U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

40–856 PDF 2008

FULL COMMITTEE HEARING ON

MODERNIZING THE TAX CODE:

UPDATING THE INTERNAL REVENUE

CODE TO HELP SMALL BUSINESSES

STIMULATE THE ECONOMY

COMMITTEE ON SMALL BUSINESS 

UNITED STATES HOUSE OF 

REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

APRIL 10, 2008

Serial Number 110-83

Printed for the use of the Committee on Small Business

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house 

HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

HEATH SHULER, North Carolina 

CHARLIE GONZA ́ LEZ, Texas 

RICK LARSEN, Washington 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

HENRY CUELLAR, Texas 

DAN LIPINSKI, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

BRUCE BRALEY, Iowa 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

BRIAN HIGGINS, New York 

MAZIE HIRONO, Hawaii 

STEVE CHABOT, Ohio, Ranking Member 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

STEVE KING, Iowa 

JEFF FORTENBERRY, Nebraska 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

DAVID DAVIS, Tennessee 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KEVIN FITZPATRICK, Minority Staff Director

STANDING SUBCOMMITTEES 

Subcommittee on Finance and Tax

MELISSA BEAN, Illinois, Chairwoman 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

VERN BUCHANAN, Florida, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa

Subcommittee on Contracting and Technology

BRUCE BRALEY, IOWA, Chairman 

HENRY CUELLAR, Texas 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

JOE SESTAK, Pennsylvania 

DAVID DAVIS, Tennessee, Ranking 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

MARY FALLIN, Oklahoma

(II) 

Subcommittee on Regulations, Health Care and Trade

CHARLES GONZA ́ LEZ, Texas, Chairman 

RICK LARSEN, Washington 

DAN LIPINSKI, Illinois 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

JOE SESTAK, Pennsylvania 

LYNN WESTMORELAND, Georgia, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

MARILYN MUSGRAVE, Colorado 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida

Subcommittee on Urban and Rural Entrepreneurship

HEATH SHULER, North Carolina, Chairman 

RICK LARSEN, Washington 

MICHAEL MICHAUD, Maine 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JEFF FORTENBERRY, Nebraska, Ranking 

ROSCOE BARTLETT, Maryland 

MARILYN MUSGRAVE, Colorado 

DAVID DAVIS, Tennessee

Subcommittee on Investigations and Oversight

JASON ALTMIRE, PENNSYLVANIA, Chairman 

CHARLIE GONZA ́ LEZ, Texas 

RAUL GRIJALVA, Arizona 

MARY FALLIN, Oklahoma, Ranking 

LYNN WESTMORELAND, Georgia

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page

Vela ́zquez, Hon. Nydia M. ....................................................................................... 1

Chabot, Hon. Steve .................................................................................................. 2

WITNESSES

PANEL I: 

Mackey, Mr. Scott, Economist/Partner, Kimbell Sherman Ellis, LLP, Montpelier, VT, On behalf of CTIA - The Wireless Association ................................... 4

Hoops, Mr. Jeffrey R., Ernst & Young LLP, New York, NY, On behalf of 

the American Institute of Certified Public Accountants ................................... 6

Lyon, Dr. Andrew B., Principal, National Tax Services NTS, 

PricewaterhouseCoopers, LLP, Washington, DC ............................................... 8

Rosenthal, Mr. Fredrick, President, Jasper’s Restaurants, Beltsville, MD, On 

behalf of the National Restaurant Association .................................................. 9

Greenblatt, Mr. Drew, President, Marlin Steel Wire Products, Baltimore, 

MD, On behalf of the National Association of Manufacturers ......................... 11

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 30

Chabot, Hon. Steve .................................................................................................. 32

Altmire, Rep. Jason ................................................................................................. 33

Mackey, Mr. Scott, Economist/Partner, Kimbell Sherman Ellis, LLP, Montpelier, VT, On behalf of CTIA - The Wireless Association ................................... 34

Hoops, Mr. Jeffrey R., Ernst & Young LLP, New York, NY, On behalf of 

the American Institute of Certified Public Accountants ................................... 39

Lyon, Dr. Andrew B., Principal, National Tax Services NTS, 

PricewaterhouseCoopers, LLP, Washington, DC ............................................... 49

Rosenthal, Mr. Fredrick, President, Jasper’s Restaurants, Beltsville, MD, On 

behalf of the National Restaurant Association .................................................. 61

Greenblatt, Mr. Drew, President, Marlin Steel Wire Products, Baltimore, 

MD, On behalf of the National Association of Manufacturers ......................... 72

Statements for the Record: 

The Telework Coalition ........................................................................................... 76

(V) 

(1)

FULL COMMITTEE HEARING ON 

MODERNIZING 

THE TAX CODE: UPDATING THE INTERNAL 

REVENUE CODE TO HELP SMALL 

BUSINESSES 

STIMULATE THE ECONOMY 

Thursday, April 10, 2008

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

The Committee met, pursuant to call, at 10:00 a.m., in Room 

1539 Longworth House Office Building, Hon. Nydia Vela ́zquez 

[chairman of the Committee] presiding. 

Present: Representatives Vela ́zquez, Hirono, Chabot, Akin, 

Fortenberry, Davis, Fallin, and Buchanan. 

OPENING STATEMENT OF CHAIRWOMAN VELA ́ ZQUEZ 

Chairwoman VELA ́ ZQUEZ. Good morning, everyone. I now call this 

hearing to order on updating the Internal Revenue Code to help 

small businesses stimulate the economy. 

As we approach April 15th, millions of Americans are preparing 

to make the tax filing deadline. Individuals and businesses are 

busy working through tax forms and schedules to determine what 

they owe the IRS. 

For entrepreneurs, however, the tax code has become an obstacle 

to success rather than a means of encouraging expansion of their 

firms. Today’s hearing will look at ways U.S. tax policy can be improved to provide immediate relief for these leaders of U.S. economic activity. 

While the most recent economic stimulus package was focused on 

rebate checks which aimed to boost consumer spending, more can 

and must be done to foster sustainable economic growth. The tax 

code is often used to influence and encourage individual and business decisions. In fact, the Internal Revenue Code is filled with numerous preferences, deductions, credits or favorable tax rates that 

boost investment, savings for retirement, and home ownership. 

However, in numerous ways the tax code is stacked against the 

average small business owner. Despite a number of changes in the 

past ten years, there continue to be an abundance of inequities and 

unnecessary complexