond that, we believe community involvement is critical. Small 

businesses are the ‘‘fabric of the community.’’ For example, across 

America, you will find small businesses sponsoring school plays, 

pee-wee football teams, cheerleading squads, and church youth 

group programs. The list goes on. The small business owner works 

in the community, lives in the community, and hires in the community. Sleep Tite Mattress has been recognized by our schools for involvement and won our area Chamber of Commerce Business of the 

Year Award in 1999. That makes us feel good. What makes us feel 

even better is seeing our employees grow and build their lives and 

stay with our company for years. To serve our employees and community, we must have lower tax rates, fewer regulations, and a 

less confusing, less complex tax code. 

We have been in business in our community for over 24 years. 

I witnessed and experienced what punitive local, state, and federal 

laws were doing to the business community in Franklin, so in 1999, 

I did something about it. I ran for city council and won a seat. 

After encouraging a few fellow business owners and business peoSBREP-219 with DISTILLER

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ple to run for council, I was honored to serve as mayor for two 

terms. We concentrated on fixing problems a bloated bureaucracy 

and out-of-touch government had levied on our city. 

Our council addressed local incentive programs that unfairly assisted large corporations but did not offer incentives to small business. We instituted a ‘‘Downtown Improvement Program’’ (DIP) 

that offered grants and low interest loans to small businesses locating or expanding within our community. We met with local zoning, 

planning, and building officials and redesigned zoning laws to assist businesses with fewer or less restrictive regulations. For example, sign ordinances and requirements. Not every small business 

person can run for elected office. Instead, Congress should work to 

reform our tax code in order to help small businesses get back to 

doing what they should be doing—running their small business. 

Over 85 percent of NFIB members agree that Congress should fundamentally reform the tax code. 

As Congress considers tax reform, I would encourage you to keep 

these most important goals in mind. Achieving these goals will 

greatly enhance the ability of small and closely-held businesses to 

thrive in the 21st century—permanently keep the tax rates low, do 

not create disparity between the corporate rate and individual rate, 

reduce complexity, and not separate the business owner from the 

business. NFIB members are willing to make tradeoffs necessary to 

lower taxes, such as reducing or eliminating deductions, credits, or 

exclusions. 

Should Congress enact comprehensive tax reform that achieves 

these goals, small business owners would no longer face one of 

their most consistent complaints—arbitrary and inconsistent tax 

preferences, constant change, and complexity in the current federal 

code. 

Small businesses truly are the engine of economic growth. This 

is not just a slogan, as small businesses created two-thirds of the 

net new jobs over the last decade. Small business owners are risktakers and entrepreneurs. They are the last businesses to lay off 

employees when business declines, and slow to rehire when business picks up. The owners work additional hours until they can 

take it no more. When small businesses hire an employee, it is 

their intent to keep them for the long run. 

The current tax code has become a confusing and unpredictable 

challenge for the vast majority of small business owners. Our tax 

laws should not deter or hinder the ability of small business owners to create or expand their business. Taxes are a major issue for 

all small business owners. Tax law can dictate the business decisions an owner must make, whether it is the type of structure to 

adopt, whether to make an investment in programs or machinery, 

to expand their facility, or to hire employees. 

After decades of patchwork changes, Congress needs to make 

major adjustments to our tax laws to reduce the complexity and 

confusion of business growth. I appreciate Congress taking a serious look at reforming the tax code and urge you to keep in mind 

the unique challenges that face small businesses. 

Thank you for having me here today, and I am happy to answer 

any questions. 

Chairman CHABOT. Thank you very much. 

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7 

Mr. Sepp, you are recognized for five minutes. 

STATEMENT OF PETE SEPP 

Mr. SEPP. Mr. Chairman, Madam Ranking Member, Members of 

the Committee, National Tax Payers Union (NTU) is honored to 

have been invited to this hearing. And I could discuss at length 

very technical changes to the tax laws itself to go on and on about 

rates and bases and JCT scores and econometric analyses, but I 

want to focus my brief remarks here on one issue—administrability. 

To us, with the tax laws as they affect small businesses, administrability means reducing complexity in the system that businesses encounter every day. It also means increasing the access to 

justice that businesses have should they find themselves in a dispute with the IRS. 

One interesting statistic about the complexity costs that small 

businesses face—I give a number of them in my testimony—but the 

National Association of Manufacturers determined that for businesses with fewer than 50 employees, the burden per worker of tax 

compliance alone is more than 50 percent higher than all other 

businesses. It is a regressive burden, and it is a costly burden. 

What we want to do here is try to identify the areas of the tax 

code that are the most complex for small businesses and legislate 

in those areas accordingly. There are some instructive studies here 

that I think could help us. 

One that was taken by the IRS Statistics of Income Division, 

measuring the tax compliance burden of small business, identified 

areas of business activity and tax return activity where businesses 

encountered unduly harsh burdens of time or money. Those were 

things like using the accrual accounting method, having foreign operations, filing returns in multiple states, keeping records for alternative minimum tax liabilities, completing an end-of-year inventory 

to comply with various tax requirements. These are areas where 

Congress needs to focus its attention in simplifying the law. How 

do we do that? Well, I think that for one, foreign operations of businesses need to be scrutinized with an eye towards reducing the 

number of forms and instructions. The Taxpayer Advocate’s office 

has the astounding statistic that there are for U.S. businesses conducting economic activity abroad, 43 publications with 1,212 pages 

referring to other publications with over 13,000 additional pages, 

1,500 pages of forms. No small business can possibly shoulder a 

burden like that without the owner just throwing up his hands saying ‘‘why bother to expand abroad?’’ And yet that’s precisely what 

we want small businesses to do—conduct more activity abroad. 

I will confine the remainder of my remarks to a very important 

and overlooked topic, and that’s taxpayer rights in the appeals 

processes and the special problems that small businesses encounter. We heard hearing after hearing back in the 1980s and 1990s 

from businesses that were literally shut down just by the audit procedure itself. They simply could not conduct their operations while 

the IRS was going through their records. We enacted laws, especially a very comprehensive one in 1998, to try to improve the appeals process, give businesses more opportunities to remain selfSBREP-219 with DISTILLER

8 

supporting during the examination and the appeals and collection 

process. We need to make modifications to those laws now. 

There is a set of proposals introduced on the Senate side by Senator Cornyn, called the Small Business Taxpayer Bill of Rights. 

This has some improvements to the current laws, such as introducing alternative dispute resolution to the process for appealing 

audits. This would be a fantastic tool. It would be lower cost. It 

would be a quicker resolution. And it would help to address some 

of the problems that the taxpayer advocate herself has identified 

in the examination process. She is saying, for example, that examiners, revenue officers, are not being given the latitude to make offers and compromise and approve them with businesses in audit 

situations quickly enough. The businesses end up suffering, the collection activities go on, and ironically, the government hurts itself 

because these businesses are basically dissolved under tax problems and they’re on longer contributing to the Treasury. That 

serves no one’s interests. 

In short, ensuring that Main Street does not get left behind 

means ensuring that the tax system does not crush the entrepreneurial spirit. And that entrepreneurial spirit is not something you 

find when a small business owner confronts the rates and bases 

and minutia of the tax system. It is what they confront when they 

face hours upon hours, thousands upon thousands of dollars trying 

to fill out tax returns, and the very real fear that if the IRS questions an item on that return, they might as well pay up rather 

than fight it, even if they think they are right, because the expense 

to them personally and to their business is just too great. We have 

to change that situation. We came together in a bipartisan fashion, 

not only in 1986, but in 1998, with the IRS Restructuring and Reform Act. Let us do it again. NTU and its members are ready to 

assist in that task. 

Thank you. 

Chairman CHABOT. Thank you very much, Mr. Sepp. 

Mr. McGregor, you are recognized for five minutes. 

STATEMENT OF DAN MCGREGOR 

Mr. MCGREGOR. Chairman Chabot, Ranking Member, and 

other Members of the Committee. Thank you for the opportunity to 

testify here today. I recognized my timeliness when my cab driver 

asked me this morning if I had paid my taxes. And he went on to 

complain about his taxes. 

Chairman CHABOT. The ranking member asked me the same 

thing when I got up here. 

Mr. MCGREGOR. This year is the 50th year—— 

Chairman CHABOT. And I did, by the way. 

Mr. MCGREGOR. This year is the 50th anniversary of McGregor 

Metalworking. 

Back in 1965, my family purchased a small eight-man tool and 

die shop. Today, we employ 375 workers in four locations in 

Springfield, Ohio, and one in Aiken, South Carolina. These are 

good-paying manufacturing jobs in areas that need them. 

Our business is contract metal forming, and our major customers 

are in transportation, auto, lawn and garden, and agriculture. 

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9 

In support of my written testimony, I would like to accentuate 

the following important points. First, pass-through status is essential for a family-owned business. In 1986, we changed from C corp 

to S corp. This change fit our desire to grow our business and still 

be able to reward our shareholders. Last week we had our semiannual family shareholder meeting where we reviewed the results 

of 2014 and our plan for 2015. This is important so that the shareholders understand the impact of their pass-through earnings on 

their tax filing, recognizing that when the earnings are reported, 

they have to pay their taxes and pay estimates the following year. 

Second, lower taxes mean higher retained earnings allowing the 

company to grow. After the big recession of 2008 and 2009, we 

were faced with two bank covenants—a requirement tying debt 

service to free cash flow, and a cap on our total debt to equity. 

Taxes play an important role here since our ability to retain earnings is limited by how much tax we pay. Prior to 2013, we paid 

about 34 cents of every dollar to cover shareholder taxes. Today we 

pay about 42 cents. This is a huge increase and it limits both our 

ability to borrow and our ability to increase employment. In my 

business, $30,000 in retained earnings can mean the addition of a 

new job. 

Third, the R&E tax credit. Because our business is technical in 

nature, we rely on the R&E tax credit to develop new processes. 

Some of our shareholders are unable to use this credit because of 

the alternative minimum tax. Changing that rule to allow taxpayers under the AMT to get the R&E tax credit would fix that. 

The total elimination of AMT would be even better. 

Fourth, the estate tax. The 2012 increase in the estate tax exemption to $5 million was a positive step for closely-held businesses, but any family that grows their business beyond this exemption must constantly make this part of their business strategy. 

Often, this is contrary to the best interest of the business and the 

family members. Transition of ownership in privately held businesses is never easy and the estate tax is often the death knell of 

family business continuance. 

And finally, tax return. Our family business started 50 years ago 

and has become a significant employer in our community of 65,000 

people. The population of Springfield is gradually declining and 

needs jobs to help retain citizens. Tax reforms that incentivize 

business growth and retention are essential to our community. 

So I will close with three recommendations for tax reform going 

forward. A, it should be comprehensive and improve the tax treatment of pass-through businesses and corporations alike. B, parity 

should be restored for the top rates paid by pass-through entities 

and corporations. And C, it should reduce or eliminate the double 

tax paid by C corporations. 

Reform that follows these principles would help McGregor Metalworking and other employers in our area continue to succeed and 

create jobs. 

Thank you, Mr. Chairman and ranking member for this opportunity to testify. I look forward to answering any questions. 

Chairman CHABOT. Thank you very much. 

Dr. Toder, you are recognized for five minutes. 

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STATEMENT OF ERIC TODER 

Mr. TODER. Thank you very much. 

Chairman Chabot, Ranking Member Vela ́zquez, and Members of 

the Committee. Thank you for inviting me to appear today to discuss the effects of tax reform on small business. The views I am 

expressing are my own and should not be attributed to the Tax Policy Center or to Urban Institute, its board, or its funders. 

There is a growing consensus that our current system of taxing 

business income needs reform and bipartisan agreement on some 

main directions of reform, although not the details. The main drivers for reform are concerns with a corporate tax system that discourages investment in the United States, encourages U.S. companies to retain profits overseas, and places some U.S.-based companies at a competitive disadvantage. At the same time, the corporate 

tax raises relatively little revenue compared to other countries, 

misallocates scarce capital by providing selected preferences to favorite assets and industries, and allows some U.S. multinationals 

to pay very low tax rates by shifting reported profits to low tax 

countries. No one is happy with this state of affairs. 

President Obama’s framework for corporate reform shares important features with the tax reform proposal introduced last year by 

former Ways and Means Chairman Dave Camp. Both would reduce 

the corporate tax rate, pay for the lower rate by cutting back major 

business tax preferences, and reform international tax rules. 

Corporate tax reform, however, cannot proceed in isolation from 

the individual income tax system. The base broadening needed to 

pay for a lower corporate rate would affect all businesses, including 

pass-through entities that pay no corporate income tax but instead 

report income to their owners who pay individual income tax. A reform that pays for a corporate tax rate cut by reducing business tax 

breaks will raise taxes on these business owners. Businesses affected include partnerships, subchapter S corporations, and sole 

proprietorships. Many of these are small businesses. Tax reform 

proposals therefore must address the concerns of small business 

owners. 

A large and growing number of U.S. businesses are organized as 

pass-through entities. In 2011, 95 percent of U.S. businesses were 

either sole props or pass-throughs and received 38 percent of business receipts. Most partnerships in S corps are small businesses, 

but 95 percent of their net income and business receipts comes 

from large and mid-size businesses with assets greater than $10 

million. 

Pass-throughs are taxed more favorably than taxable corporations because they face only a single level of tax, where profits from 

taxable corporations face both the corporate tax and the individual 

tax when companies pay dividends or shareholders receive capital 

gains. A lower corporate rate would create a more level playing 

field between corporations and pass-throughs. 

Less than 4 percent of individual taxpayers who receive most of 

their income from business are in the two highest tax brackets. 

These taxpayers receive 65 percent of business income, but much 

of this does not come from small businesses. A broader tax reform 

that reduced marginal tax rates and eliminated tax preferences, 

which I might prefer for both individuals and corporations, need 

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not raise taxes on pass-throughs, but to maintain revenue and distribution on neutrality, such a reform would have to cut back on 

popular tax preferences, such as the deductions for home mortgage 

interest, charitable deductions, state and local taxes, and the exemption of health insurance premiums from tax. Even then, as in 

the Camp proposal, an additional surtax at the highest incomes 

might be required to meet the revenue and distributional targets. 

Congress should shield most businesses from the adverse effects 

of business-only tax reform through targeted relief. This might include extending and expanding the higher section 179 expensing 

limits that expired at the end of 2014, or increasing the width of 

the 15 percent corporate rate bracket. A special tax rate for passthrough income, however, would create unequal treatment between 

high income individuals with business income and those with labor 

compensation, and would create market distortions as businesses 

seek ways to compensate highly paid employees as independent 

contractors and engage in other transactions to recharacterize income. 

In conclusion, the corporate tax reforms now under discussion 

raise concerns about the treatment of pass-throughs, many of 

which are small businesses. These concerns are best addressed 

through targeted relief for truly small businesses instead of general 

tax rate cuts for income from pass-throughs, and I would point out 

some of these forms of relief, like expensing, would also be a major 

simplification. 

Thank you. 

Chairman CHABOT. Thank you very much, Dr. Toder. And I 

would like to thank all the panel for their excellent testimony here 

this morning. And now the members of the Committee will have 

five minutes to ask you questions. And I will begin with myself recognized for five minutes. 

Scott, let me begin with you. You mentioned the NFIB’s recent 

Small Business Problems and Priorities survey and that 5 out of 

the top 10 concerns in that survey relate to taxes. Could you talk 

a little bit about where taxes fall on your list as a business owner 

and how that has changed over the past 25 years that you have 

been in business? 

Mr. LIPPS. Well, the most important part to us is we are only 

15 employees. We do not have a compliance officer to assist with 

taxes. So just keeping up with the code and investing—we have to 

hire outside help. So that is an expense to the corporation that the 

tax burden is creating. So a less confusing regulation would allow 

us to continue to offer more benefits, for example. 

I mean, I was very proud to tell you we offer a full range of benefits. We even have paid healthcare for our employees. We have paid 

sick time, paid vacation, but our 401K, something had to give, and 

jobs are so important to us that we no longer can match. So, example. If we were not paying or fighting an aggressive tax code or a 

confusing tax code, I think we would be able to do things like restore our match to the 401K. 

Chairman CHABOT. Thank you very much. 

Mr. Sepp, I will go to you next. At a hearing that we conducted 

last month, we focused a lot on the fact that for the last six years, 

the number of business deaths, or businesses going out of existSBREP-219 with DISTILLER

12 

ence, small businesses, has outpaced the number of business 

births. And apparently, that is the first time in American history 

according to what we were told. This is a very troubling statistic. 

Do you feel that the problems with our tax code could be a factor 

in the fact that we do see businesses going out of existence more, 

you know, dying than rising? 

Mr. SEPP. Oh, I definitely think so. In the metaphysical sense, 

we have businesses thinking about the burdens of complexity, not 

only at the federal level but even at the state level in complying 

with taxes. That is not really something that Congress can deal 

with, but it is a consideration in every business owner’s everyday 

operations. But even in the more practical narrow sense, there may 

be an issue with the IRS’s own collection procedures here in that 

the taxpayer advocate has noted several times that all too many 

cases involving small business tax debts are being thrown into the 

automated collection system rather than being kept at levels where 

there might be an efficient resolution to the problem to keep the 

business self-supporting. 

So again, we sort of have a bifurcated problem here, one that is 

systemic in terms of how the tax laws are written, and one that 

is operational in terms of how the IRS is approaching resolutions 

with businesses. 

Chairman CHABOT. Thank you. 

Let me turn to you next, Mr. McGregor. 

You also mentioned the death tax in your written testimony, 

Federal Inheritance Tax. We call it the death tax around here now. 

This week we are voting once again on the floor on legislation to 

eliminate it. Your family has had businesses for several generations now. Could you talk a little bit about how the death tax impacts a small business, plans that you make, and how many employees you can hire and what you have to go through in planning 

for that? 

Mr. MCGREGOR. I think the real issue is the extenuation of the 

business down into the next generation. In our particular case, we 

gave stock to the next generation, which may or may not be a great 

idea. It has worked out well for us but we have continually worked 

around this issue and tried to prepare to be able to move it forward. So it is really more of a cost of planning and making a mistake that damages the business. 

Chairman CHABOT. And we have been told for years that the 

two entities that are most directly affected by the death tax are 

small businesses because of the difficulty in passing to the next 

generations and family farms are the two that it affects most directly. 

I am almost out of time, so in the time that I have left here, let 

me just ask the question. We have talked about—I think we are 

probably—it is a bridge too far now, but we have talked about 

going to either a flat tax or a flatter tax. Or to a national sales tax 

and getting rid of the IRS and getting read of income taxes all together. And I would just like to see a show of hands because I do 

not have a lot of time. Can I see how many of you think that we 

ought to go to a flatter or a flat tax? Just a show of hands. Three 

out of four. 

SBREP-219 with DISTILLER

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And how about if we could get rid of income tax and IRS all together and go to a sales tax, can I see how many would be supportive of that? Okay. So I am seeing two of the four there. Okay. 

It is interesting. I appreciate that very much. 

And I will now yield to the ranking member, Nydia Vela ́zquez. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

Mr. Toder, the last time broad based tax reform took place, one 

of the driving principles was tax neutrality. Today, as we move forward on tax reform, there is also concern with the long-term budget; what principles should be included in our effort to overhaul the 

code while also minding current fiscal realities. 

Mr. TODER. That is a very good question. We certainly could 

have a revenue-neutral tax reform that would not address the longterm budget efforts. I think it is difficult. The problem with doing 

that is a true tax reform would cause so many special interests to 

be hurt and so many people would object to it that it is a very hard 

political lift to do without also making some contribution to the 

long-term budget effort. So that is my reservation, but I think that 

would be a positive step to do revenue-neutral tax reform. 

With regard to the long-term budget, you really have to address 

the issue of entitlements and the growth of entitlements and do 

something on the spending side. So I think the revenue probably 

would fall short and we would need more revenue as well, but 

those two things really need to be handled simultaneously. 

Ms. VELA ́ ZQUEZ. Thank you. 

The administration stated that its intention is to lower corporate 

rates from 35 to 28, and 25 for manufacturers. The tax code already has specific provisions for certain industries and sizes of 

businesses, so this idea is nothing new. However, should we be 

moving away from picking winners and losers as we move forward 

to reform the tax code? Is having special tax treatment inevitable 

to ensuring Main Street businesses can compete on a level playing 

field as their larger counterparts. Where do we draw the line? 

Mr. TODER. Well, I think my view is we should have as little 

special tax treatment as possible. And we would be much better off 

with lower tax rates for all forms of businesses rather than trying 

to have the government pick winners and losers. I do not think the 

government is very good at that. 

Some people talk about the research credit, so there might be 

some argument for keeping that, but I am not even necessarily persuaded of that. And there might be some proposals, such as small 

business expensing, which are aimed at the very high compliance 

costs that small businesses face relative to their level of revenue 

or profits. And so I think easing those compliance costs may require—does require some special provisions. But generally, the answer, yes on the level playing field. 

Ms. VELA ́ ZQUEZ. Thank you. 

Mr. Lipps, one of the goals of tax policies is providing business 

owners with certainty when it comes to taxes. Adding to this uncertainty is the ongoing debate on tax reform. What effect does this 

have on your business success? 

Mr. LIPPS. I think it would allow us to become more of the fabric of the community. Any dollars that we have we use to sustain 

the corporation and improve our benefits package. We support our 

SBREP-219 with DISTILLER

14 

local school system. We give our employees, as I mentioned earlier, 

a 401K match back. So I feel like a small business owner has a responsibility to be part of the fabric of their community. Tax assistance, of course, will help us with that. 

Ms. VELA ́ ZQUEZ. If we do not take affirmative action on comprehensive tax reform, what effect will that have in terms of you 

being able to hire, to make business investments? 

Mr. LIPPS. It will limit our ability, and we may have to look at 

other options, like reducing how much we contribute towards our 

company health policy. It will help some small businesses in the 

sense that we have to pay a local tax preparer, so fees are going 

to go up as it becomes more confusing, so the local tax person is 

probably going to say, ‘‘Scott, send a check.’’ 

Ms. VELA ́ ZQUEZ. Thank you. 

I would like to ask this question to each of the panel. Many 

members on this committee have been adamant that comprehensive tax reform legislation get passed this year. I think quick action 

could send an important message to the business community, yet 

there is widespread pessimism that anything will evolve anytime 

soon because some difficult compromises must be made. If we could 

accomplish only corporate tax reform and not individual, is this 

something the small business community could accept? I heard almost all of you saying comprehensive tax reform. Or would you 

rather see nothing get done until a complete overhaul can be completed? 

Chairman CHABOT. The gentlelady’s time has expired but you 

can all answer the question. 

Ms. VELA ́ ZQUEZ. Yes, Mr. McGregor. 

Mr. MCGREGOR. I would rather hold out. I would like to see 

comprehensive. 

Ms. VELA ́ ZQUEZ. Thank you. 

Mr. MCGREGOR. Thirty percent of my competitors are C corporations and I would be at a big disadvantage. 

Ms. VELA ́ ZQUEZ. Mr. Sepp? 

Mr. SEPP. Well, the last thing we want to see is some kind of 

C corp reform effort that severely disadvantages pass-through entities. We might be able to create some kind of safe harbor for passthroughs while the C corp reform is going on. I also think there are 

other reforms that can be made incrementally to benefit both small 

businesses and large ones that would lead toward comprehensive 

reform in the next Congress. I recount some of them in the testimony. 

Ms. VELA ́ ZQUEZ. Yes. But my question was if all we can do is 

corporate tax reform, would you be supportive? 

Mr. SEPP. Not comprehensive enough. 

Ms. VELA ́ ZQUEZ. Mr. Lipps? 

Mr. LIPPS. We are a C. We were a pass-through and we are a 

C now. So removing the individual story, I would say I fear removing the business owner and the small business and causing separation there. 

Ms. VELA ́ ZQUEZ. Thank you. 

Mr. Toder? 

Mr. TODER. I cannot speak for the small business community, 

but I can say that our international and corporate rate structure 

SBREP-219 with DISTILLER

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relative to the rest of the world is so problematic these days that 

I think we have to address those issues. And in doing so, we will 

inevitably affect other businesses and we will have to take some 

measures to deal with that. 

Ms. VELA ́ ZQUEZ. Thank you. 

Thank you, Mr. Chairman. 

Chairman CHABOT. Thank you. The gentlelady’s time has expired. 

The gentleman from Missouri, Mr. Luetkemeyer, is recognized 

for five minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. And thank all 

of you for being here today. I appreciate your testimony. 

I want to start out with a situation. I know that the tax extenders that we passed at the end of last year, you know, we waited 

until the eleventh hour to do that and it is kind of interesting. I 

had one of my constituents who sells a lot of equipment to rock 

quarries and people who are in that business, and he sold five particular pieces of equipment, all the rest of the year, but when we 

passed the tax extenders at the end of the year with accelerated 

depreciation in it, suddenly he sold six more pieces of equipment 

in the last two months of the year. 

What tax extenders are important to you? The first part of the 

question. And the second part of the question is with complex tax 

reform or comprehensive tax reform, will you be willing to give all 

that up if we can go back to a flatter tax? 

Mr. Lipps, let us start with you. 

Mr. LIPPS. We use section 179 small business expenses. I think 

that is a tax extender. We also have the bonus depreciation program we use, so that is important to us. Obviously, section 199. 

I think that tax extenders are critical today because of the current tax code we are living under. However, if you flatten that tax 

code out or do a comprehensive reform that addresses all of our 

measures, I believe that small businesses are much, much—very 

willing to give that up. 

Mr. LUETKEMEYER. Mr. Sepp, what do you see? 

Mr. SEPP. Well, section 179 is obviously very important for 

small businesses. It takes us in the direction of full expensing, 

which should be the ultimate goal of tax reform for all businesses. 

That is probably a long way off, very difficult to achieve. But 

among other extenders, there are only perhaps a handful. The R&E 

is one that comes to mind that would be worth preserving in many 

situations. Here again though, taking them all and trading them 

for rate reduction in a simplified system might be worthwhile. Your 

colleague, Congressman Pompeo had an excellent bill in the last 

Congress to take about a dozen very narrowly drawn energy credits 

and direct the secretary after their repeal to put that into rate reduction. That is an incremental approach we might want to take. 

Mr. LUETKEMEYER. Perfect. 

Mr. McGregor? 

Mr. MCGREGOR. We do use the R&E tax credit and it takes a 

lot of effort to create that data. So it is nice to know in advance 

that it is going to happen, because to do it for a year and not get 

it. 

SBREP-219 with DISTILLER

16 

As far as tradeoffs, that is an expectation. You know. I am not 

a huge bonus depreciation person. We are heavy, you know, heavy 

investment and it can pay off beautifully. And if we have it, it is 

wonderful, but you know, so that would be on the table. 

Mr. LUETKEMEYER. Perfect. Thank you. 

Mr. Lipps, you are representing NFIB today, and quick question 

for you here with regards to, you know, the chairman made reference a while ago to the fact that we have lost more businesses 

in the last several years than we have actually created. And so I 

was wondering if you have an idea of how many businesses were 

lost due to the complexity of the tax code or how many were not 

started. Is there some sort of information out there? That is a pretty nebulous question there but I am just curious if you have seen 

some trends perhaps that you could tell me that were based on the 

tax code. 

Mr. LIPPS. I am usually spending my time trying to run my 

small company and understand the tax code. So NFIB studies the 

numbers. But I would certainly tell you a personal situation. I have 

a daughter who actually asked to sit down in our company and say, 

‘‘How do I resign when my dad is the president?’’ She wanted to 

start her own company. And we found it so much more difficult 

than just 25 years ago. It was so complex for her that we had trouble even helping her do that, and we were so proud she wanted to 

be an entrepreneur, but it is a very difficult and daunting situation 

when you first analyze it. 

Mr. LUETKEMEYER. I think, you know, that is one of the problems that we have is that there are so many disincentives now to 

starting a small business, and the statistics bear it out. When you 

look at the number of businesses that are not being started compared to the ones that are losing, it should send up some alarms 

here. 

Just very quickly, Mr. Sepp, you made a comment a while ago 

with regards to business being able to expand abroad and to use 

tax incentives to do that. Do you have some ideas? 

Mr. SEPP. Well, I think that making the switch to a territorial 

tax system versus the worldwide one we have would be a step in 

the right direction. That is a very comprehensive—— 

Mr. LUETKEMEYER. Do you think if you went to like a flat tax 

that would that be helpful or would that be hurtful? 

Mr. SEPP. That would be helpful in my opinion. There are lots 

of other smaller steps we have to take, but most importantly, even 

if we are to live under the current system, we have got to simplify 

the structure of forms and reporting for smaller businesses that 

have activities abroad. One way we might want to do that is 

through a quadrennial simplification process. That was something 

that was brought up when we were debating the IRS Restructuring 

and Reform Act back in 1998. You bring in a bunch of volunteers 

from the public and private sector to go through the code and the 

regulations, make a list of recommendations, have an up or down 

vote on them. That would be a way to resolve some of this. 

Mr. LUETKEMEYER. Well, it would certainly be great if we 

could simplify the tax code because I know 15–20 years ago I did 

my business’s taxes and it was like eight or 10 pages, and now my 

SBREP-219 with DISTILLER

17 

taxes, I cannot do them any longer and they are at least an inch 

and a half thick. So we need to do something. 

Thank you very much for your testimony. 

Chairman CHABOT. The gentleman’s time is expired. 

The gentleman from Massachusetts, Mr. Moulton is recognized 

for five minutes. 

Mr. MOULTON. Thank you, Mr. Chairman. 

Gentlemen, there is broad consensus on this panel and certainly 

in the room that we need to have comprehensive tax reform. And 

I just want to get at that a little bit more. 

Mr. Lipps, from your position, not just as a small business owner 

but also from your position at NFIB, from your perspective, what 

is holding us back in being able to tackle this issue? And you can 

answer that both in terms of what your view of the problems in 

Congress is but also why is there not more pressure from the small 

business community to really get this done? 

Mr. LIPPS. I think the small business community is so committed to its job to daily making payroll that we—we are not 

protestors. We do not have time. So we do at local town halls when 

Congressman Chabot appears in Franklin, believe me, we ask him 

to help us with this issue. But I really think it is a time factor. If 

we take time away from our company, who is going to do the job 

while we are out trying to fight for tax reform? So sometimes our 

voices may be muffled. 

Mr. MOULTON. That is a good question. 

Is there anyone else who would like to comment on that? Dr. 

Toder, do you have any thoughts in particular? 

Mr. TODER. Well, you know, the tax system is very complicated, 

and changing it is also very complicated. There are many moving 

parts and there are many people who will be affected, some of 

whom will be affected adversely. You get lower rates down by 

eliminating benefits for some groups of taxpayers. They are not 

just small loopholes. They are things like home mortgage interest 

and charitable contributions. And without saying that necessarily 

that is a bad thing to trade off lower rates for eliminating benefits, 

it is not easy to do. 

And I testified at a hearing on the home mortgage interest and 

suggested ways which I thought it could beneficially be cut back, 

and I was not surprised that the total lack of interest from members of the Ways and Means Committee in those ideas. So it is difficult. 

Mr. MOULTON. Mr. Sepp? 

Mr. SEPP. I would say there is a problem of follow through at 

the granular level of small business input about the tax system. 

The taxpayer advocacy panels, for example, that are meeting 

around the United States, take all kinds of suggestions from small 

business owners about everything—how to improve the look of 

forms, the ease of compliance and the like. Some of those are 

adopted by the IRS. Others are cast by the wayside. The same 

thing happens with the Taxpayer Advocate’s Report to Congress. If 

you look through the report cards that follow subsequent to each 

one of those, there are just a whole list of recommendations the advocate made, and the IRS’s responses. More often than not, the IRS 

refuses to implement them. One thing that might be helpful would 

SBREP-219 with DISTILLER

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be for Congress to put policy riders, frankly, and appropriations 

bills instructing the IRS to pay more attention to these recommendations and try to implement them. 

Ms. VELA ́ ZQUEZ. Would you yield for a second? 

Mr. MOULTON. Yes. 

Ms. VELA ́ ZQUEZ. You do not think that budget has any implication in terms of the lack of staff at the IRS? 

Mr. SEPP. I think budget does have somewhat of an implication, 

though I would point out that between 2005 and the present, if you 

take a look at the three major categories of the IRS budget, taxpayer service has been declining at the expense of enforcement and 

administrative costs. So that is a priority problem, too. 

Ms. VELA ́ ZQUEZ. I thank the gentleman for yielding. 

Mr. MOULTON. Thank you. 

Mr. MCGREGOR. Can I just say a word? 

Mr. MOULTON. Mr. McGregor, yes, sir. 

Mr. MCGREGOR. The big C corporations are squealing loudly 

because of global competitiveness, and you are hearing them. We 

are starting to squeal because we do not want to be left behind. So 

that is my answer for you. 

Mr. MOULTON. So there is broad consensus among many people 

on the principle of a simpler tax code where we are able to reduce 

overall rates in exchange for eliminating loopholes. The problem, 

Dr. Toder, as you referred to, is that everybody has at least three 

or four loopholes that he or she wants to hang on to. From the 

small business perspective, what are the carve outs that are most 

important if you were to just pick two that you think are most important to preserve in a reform that would eliminate many of the 

loopholes overall? 

Mr. Sepp? 

Mr. SEPP. I would say the provisions regarding expensing because they take us as close as we can to the full expensing ideal 

that we want in a tax system. 

Mr. MOULTON. Mr. Lipps? 

Mr. LIPPS. I would say for our situation, the 179 has been most 

beneficial. And I would certainly look at the death tax because I 

have so many family farms in my area that it is a bigger problem 

for the family farm than small businesses because you have got the 

$5 million carve out right now. 

Mr. MOULTON. Mr. McGregor? 

Mr. MCGREGOR. You are asking what do we not want to give 

up? 

Mr. MOULTON. Exactly. 

Mr. MCGREGOR. I would say state and local taxes as a deduction. 

Mr. MOULTON. Great. 

Dr. Toder? 

Mr. TODER. Well, I am not sure I am—— 

Mr. MOULTON. That is all right. My time is expired. 

Mr. TODER. I am not giving anything up, I guess. 

Mr. MOULTON. Thank you. 

Mr. TODER. I mean, I have my benefits but they are not business benefits. 

SBREP-219 with DISTILLER

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Chairman CHABOT. The gentleman’s time is expired. Thank 

you. 

The gentleman from New York, Mr. Gibson, is recognized for five 

minutes. 

Mr. GIBSON. Thanks, Mr. Chairman. I appreciate the panelists’ 

informative hearing. I appreciate your testimony. 

Mr. Sepp, a couple of data-related questions. The first one, if you 

can, if possible, I would be interested in your report and analysis 

in terms of 1987 to 2015, if that is available. First question is compliance cost as a percentage of business. Any data you have on that 

and sort of looking at it from 1987 to 2015. 

Mr. SEPP. Well, there have been attempts to quantify the costs 

of the federal tax system going back something on the order of 70 

years, and depending on what you count in the estimates, the burdens have been figured at anywhere between 1 percent and over 

11 percent of actual tax collections. There was one conducted back 

in 1993 by Professor James Payne, who suggested that for every 

additional dollar of tax raised on the federal level, there was a 65 

cent deadweight loss. Now, my review, and I am certainly not in 

academia, but my brief review of the literature says that is the 

edge of the envelope as far as costs go. 

Mr. GIBSON. Is there any sense in terms of what the opportunity costs—have you seen any follow-on studies there? In other 

words, it comes disproportionately at capital investment, or it 

comes disproportionately at wages and benefits? Is there any sense 

on what the opportunity costs are? 

Mr. SEPP. It tends to come proportionately on new investment. 

That is what a lot of the literature says. Not all of it, certainly. 

There is also this problem we have, I think, in identifying precisely 

that point, the opportunity cost. Payne attempted to do that, which 

is why his estimate is so high. We have a difficulty trying to figure 

out how you quantify something that has never really happened. 

And I think that given the fact the last study I was able to find 

of small business tax burdens was 2011 for the SBA Office of the 

Advocate, this is something Congress might want to explore, is 

having some kind of symposium between SBA, private sector professionals, and the like, and really drill down on this question of 

opportunity cost. 

Mr. GIBSON. Thank you. 

And then the second data-related question. It might not have 

empirics on it but maybe intuition or speculation anyway. It has 

to do with 1987 to 2015 IRS approach in terms of education and 

compliance. Have you noted any significant changes there in terms 

of approach, whether or not they are spending sufficient time helping small businesses who may be not knowingly complying versus 

coming in and penalizing them? 

Mr. SEPP. I think it is a matter of peaks and valleys. In the late 

1980s, you had Congress engaged in activity like Taxpayer Bill of 

Rights I. In 1996, you had the second TBR. In 1998, the IRS Restructuring and Reform Act. And the 1998 act is what really put 

the emphasis on reorganizing the agency retraining employees toward customer service, and thinking more about the ability of allowing businesses to remain self-supporting while they were going 

through collection due process. The taxpayer advocate though has 

SBREP-219 with DISTILLER

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noted that increasingly they are relying on the automated collection system to handle a lot of these things, and I think we probably 

hit a peak on the emphasis on proactive service in resolving these 

problems somewhere in 2005–2007. It has been downhill since. 

Mr. GIBSON. And do you think that as we proceed as a Committee, it may be worthwhile for us to sort of recapture that essence of trying to be helpful? 

Mr. SEPP. Absolutely. 

Mr. GIBSON. Yeah. And then finally, just from the panel, given 

the 1986 reform, a lesson learned. Something that you think we 

should—certainly, a lot of people think it was a good reform, but 

what should we try to stay away from? One each. 

Mr. TODER. All right. I will start. 

I think it was a good reform, but in terms of meeting certain targets, they did something, things that they should not have done, 

like the Individual Alternative Minimum Tax in its current form is 

really a product of 1986 reform and trying to get a few more dollars 

to hit targets. And so I think you have got to be careful that you 

do not put time bombs into the system. 

Mr. SEPP. That is good. 

Mr. MCGREGOR. I would say that they may have done a few 

things wrong but that would be the target going forward. 

Mr. SEPP. I would have to agree with Dr. Toder about AMT. 

That was a major mistake. 

Also, in the current draft—well, the draft from the last Congress, 

some of the methods, such as repealing LIFO accounting might 

have been a step too far and deserve reexamination. 

Mr. LIPPS. In 1986, we were not in business yet. We had a 

dream of being in small business. So I am going to yield to my esteemed colleagues. 

Mr. GIBSON. Yeah. Thank you. This is very helpful. 

Thanks, Mr. Chair. 

Chairman CHABOT. Thank you very much. The gentleman’s 

time is expired. 

Ms. Meng, the gentlelady from New York, is recognized for five 

minutes. 

Ms. MENG. Thank you, Mr. Chairman. Thank you, ranking 

member. Thank you to the witnesses for being here today. 

I believe that certainty and clarity are necessary to improve the 

tax code for small businesses, and complications stem from the various temporary, unstandardized deductions and credits. However, 

many of these credits do serve a valuable purpose in incentivizing 

financial activities useful for the public, such as student loans, first 

time homebuyers, R&D investment, charity, and so forth. Do you 

have any ideas that simplify the tax code while still maintaining 

a system of positive incentives for small businesses? And anyone 

can answer. 

Mr. TODER. I will make a comment on that. I think it would be 

very desirable for the Congress to reexamine these proposals once 

and for all that you call extenders. Decide which ones you want to 

keep and which ones you want to get rid of so we do not have this 

uncertainty in this process every single year which creates difficulty for taxpayers, difficulty for the IRS, difficulties for the tax 

system. I mean, there are probably some of those benefits that you 

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want to make permanent but there are many that we would be better off without. 

Ms. MENG. On another note, our current tax code is not a progressive tax system because there are many with greater ability to 

pay do not always pay a higher rate. Is there more room in our tax 

code, and if you have any ideas to reflect the progressive personal 

income tax structure. 

Mr. TODER. All right. Well, I will comment on that, too. I think 

we actually do have a very progressive personal income tax structure. And to the extent that that does not apply to everybody and 

there are some very high income people who are not paying a large 

share of tax because of certain tax benefits, I think the solution to 

that is to remove those tax benefits and try to lower rates in compensation as we did in 1986. But, you know, you may want the system to be more progressive, but I think it is progressive. 

Mr. SEPP. I would just add the concern that while we think a 

lot about longitudinal fairness in the tax system looking up and 

down the income scale, we need to keep looking sideways on the 

income scale, making sure that people with roughly the same 

amount of income or profit pay roughly the same amount of tax. 

And the answer in this system is nowhere close. There was actually 

a study by Quantria Strategies for Small Business Administration 

which took a look at compliance burdens by industry for sole proprietorships and the fluctuations were wild depending on business 

models and activities. Some like mining, agriculture, transportation, and warehousing, they had complexity burdens in terms of 

hours spent and money spent that were 500 percent or more higher. Gigantic differences. 

Ms. MENG. Thank you. I yield back. 

Chairman CHABOT. Thank you. The gentlelady yields back. 

The gentleman from California, Mr. Knight, is recognized for five 

minutes. 

Mr. KNIGHT. Thank you, Mr. Chairman. I will just make a couple comments before question. 

You know, coming from California, our biggest concern from 

small business is not so much the whole complexity of everything 

but how much we change. Changing the rules every year seems to 

be the number one concern of small businesses. I cannot do a fiveyear plan or a 10-year plan if you are going to change it 5 or 10 

times on me, and I cannot invest a certain amount of money if you 

are going to change the rules in the next few years on me. 

So let me ask just a broad question about that, about the Federal 

Government. How much does certainty help the small business, especially when it comes to taxes and regulations as we move forward, and how much has that been changed since the reforms in 

the late 1990s? 

Mr. LIPPS. It is the most critical part of us deciding to invest 

in new facilities, infrastructure, or machinery. If we know what we 

are facing and we face it on time—sometimes the extenders are a 

little late—if we know what is ahead of us, we know how much risk 

can be taken to protect the jobs that we currently have. 

Mr. SEPP. Last month there was an interesting study conducted 

by Institute for Policy Innovation where they reviewed reports from 

Federal Reserve Bank of Kansas City and employment reports 

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from the media, and they determined that the retroactive extension 

of section 179 expensing was so sudden and created a level of certainty after so much uncertainty that it did not have its intended 

effect of helping investment. There was not a measurable rise as 

expected at least in things like agricultural equipment investments. It came too little, too late. 

Mr. MCGREGOR. I think the example we heard about bonus depreciation clearly affects major purchases of capital equipment. 

And it can be very damaging. 

Mr. TODER. I would like to actually commend the Congress. You 

have made great progress since a few years ago when you had all 

the Bush tax cuts being expired or extended, and at least you have 

settled on big parts of the tax code. You have these remaining expiring provisions and I would agree bonus depreciation is very important. Having an investment incentive that you give after the 

year is over does not really do very much for investment. So either 

keep it, or get rid of it, or modify it. 

Mr. KNIGHT. And I think, you know, several of the members 

have hit on a couple of the items that make it very important for 

us. You know, if we talk about an overhaul, I am an optimist, and 

I would like to see that but I am also a realist, that there are tens 

of thousands of people employed by the government and there are 

close to a million people employed that do taxes, that do preparation, that do attorney work on taxes, and it is very difficult to do 

an overhaul when you are talking about close to a couple million 

jobs across the country. So I would ask that you have a little bit 

of an open mind, too, when we are talking about little pieces that 

we can do that will help small business especially, and we can get 

them through, especially in Congress where we do not agree all the 

time. And getting something that is bipartisan that moves forward, 

that gets signed by the president is very important, especially 

when we are talking about the entrepreneurs that are hiring people that are expanding that are helping our economy like no one 

else can. So, those are the comments that me, as a freshman, 

would like to move forward with and especially the optimism of 

getting something done in my first session. 

So I yield back the balance of my time. Thank you, Mr. Chair. 

Chairman CHABOT. Thank you. The gentleman yields back. 

The gentleman from Nevada, Mr. Hardy, who is chairman of the 

Subcommittee on Investigations, Oversight, and Regulations is 

recognized for five minutes. 

Mr. HARDY. Thank you, Mr. Chairman. 

You know, as a small business owner myself in the past, the opportunity to employ is a great thing. And as a business, you want 

to have to pay taxes because that means you are going in the right 

direction, not the other. Tax deductions or tax losses is not a good 

thing. 

But through that process, Mr. Sepp, you talked about manufacturers costing them—large manufacturers costing somewhere 

around $960,000 a year to prepare for those taxes. And I know that 

you are correct when you talk about one and a half or bigger for 

smaller businesses that employ under 50, that it costs us more. 

Can you give me an idea why that is? I know why but I would like 

to have you explain that. 

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Mr. SEPP. Well, just that there are certain inescapable base 

costs to tax compliance that no business can really avoid, has to 

deal with filing. If we are talking about C corps, well, we have a 

variety of schedules and whatnot that have to be filed, but the 

basic 1120 return takes a lot of time and effort. If you are looking 

at Schedule C filers of any size, the Schedule C might become complicated the larger the business is, and especially if it does business 

abroad. But even if there is no activity abroad, the filing of the 

Schedule C has a base cost in time and money that really cannot 

be avoided. The National Society of Accountants publishes a whole 

list of those costs by form. Also, of course, if you are distributing 

the costs over your employees, obviously, fewer employees, greater 

costs per employee, that is going to run the math up as well. 

Mr. HARDY. I would like to also now go back to Mr. Knight’s 

discussion. I think he is right on point that business has a challenge with knowing what the Federal Government is going to continue to do, what new creative idea they are going to come up with 

the tax code. Has anybody wondered whether a lot of the loss of 

those businesses over the last eight or so years, or six to eight 

years, might have been because businesses invested in some of 

those write-offs that they had early opportunities to do and the 

change in our economy had us deeply in debt as businesses because 

nobody predicted this collapse, but that because of tax codes actually caused people to do things that might otherwise have been 

more prudent to go some other direction? Does anybody care to 

touch on that one? 

Mr. LIPPS. It caused us to be more conservative than I think we 

would have been. We are risk takers. That is the pure heart of an 

entrepreneur. However, if you jump in the water and then you do 

not make the necessary changes, I am still in the water. And so 

I think that it has created a situation where entrepreneurs have 

taken less risks. Honestly, in my opinion, I believe that means that 

we have hired fewer people as an aggregate. 

Mr. HARDY. Well, along with my comment on that, I guess back 

in 2004, 2005, 2006, 2007, 2008, things were moving along. You got 

major tax deductions trying to get the economy moving again prior 

to that. You got major tax deductions on equipment in the construction industry, mining industry, and other industries that you 

wanted to utilize that opportunity when you are spending millions 

of dollars in taxes and providing that opportunity. And then the 

collapse came, which you still owe that debt but you cannot even 

make the tax. So now you turn a different direction. So do you believe there is any cause? Because there is uncertainty in taxes, the 

direction they went, and how they changed in that short of a time. 

Mr. LIPPS. Earlier you mentioned that a lot of people did not see 

it coming. The government did not see it coming. We did not see 

it coming. And 2009 was the first time in our career we ever had 

to lay anyone off. If I fire you, that is different. It does not matter. 

You earned the right to be fired. But if we lay you off because we 

missed something, it was the most horrible situation our family 

ever went through because those team members to us, that is gold. 

That is our number one asset. 

Mr. HARDY. That is the toughest thing you will ever do. 

Mr. LIPPS. It was horrible. 

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Mr. HARDY. Thank you. My time is expired. 

Chairman CHABOT. Thank you. The gentleman yields back. 

The gentleman from South Carolina, Mr. Rice, who is chairman 

of the Subcommittee on Economic Growth, Tax, and Capital Access 

is recognized for five minutes. 

Mr. RICE. Thank you. 

I want to start with Mr. Lipps and Mr. McGregor because you 

are all in business. Mr. Lipps, is your business exposed to international competition? 

Mr. LIPPS. We are really not. The mattress industry is semi insulated. If you look at the cubic foot, the size of a mattress product 

coming from a foreign country, it takes up so much room in a cargo 

container that because of not necessarily weight but because of 

cubic feet, we are a little more insulated than many of our small 

business brethren. 

Mr. RICE. Mr. McGregor? 

Mr. MCGREGOR. We do a fair amount of business with 

Husqvarna in South Carolina. And they buy pullies from us. And 

some year we get it and other years we do not, but China is our 

competitor there. And we are scheduled to lose that business. We 

have not lost it yet, maybe because of the dock strike. I am not 

sure. 

Mr. RICE. Do you think that our tax code makes you more or 

less competitive with your competition in China? 

Mr. MCGREGOR. Well, I spent some time in China, and I know 

their cost. I think that the tax code is definitely a factor in our pricing. I am not sure it is enough to make a difference. 

Mr. RICE. Basically, I look at the taxes, the price you pay to 

keep the government open, and if you are paying more for your 

government than they are paying for their government, does that 

not put you at a competitive disadvantage? 

Mr. MCGREGOR. Their government is putting them in business. 

Mr. RICE. Mr. Sepp and Mr. Toder, define—Mr. Toder, would 

you define a loophole for me? I keep hearing people throw around 

the term ‘‘loophole.’’ Like every deduction is a loophole. What is a 

loophole? 

Mr. TODER. I do not call those provisions loopholes. I call them 

tax subsidies, tax benefits, tax expenditures. To me, a loophole is 

something that is enacted in the dark of night by somebody that 

only a few people benefit from that most people do not know about, 

sneaky things. That is why I do not use the word loophole. I prefer 

to say a tax preference, which means something which gives your 

form of income or your form of activity more favorable treatment 

than somebody else. 

Mr. RICE. Would you not say that most of these things in the 

tax code are intended to promote certain activity and were enacted 

with well-intentioned ideas? 

Mr. TODER. Absolutely. That does not mean they are good policy, but absolutely. 

Mr. RICE. Mr. Sepp, would you agree with that? What is a loophole in your mind? 

Mr. SEPP. That is an impossible definition because a loophole to 

one person is a subsidy or a tax relief provision to another. I would 

say though that some things that qualify for a tax provision being 

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less desirable than more desirable is it is very narrowly drawn. It 

is temporary in nature. It has claw backs built into it that might 

specifically exclude some industries from availing themselves of it. 

So those are things to look for in formulating better tax benefits. 

Mr. RICE. Is the mortgage interest deduction a loophole? 

Mr. SEPP. For a write-off for housing, that is a social goal that 

Congress has settled on as something that is desirable for many 

people. I do not think it necessarily has to be in the tax code if it 

is properly—— 

Mr. RICE. Is the capital gains rate a loophole? 

Mr. SEPP. No. Because capital gains taxation is a form of double 

taxation in many cases. 

Mr. RICE. I have a question for you. Would you characterize our 

tax code for us? Is it internationally competitive or noncompetitive? 

Mr. SEPP. Noncompetitive in a number of ways. We have talked 

a little bit about—— 

Mr. RICE. I am running out of time so I have to cut you off. 

Mr. Toder, competitive or noncompetitive? 

Mr. TODER. I think our system places some of our companies at 

a disadvantage, but it places some of our companies at an advantage. It is really a case by case situation. 

Mr. RICE. I want to follow up with that—on that with you a little later. I am just running out of time. 

Would you characterize our tax code, Mr. Toder, as modern or 

outdated? 

Mr. TODER. I think it is outdated. 

Mr. RICE. Mr. Sepp? 

Mr. SEPP. Outdated. 

Mr. RICE. Would you say, Mr. Sepp, that our tax code promotes 

or stifles economic growth in this country? 

Mr. SEPP. Stifles it. 

Mr. RICE. Mr. Toder? 

Mr. TODER. I do not think it stifles it. I think we could have 

a tax code which is more friendly to economic growth, but I do not 

think it is a major factor. 

Mr. RICE. I think we can do a lot better. I think it actually stifles economic activity, and I want to end my little presentation by 

apologizing to all of you gentlemen that we do not have leadership 

on both sides of the aisle here that are willing to put forth bold 

ideas about tax reform. So I think we could do a lot better for this 

country, and we could do a lot better to promote economic activity. 

Thank you very much. 

Chairman CHABOT. Thank you. The gentleman’s time is expired. 

The gentleman from Virginia, Mr. Brat, is recognized for five 

minutes. 

Mr. BRAT. Thank you, Mr. Chairman. I thank you all for coming 

before us today. It is a pleasure to have you with us. 

I have been listening, and several things are merging. I want you 

to put on your marketing hats right now. I recently ran for federal 

office, knocked on a thousand doors, whatever. My district is all 

small business. And you go door to door to door, and small business 

says, ‘‘No one listens to us.’’ I have got cattlemen, ranchers, farmers, a bunch of small business community bankers are by far and 

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away the majority, and some of them are almost conspiracy minded 

in terms of the system is rigged against them. And so at the end 

of this I will just give a couple ideas and just put a few of the 

phrases I have been hearing forward. 

But at the end of this, if you have 30 seconds of messaging on 

behalf of small business person across the country, what would 

your messaging be to Congress? And a lot of the folks—Mr. Lipps 

has been saying over and over and over, that most small businesses are too busy doing their own thing to spend significant time 

thinking about messaging when it does matter in terms of getting 

the right policy. And you have kind of got to get the current moving 

in the right direction so us politicians can jump in later and help 

you, but the current has got to be moving and it is not moving. And 

so I always ask my small business people, hey, start writing in the 

local papers. Not political pieces, but with this tax rate, with this 

regulation, I cannot stay in business. I am going to go out of business. My people are going to lose their jobs. Just so you know. 

I just want to get you thinking that way in terms of—I will come 

back. We have been mentioning depreciation, expensing, tax rates, 

what is the message? What should we be hitting on there? I have 

got a tax foundation. Published a piece on economic and budgetary 

effects of full expensing of investment. Mr. Sepp was getting at 

that. It sounded like if you could hit that, that was pay dirt. Found 

cutting corporate tax rate 10 points would increase GDP about 2 

percent, but full expensing would boost GDP about 5 percent. I am 

just kind of asking. Total federal tax revenue would be $97 billion 

a year. Also, benefits accrue disproportionately to low end of the income scale due to job growth, productivity, wages. I am just kind 

of throwing those kind of three out—tax rates, depreciation, expensing, regulatory burden, just as a set up. 

Thirty seconds to everybody. Why do we not start with Mr. 

Lipps? If you had to message to the country, you are going on TV, 

what would you say for small business? 

Mr. LIPPS. I would start by agreeing with your initial comments, 

that many small businesses have thrown their hands up and said 

their voice is not being heard. Earlier in our testimony you heard 

someone say that there is not an outcry, an upswell from the small 

business community. We are working. That is why you do not hear 

that. But a lot of them will tell you they have no say, so why are 

they going to invest that time when they could have been building 

one more mattress. So that is my first point. 

My second point is I do not hear small businesses saying find us 

loopholes or advantages. I find them saying make it easy enough 

that I can understand it. I will pay my taxes and I will go back 

to work and create a job. So I do not think we are looking for advantages. I think we are looking for less complexity. 

Mr. BRAT. Good. Good. Thank you. 

Mr. Sepp? 

Mr. SEPP. My message would be get more involved in the tools 

that are available and use them to your advantage. Volunteer for 

the taxpayer advocacy panels. That is where tax complexity is addressed at the most basic level. Also, have more committees outside 

of Ways and Means Committee get involved in tax complexity analysis. There was a requirement in the 1998 law that we have an 

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analysis of complexity accompanying every major tax provision 

coming out of Ways and Means or Finance. We have not adhered 

to that rule. We have got to have more coordination between those 

panels and the IRS’s taxpayer advocate to get these suggestions 

into the policymaking stream so that businesses do feel their concerns are being taken seriously. 

Mr. BRAT. Right. 

Mr. McGregor? 

Mr. MCGREGOR. I would echo simplicity, permanence, rates designed for growth and acknowledged by everyone that that is the 

intent. As far as expensing, I see that as more of a deferral so I 

am not as excited about that. 

Mr. BRAT. Mr. Toder, sorry, 19 seconds. 

Mr. TODER. Okay. I agree with my fellow panelists on simplicity. You know, I think everyone should be paying taxes commensurate with their income, but we should make it easy for them 

to do that and we should have a lower rates rather than special 

benefits. 

Mr. BRAT. Thank you all for being with us. Thank you. 

Chairman CHABOT. Thank you. The gentleman yields back. 

I would like to thank our distinguished panel here, both this 

morning and this afternoon, because we are afternoon now. I think 

you all did an excellent job, and I think some of the stuff we already inherently knew but you said it so well that it is going to 

stick. And I think one of the things you said is how significant it 

is that we not only reform our corporate tax code but also the individual. It has to go hand in hand, and we need to simplify it. There 

was consensus on a lot of things here, and we intend on this Committee to work with Paul Ryan and the Ways and Means Committee as we move forward on any reform package. 

And I want to thank the ranking member and minority members 

of the Committee also for participating today. And I would ask 

unanimous consent that members have five legislative days to submit statements and supporting materials for the record. And if 

there is no further business to come before the Committee, we are 

adjourned. Thank you very much. 

[Whereupon, at 12:30 p.m., the Committee was adjourned.] 

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A P P E N D I X 

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1nfib.com/problems&priorities2012 

2nfib.com/sbet 

Good morning, Chairman Chabot, Ranking Member Vela ́zquez, 

and members of the Committee. I am pleased to be here on behalf 

of the National Federation of Independent Business (NFIB). Our 

family owns Sleep Tite Mattress Factory & Showroom and has 

been a member of NFIB since 1995. I also currently serve on the 

NFIB-Ohio Leadership Council. Thank you for holding today’s 

hearing, ‘‘Tax Reform: Ensuring that Main Street Isn’t Left Behind.’’ The current tax code negatively impacts small and closelyheld businesses in several important ways, so I appreciate the invitation to be here today to discuss these important issues from the 

perspective of a small business owner. 

The NFIB is the nation’s leading small business advocacy organization. The typical NFIB member employs about 8 to 10 employees 

with annual gross receipts of about $500,000. All of NFIB’s members are independently owned, which is to say that none are publicly traded corporations. While there is no one definition of a small 

business, the problems NFIB members confront, relative to the tax 

code, are representative of most small businesses. A few consistent 

concerns are raised regardless of the trade or industry in which the 

small business is engaged. 

As part of representing small business owners, NFIB frequently 

conducts surveys of both the NFIB membership and the small business population as a whole, and taxes consistently rank as one of 

their greatest concerns. In the most recent publication of the NFIB 

Research Foundation’s Small Business Problems and Priorities, 5 of 

the top 10 small business concerns are tax-related.1 In fact, the 

February 2015 Small Business and Economic Trends report ranks 

taxes as the number one problem small business owners currently 

face. Right now, taxes are a bigger problem than poor sales, the 

cost and quality of labor, and government regulation.2

I would like to spend the rest of my time telling you about my 

personal experience. Sleep Tite Mattress Factory & Showroom was 

founded in 1947, by Stan Rothman. In 1990, our family founded an 

institutional (acute and long term care) bedding company, 

HomeCare Mattress, Inc. In 1992, we merged HomeCare Mattress, 

Inc with Sleep Tite. We started with 4 employees and now have 15 

full-time employees. We are currently structured as a c-corporation, 

but we started as a pass-through. While often times a struggle, we 

are VERY proud to offer our team-members health insurance, a 

401K program, paid sick leave, paid vacation time, and more benefits. Aggressive tax rates, and compliance efforts directed to fulfill 

intrusive regulations, severely impact our ability to offer a full benefits package that our employees need and deserve. 

We are proud of Sleep Tite Mattress Factory. We think you 

would be, too. As I mentioned, we strive to offer our team members 

a positive work environment that offers a learning experience, the 

ability to make decisions, a career opportunity and full benefits. 

Beyond that, we believe community involvement is critical. Small 

businesses are the ‘‘Fabric of the Community.’’ For example, across 

America you will find small businesses sponsoring school plays, 

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3nfib.com/taxsurvey 

4 Ibid. 

5 Ibid. 

peewee football teams, cheerleading squads, and church youth 

group programs—the list goes on. The small business owner works 

in the community, hires in the community and LIVES in the community. Sleep Tite Mattress has been recognized by our schools for 

our involvement and won our area Chamber of Commerce Business 

of the Year Award in 1999. That makes us feel good. What makes 

us feel even better is seeing our employees grow and build their 

lives and stay with our company for years. To serve our employees 

and our community, we must have lower tax rates, fewer regulations and a less confusing, less complex tax code. 

We have been in business in our community for over 24 years. 

I witnessed and experienced what punitive local, state and federal 

laws were doing to the business community in Franklin, Ohio, and 

in our surrounding communities. So, in 1999, I did something 

about it. I ran for city council and won a seat. After encouraging 

a few fellow business owners, and business people, to run for the 

city council, I was honored to serve two terms as Mayor of Franklin. We concentrated on fixing the problems a bloated bureaucracy 

and out-of-touch government had levied on our city. 

Our Council addressed local incentive programs that unfairly assisted large corporations but did not offer incentives to small business. We instituted a ‘‘Downtown Improvement Program’’ (‘‘DIP’’) 

that offered grants and low interest loans to small businesses locating or expanding in our community. We met with local zoning, 

planning and building officials and redesigned zoning laws to assist 

businesses with fewer or less restrictive regulations (example: sign 

ordinances and requirements). Not every small business owner can 

run for elected office. Instead, Congress should work to reform our 

tax code in order to help small business owners get back to doing 

what they should be doing: running their small business. Over 85 

percent of NFIB members agree that Congress should fundamentally reform the tax code.3

As Congress considers tax reform, I would encourage you to keep 

these most important goals in mind. Achieving these goals will 

greatly enhance the ability of small and closely-held businesses to 

thrive in the 21st century: 1) permanently keep the tax rates low, 

2) do not create disparity between the corporate rate and individual 

rate, 3) reduce complexity, and 4) do not separate the business 

owner from the business. NFIB members are willing to make the 

tradeoffs necessary to lower tax rates, such as reducing or eliminating deductions, credits, or exclusions.4

Should Congress enact comprehensive tax reform that achieves 

these goals, small business owners would no longer face one of 

their most consistent complaints: arbitrary and inconsistent tax 

preferences, constant change and complexity in the current federal 

code.5

Small businesses truly are the engine of economic growth. This 

isn’t just a slogan, as small businesses created two-thirds of the net 

new jobs over the last decade. Small business owners are risk takSBREP-219 with DISTILLER

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ers and entrepreneurs. They are the last businesses to lay off employees when business declines and slow to rehire when business 

picks up. The owner works additional hours until they can take it 

no more. When small business hires an employee, it is their intent 

to keep them on for the long run. 

The current tax code has become a confusing and unpredictable 

challenge for the vast majority of small business owners. Our tax 

laws should not deter or hinder the ability of small business owners to create or expand their businesses. Taxes are a MAJOR issue 

for ALL small business owners. Tax law can dictate the business 

decisions that an owner must make, whether it is the type of structure to adopt, whether to make an investment in programs or machinery, to expand their facility, or to hire employees. 

After decades of patchwork changes to the tax code, Congress 

needs to make major adjustments to our tax laws to reduce complexity and confusion and encourage business growth. I appreciate 

Congress taking a serious look at reforming the tax code and urge 

you to keep in mind the unique challenges that face small businesses. 

Thank you again for having me here today and I’m happy to answer any questions you may have. 

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TESTIMONY BEFORE THE COMMITTEE ON SMALL 

BUSINESS 

UNITED STATES HOUSE OF REPRESENTATIVES 

Hearing On: 

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

Dan McGregor, Chairman, McGregor Metalworking 

Companies 

April 15, 2015 

Background 

Thank you Mr. Chairman, I appreciate the opportunity to testify 

today on these important topics. My name is Dan McGregor and I 

am the Chairman of McGregor Metalworking Companies 

(MCGREGOR) and a board member of the S Corporation Association. 

My family business began in 1965 as an investment with my father and 3 brothers. We purchased an 8 man tool and die shop in 

Springfield, Ohio. Since then, we gradually expanded to a total of 

four businesses in Springfield and another located in Aiken, South 

Carolina, employing a total of 375 workers spread across both 

states. These are good paying manufacturing jobs, with health insurance and retirement plans, in areas that need employment opportunities. 

MCGREGOR is primarily engaged in contract manufacturing in 

the metalworking industry. We perform a wide variety of services 

such as metal stamping, spinning, welding, machining and assembly for customers in industries including locomotive, auto, agricultural, and law and garden companies. Our customers include General Electric, Honda, John Deere and many others. 

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

Importance of the S Corporation to Family Businesses 

From the beginning, MCGREGOR has been a family owned and 

run business. Our current shareholders are McGregor family members of the second and third generation. A central component of the 

success of our business has been our S corporation status. 

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When McGregor Metalworking was a C corporation, we paid out 

few dividends to our shareholders abiding by the minimum dividend payout rules. Growing the business was our objective and 

paying double taxation did not fit with our entrepreneurial spirit. 

This situation is often referred to as the ‘‘double tax’’ since the 

same business income is taxed twice. The prevalence of the double 

tax leading to minimization of dividends to shareholders causes 

family C-Corporation shareholders not active in the business to become less interested in the success of the business. This is not a 

healthy situation for closely held businesses being passed on to the 

next generation. 

In 1986, anticipating Congressional action to overhaul the tax 

code, we converted to S corporation status. At the time, we thought 

that the opportunity to be taxed as a ‘‘pass-through’’ to eliminate 

the double corporate tax would allow us to reinvigorate our company and our shareholders. Sure enough, after nearly 30 years as 

an S corporation, I am positive there is no better way to organize 

a family business like my own. 

So much has been written about the erosion of the corporate tax 

base in recent years that an essential reality has been lost—the 

business tax base is larger today than it was prior to 1986 tax reforms. It is true the corporate base has declined since 1986, but the 

growth of the pass through business sector has made up for it and 

more. 

According to the Tax Foundation, when my company converted 

to an S corporation in 1986, pass-through businesses contributed 

only 1 percent to our GDP. Today, pass-through businesses make 

up 6 percent of U.S. income. As a result, the business tax base— 

combining corporate and pass through businesses—has expanded 

from 9 percent to 11 percent of our national income. The United 

States today is more entrepreneurial because of the 1986 tax reforms and the growth of the pass through business sector. 

S Corporation Taxation & the Fiscal Cliff 

There is much confusion about how S corporations are taxed. We 

pay tax on all our business income when it is earned and regardless of how much is distributed to our shareholders. 

Since the tax is paid at the shareholder level, we make sure to 

distribute every quarter enough earnings for shareholders to pay 

their tax estimate. And since S corporations are allowed only one 

class of stock, those distributions must be equal to the highest marginal rate faced by any of my shareholders. 

Prior to the fiscal cliff resolution, the top federal marginal rate 

was 35 percent and the business as a whole had a tax rate of about 

33.3 percent taking into account federal deductions for section 199 

and the R&E tax credit as well as state and local taxes. That 

meant that every quarter we would distribute at least 34 cents of 

every dollars we earned to pay the S corporation’s taxes. 

Following the resolution of the fiscal cliff, the top tax rate on my 

shareholders increased to approximately 41.4 percent due to the 

higher 39.6 percent marginal rate plus, where applicable, the new 

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3.8 percent Affordable Care Act tax and the effect of the reinstatement of the Pease limitation on itemized deductions. As a result, 

today we have to distribute approximately 42 cents of every dollar 

earned so our shareholders can pay the federal, state and local S 

corporation tax. 

This sharp increase has hurt our ability to compete, grow, and 

create jobs. Think about it this way—we are in a capital intensive 

business and have two sources of capital: what we can borrow from 

the bank and what we retain from our earnings. Unlike a large 

multinational, we simply do not have access to the public capital 

markets. 

During the ‘‘big recession’’ of 2008 and 2009 our bank added two 

convenants to our loans: First, a debt service coverage ratio 

where free cash flow must cover bank payments by a multiple of 

1.25 and, second, a cap on our total debt to equity not to exceed 

a multiple of two. In order for our companies survive and grow, we 

need retained earnings, but right now they are being depleted by 

our tax burden. 

Prior to the fiscal cliff, we were able to retain up to 66 cents of 

ever dollar we earned. Those retained earnings formed the core of 

our working and investment capital and over the years we used 

them to grow the business from 8 workers to 375. After the fiscal 

cliff, we have the option to retain only 58 cents of a dollar of earnings, depending on our annual budget and capital needs. 

I use a rough estimate that it takes between $30,000 and 

$40,000 of after-tax earnings coupled with prudent bank debt to 

create the investment that will justify a new hire. Having 

MCGREGOR’s effective tax rate rise from 34 to 42 percent means 

lots of lost job opportunities. 

Tax Reform 

I understand Congress is struggling with the challenge of reforming the tax code and making our approach to taxing business income more competitive. Part of this discussion is the need to reduce 

the tax rate imposed on C corporations. It’s hard to compete 

against foreign companies when you are paying significantly higher 

levels of tax. I am sympathetic to these concerns and I know that 

the S Corporation Association has been supportive of cutting the 

corporate rate to something more in line with the rest of the world. 

But the same arguments that support cutting the corporate rate 

also apply to pass through businesses like my own. We face the 

same competitive pressures as C corporations, and we currently 

pay a higher tax rate than both the company headquartered overseas and the C corporation down the street. 

Tax reform that broadened the tax base while reducing the tax 

rate on C corporations only would increase this disparity. Under 

the worst case scenario where MCGREGOR loses LIFO, the R&E 

tax credit, and the Section 199 deduction, I estate our effective tax 

rate would rise from 42 to in excess of 46 percent. No amount of 

expensing or other band aide provisions would offset this hit. 

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A 2011 study by Ernst & Young reinforced this point. They found 

that corporate-only reform would raise taxes on my company and 

others like it by 8 percent per year or $27 billion overall—and that 

does not include the effects of the 2013 fiscal cliff tax hike. 

This recent history illustrates why the proposals for ‘‘corporateonly’’ tax reform are so troubling to me and other owners of passthrough businesses. Rather than provide needed rate relief to all 

businesses, corporate reform would reduce rates on C corporations 

only, increasing the differential between C and S corporation top 

rates from the current five to ten percentage points up to fifteen 

percentage points and more. It would return the tax code to pre1986, when nearly all businesses were C corporations and tax considerations played a measurably negative role in their governance. 

It also would leave S corporation owners with two equally painful 

choices. We could remain an S corporation and attempt to compete 

against domestic and foreign companies while paying significantly 

higher tax rates. Or we could convert back to C status to access 

the lower rate and, like most C corporations, stop paying dividends 

to avoid the double tax. 

This inability to share our company’s earnings among family 

members would strike at the very heart of our identity as a familyowned business. Why own a private business if you are unable to 

share in its success? Under such circumstances, selling the business to a public corporation with no need to pay dividends and a 

ready market for its stock would become increasingly attractive. It 

would also mean that the business decisions affecting 375 workers 

in Springfield would now be made in a corporate boardroom someplace else. 

As an alternative to corporate-only tax reform, the S Corporation 

Association and other allied trade groups have advocated for three 

key principles to be adopted in any tax reform effort: 

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

2. Tax reform should seek to restore rate parity for the top 

rates paid by individuals, pass through businesses and corporations; and 

3. Tax reform should seek to reduce or eliminate the double 

tax paid by C corporations. 

These principles are articulated in a letter attached to the back 

of my testimony and supported by over 100 business groups, including the National Federation of Independent Business, the Precision Metalforming Association, the American Farm Bureau, and 

the National Restaurant Association. 

Other Tax Considerations 

Let me briefly mention three other tax issues of importance to 

MCGREGOR. 

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tage of the R&E tax credit. The usefulness of the credit is limited, 

however, by the Alternative Minimum Tax (AMT). When the advantages and disadvantages of the pass through business structure 

are discussed, the role of the AMT rarely comes up, but it is significantly negative. Not only does the AMT raise the taxes of many of 

my shareholders, it also precludes them from benefiting from the 

R&E tax credit, thereby diluting the value of the credit to 

MCGREGOR. Allowing taxpayers paying the AMT to access the 

R&E tax credit would solve this problem. Getting rid of the AMT 

entirely would be even better. 

Second, as a family owned business, succession and the estate 

tax are a constant challenge for MCGREGOR. The outcome of the 

fiscal cliff negotiations set the estate tax exemption to $5 million 

and the marginal rate at 40 percent, but for a business the size of 

MCGREGOR, those levels mean we still have to deal with the effects of the estate tax as our shareholders grow older. Any family 

that grows their business beyond that exemption level must constantly made this tax part of their family business strategy. Often 

tax strategy is contrary to the best interests of the business and 

the family members. Transition of ownership in privately held businesses is never easy and the estate tax is often the death knell of 

family business continuance. 

Finally, there are a number of smaller tax items improving the 

governance of S corporations that should be enacted and/or made 

permanent, including the shorter recognition period for built-in 

gains and leveling the tax treatment of charitable donations of S 

corporation stock. These provisions have been championed by Representatives Reichert (R-WA) and Kind (D-WI) for years and have 

already passed the House this year. 

Conclusion 

McGregor Metalworking has been proud to provide quality, high 

paying jobs to workers in Springfield for over 50 years. S corporations around the country do the same thing, employing one out of 

four private sector workers and contributing significantly to our national income. The reforms enacted in 1986 helped MCGREGOR 

and other S corporations thrive by allowing us to operate in a significantly superior business structure. Any reform considered by 

Congress should seek to strengthen and grow the pass through sector. With the tax reform principles I have laid out today, I am confident that MCGREGOR and other pass-through businesses will 

continue to drive job creation and economic growth in communities 

like Springfield for years to come. 

Thank you for your time and I am happy to answer any of your 

questions or even better I invite you to come to Springfield to visit 

our plants and see the results of reinvestment by S Corporations. 

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1 U.S. House of Representatives Committee on Small Business, Memorandum on Tax Reform: 

Ensuring that Main Street Isn’t Left Behind (2015), available at http://smallbusiness.house.gov/ 

uploadedfiles/4-15-2015—hearing—memo.pdf 2 Joel Kotkin, ‘‘Rise of the 1099 Economy,’’ Forbes Magazine, July 25, 2012. 3 Association for Enterprise Opportunity, ‘‘Power of 1 in 3. http://www.aeoworks.org/pdf/ 

one—in—three.pdf 

The Association for Enterprise Opportunity (AEO) is submitting 

testimony in support of comprehensive tax reform and to recommend improvements to certain tax policies. AEO is the voice of 

microbusiness in the United States. For two decades, AEO and its 

more than 400 member organizations have helped millions of entrepreneurs contribute to economic growth while supporting themselves, their families and their communities. 

AEO commends the Committee for convening a hearing on such 

a critical topic. While many small business advocates have shared 

their views on tax policy, AEO is adding the voice of microbusiness 

to this important discussion. There is consensus that our tax system should be simpler.1 Citing numerous reports from the Internal 

Revenue Service (IRS) National Tax Payer Advocate and Small 

Business Administration (SBA) Office of Advocacy, it is clear that 

small businesses face a tax code that drains them of their two most 

valued resources: time and money. Notably, these burdens are not 

uniform across company size—big business has the resources to 

more easily comply with, and even shape, the tax code. 

Much of this is due to a tax code that is outdated. The entrepreneurial landscape no longer aligns with our anticipated tax system, 

last reformed more than 25 years ago. Businesses now operate everywhere, including homes and shared office spaces, and the ‘‘independent workforce’’ is growing at an incredible pace: the number of 

Americans who ‘‘primarily work on their own’’ is up 14% (1.3 million people) since 2001.2

These 21st century entrepreneurs struggle to navigate the deductions and credits designed to spur business creation. Of the more 

than 20 tax provisions supporting small businesses, almost all require increased record keeping. This requires time and money that 

could be put to better use. It is also these entrepreneurs who hold 

the key to jumpstarting our economy. As noted in AEO’s Power of 

One in Three report, if 1 in 3 microbusinesses hired just one employee, America would be at full employment.3

The majority of these microbusinesses are structured as passthrough entities, allowing business owners to calculate and pay 

taxes on their individual taxes. According to the U.S. Census Bureau, for example, sole proprietorships make up a full third (33.6%) 

of all pass-through businesses that pay taxes at individual rates. 

For this reason, AEO urges that any reform to the corporate tax 

code be accompanied by a balanced reform to the individual code. 

Comprehensive tax reform is the only option to ensure that a vast 

majority of microbusinesses do not immediately face a significant 

and unfair disadvantage. 

Any overhaul of the tax system should also be guided by the 

basic principles of simplicity and fairness. In AEO’s view, tax compliance—while necessary—should not be a barrier to entrepreneurship. Microbusinesses should expect a tax system that collects revSBREP-219 with DISTILLER

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4 U.S. Government Accountability Office, ‘‘Corporate Income Tax: Effective Tax Rates Can Differ Significantly from the Statutory Rate.’’ 2013. Available online at http://www.gao/gov/assets/ 

660/654957.pdf 5 Corporation for Enterprise Development, ‘‘Microbusinesses: America’s Unsung Heroes.’’ 2013. 

Available online at: http://cfed.org/assets/pdfs/FactFile—May2013.pdf 6 Corporation for Enterprise Development, ‘‘Innovations in Microbusiness.’’ 2014. Available online at: http://cfed.org/assets/pdfs/Innovations—in—Microbusiness.pdf 

enue in a consistent manner, offering certainty from year to year. 

The annual sprint to extend tax credits and deductions, or ‘‘extenders,’’ is a prime example of how the current system gives business 

owners little certainty. Making tax expenditures that are proven to 

support small businesses permanent would eliminate annual confusion over credits and deductions. 

Similarly, tax rates for businesses ought to be the same and tax 

liability should not depend on how a business is organized. American corporations only pay an effective tax rate of 12.6%, a far cry 

from the statutory 35%, while small businesses operating as SCorps pay an effective tax rate of nearly 27%.4 Conversely, tax deductions or credits should be applicable to any form of business 

(e.g. the self-employed cannot deduct health expenses, an option 

available to other businesses). Reforms should address these inequities. In our view, business is business. 

In addition to ensuring that broader reforms take small businesses into consideration, AEO recommends the following policies 

that will benefit Main Street: 

Expand Volunteer Income Tax Assistance Program to Assist 

Microbusiness 

More than 1 in 4 (27%) of microbusinesses cited tax preparation 

as a problem for business.5 This does not have to be the case. Already a program exists that could aid entrepreneurs. The Volunteer Income Tax Assistance (VITA) Program currently assists lowand moderate-income (LMI) individuals with support from IRS-certified volunteers. Congress and the IRS should expand the VITA 

Program’s capacity to help microbusiness owners navigate the tax 

system. 

First, the IRS Office of Stakeholder Partnerships, Education and 

Communication (SPEC) Office should improve the support that the 

program delivers to microbusiness owners. The program’s capacity 

to serve microbusiness owners is limited by program rules that preclude VITA sites from preparing all but the simplest Schedule C 

forms. The Corporation for Enterprise Development (CFED) found 

that VITA sites are ready and willing to do more for microbusiness.6 The IRS has the authority to lift the restrictions on Schedule 

C preparation at its discretion, without initiating the lengthy process of proposing a regulation for public comment. 

The Entrepreneur Start-Up Growth Act (H.R. 3571), introduced 

in 2011 by Committee Member Judy Chu, proposed a pilot program 

to test the feasibility of expanding VITA support to self-employed 

tax filers. AEO hopes that similar legislation will be reintroduced 

in the 114th Congress. New provisions could consider authorizing 

VITA sites to implement pay-as-you-go fees for the most complex 

tax filings. 

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7 Center on Budget and Policy Priorities, ‘‘EITC and Child Tax Credits Promote Work, Reduce 

Poverty, and Support Children’s Development.’’ (2015). Available online at http://www.cbpp.org/ 

cms/?fa=view&id=3793 8 Brookings Institution, ‘‘Minority and Women Entrepreneurs: Building Capital, Networks, 

and Skills.’’ (2015). Available online at http://www.brookings.edu/ /media/research/files/papers/ 

2015/03/11-hamilton-project-expanding-jobs/minority—women—entrepreneurs——building—skills—barr—final.pdf 

Aiding Underserved Communities through Proven Tax Policy 

The Earned Income Tax Credit (EITC) is an important tax credit 

for low-income workers and allows entrepreneurs to reinvest their 

EITC back into their business. Research has shown that the EITC 

promotes work, reduces poverty, and benefits microbusinesses.7

The EITC can be strengthened to continue to aid underserved 

communities. Interestingly, the current structure of the EITC 

(withholding credit in U.S. Treasury) has increased savings among 

low- and moderate-income individuals—a lauded goal. 

Create and Expand Credits Needed by Microbusiness 

AEO believes a New Entrepreneur Tax Credit would incentivize 

business creation. Studies have consistently found that underserved communities and individuals benefit from self-employment 

and new business ventures.8 AEO encourages Congress to look further at small business tax provisions already in the tax code and 

how they could benefit new businesses during its time of greatest 

challenge. 

Established microbusinesses should also be supported to save for 

their retirement. The SBA Office of Advocacy found that microbusinesses, especially those owned by minorities, are the least likely to have retirement savings. Currently, the Saver’s Credit exists 

to address this issue. That credit, however, is nonrefundable, needlessly complex and is defined by sharp income eligibility cliffs. 

These shortcomings mean that only a very small percentage of lowincome tax filers qualify for the credit, and an even smaller number actually claim the credit. By simplifying how microbusiness 

owners claim the credit and by making it refundable, Congress can 

improve the Saver’s Credit’s ability to aid saving for retirement. 

The need for action on comprehensive tax policy is clear. In our 

view, addressing the corporate rate alone would be unfair for the 

microbusiness community at the very backbone of the American 

economy. Reforms should be enacted, based on the ideas of a simpler and fair tax code. Finally, should a tax overhaul not be viable 

this Congress, there are still small, but important, tax changes for 

policymakers to consider to strengthen the community AEO serves. 

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

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About AEO 

The Association for Enterprise Opportunity (AEO) is the voice of 

microbusiness in the United States. For two decades, AEO and its 

more than 400 member organizations have helped millions of entrepreneurs contribute to economic growth while supporting themselves, their families and their communities. AEO members and 

partners include a broad range of organizations that provide capital 

and services to assist underserved entrepreneurs in starting, stabilizing and expanding their businesses. Together, we are working to 

change the way that capital and services flow to underserved entrepreneurs so that they can create jobs and opportunities for all. 

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1 U.S. House of Representatives Committee on Small Business, Memorandum on Tax Reform: 

Ensuring that Main Street Isn’t Left Behind. 2015. Available online at http:// 

smallbusiness.house.gov/uploadedfiles/4-15-2015—hearing—memo.pdf 2 Internal Revenue Service, National Taxpayer Advocate: 2014 Report to Congress. 2015. Available online at http://www.taxpayeradvocate.irs.gov/media/default/documents/2014-annual-report/ 

volume-one.pdf 

On behalf of women entrepreneurs nationwide and our diverse 

group of Coalition Partners, Women Impacting Public Policy 

(WIPP) submits the following statement identifying the need for 

tax reforms to benefit women business owners. 

As the advocate for the women’s business community, WIPP has 

always supported a simpler and fairer tax code. Nearly 90% of 

women-owned firms are small businesses that, as this Committee 

has noted, face increased burdens and costs from an outdated tax 

system.1 Most important to women business owners, though, is the 

need for comprehensive reform. 

In the current environment of tax reform proposals, agreement 

is building on the need to lower the corporate tax rate to be globally competitive. Doing so without consideration for the millions of 

pass-through entities paying business taxes as individuals would 

be unfair. Tax reform must be done comprehensively. Raising or 

lowering the corporate or individual rate independent of the other 

would shift the balance between business types more than three 

decades in the making. 

Change, however, is needed. Not only has the business environment noticeably evolved since the last tax overhaul in 1986, but 

also the American economy. Simply put, now is the time for reform. 

WIPP believes that two overarching themes should guide a rewrite of the tax code: simplicity and fairness. The current system 

is too complex, creating confusion and frustration for women-owned 

businesses. The system is also unfair to the vast majority of 

women-owned firms that are small businesses, because they do not 

have the same capabilities and resources as larger corporations 

that take advantage of the code’s complexity. 

Bringing Simplicity to the Tax Code 

Part of making tax reform simple is making tax reform permanent. Tax laws changed the Internal Revenue Service’s (IRS) tax 

code on two different occasions in 2013, and the IRS National Taxpayer Advocate stated that these changes often generate taxpayer 

confusion.2 In addition, Congressional action on business deductions on a piecemeal basis makes planning difficult. Permanent tax 

reform will lead to more certainty, and as a result, better-informed 

business decisions. 

Complexity has costs for the government as well. It increases the 

ability of firms and individuals to hide revenues. A simpler code 

and filing system would make perpetrators of tax evasion more obvious to an IRS struggling with diminished resources. The annual 

tax gap—the significant amount of revenue owed but not collected—is partially caused by the code’s complexity. In 2001, the 

most recent year analyzed by the IRS, the tax gap was $345 billion. 

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3 Internal Revenue Service, National Taxpayer Advocate: 2014 Report to Congress Executive 

Summary (2015), available online at http://www.taxpayeradvocate.irs.gov/Media/Default/Documents/2014-Annual-Report-to-Congress-Executive-Summary.pdf 4 U.S. Government Accountability Office, ‘‘Corporate Income Tax: Effective Tax Rates Can Differ Significantly from the Statutory Rate.’’ 2013. Available online at http:www.gao.gov/assets/ 

660/654957.pdf 5Small Business Administration, ‘‘The Impact of Regulatory Costs on Small Firms 7-8.’’ 2010. 

Available online: https://www.sba.gov/sites/default/files/ 

The%20Impact%20of%20Regulatory%20Costs%20on%Small%20Firms%20%28Full%29.pdf 

The view of the tax code with regard to complexity is best summarized by the National Taxpayer Advocate in its most recent report to Congress: ‘‘We have to face up to the fact that we have an 

incredibly complex tax system that, by virtue of its complexity, creates burden, confusion, and unfairness.’’ 3 WIPP agrees, and urges 

Congress to address these challenges. 

Ensuring the Tax Code is Fair 

American women-owned businesses come in all shapes and sizes, 

including partnerships, S-corps, C-corps, LLCs, and sole-proprietorships. Having different rules for different businesses only increases 

complexity (see above). Such a tax system hinders growth and discourages businesses to grow in a way that is best suited for their 

efforts and development. 

Whether caused by different compliance costs, business structures, or accounting methods, the reality is, entrepreneurs are paying more than big business. American corporations only pay an effective tax rate of 12.6%, which is nowhere near the statutory 35%, 

while small businesses operating as S-Corps pay an effective tax 

rate of nearly 27%.4 All the while, small firms are paying 67% 

more in tax compliance.5 Resolving this inequity should be a goal 

of the next revision of the tax code. 

While WIPP is optimistic that the 114th Congress can lead on 

tax reform, smaller tax policies can aid women entrepreneurs without a broader overhaul. In the absence of comprehensive reform, 

there are steps Congress can take to further support women entrepreneurs. 

Incentivize New Businesses 

Both chambers of Congress search, almost annually, for ways the 

tax code can support start-up companies and newly found businesses. WIPP recommends making many of the tax credits and deductions already proven to support small businesses available to 

newly formed businesses in their first three years. In the event of 

an overhaul that removes ‘‘tax extenders,’’ they could still be offered to the newest small businesses. 

Employee-owned Businesses 

Businesses with employees who are financially invested in the 

company’s success often produce impressive results. That is why 

WIPP recommends that any tax reform avoid modifying the provisions that support Employee Stock Ownership Plan (ESOPs). 

ESOPs have been a valuable option for employees to be rewarded 

for hard work and to move on after the departure of an owner. 

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6Testimony of Donald Williamson to the House Small Business Subcommittee on Economic 

Growth, Tax and Capital Access, ‘‘Cash Accounting: A Simpler Method for Firms?’’ (2014), available online at: http://smallbusiness.house.gov/uploadedfiles/7-10-2014 williamson testimony.pdf. 

Even more important, they represent another way for small businesses to access capital at low cost. These plans should carry protections to prevent undue risk to employees, but have also demonstrated an increase in production and profitability of many small 

businesses. 

Simplify and Expand Cash Accounting Method 

Most small businesses operate in a pretty simplistic manner: income and expenses run through the same bank account—similar to 

a personal checking account that most Americans use. Currently, 

the tax code does not reflect this practice—instead holding many 

small businesses to the same accounting standards as global corporations and publicly traded companies. 

This does not have to be the case. Expanding the cash accounting 

method to a larger threshold would give more women entrepreneurs a simpler income reporting mechanism, allowing them to 

run their businesses and focus on growth. 

Moreover, as the Kogod Tax Center has noted, the cash accounting method should be simplified as well. There is no benefit to the 

IRS, and certainly a detriment to small businesses, by keeping unnecessary complications in this accounting method.6

Expand the Small Business Health Care Tax Credit 

The Affordable Care Act included a tax credit for small businesses that provided health insurance to their employees. Currently, the tax credit is only available to businesses with fewer 

than 25 employees and average wages of less than $50,000. Moreover, to receive the full tax credit, which covers up to 50% of employer-paid premiums, businesses must have 10 or fewer employees 

and average wages of up to $25,000. Women business owners have 

shared with WIPP that the credit is too restrictive to be valuable. 

WIPP recommends expanding eligibility for the tax credit. Under 

legislation in this Congress, the Small Business Tax Credit Accessibility Act (S. 379), these restrictions would be relaxed to make 

businesses with up to 50 employees and average wages of up to 

$80,025 eligible for the tax credit. Additionally, it would extend the 

number of consecutive years a small business can claim the tax 

credit from two (current law) to three years. It also removes the requirement that employers claiming the credit must contribute the 

same percentage of the cost for each employee’s health insurance. 

Women business owners want to provide coverage to their employees. Accessing that help should be easy, and not limited to a few 

businesses. 

Thank you for the consideration of these views. WIPP has long 

appreciated the role of the House Small Business Committee as an 

advocate for the diverse business community, including women entrepreneurs. 

Æ 

SBREP-219 with DISTILLER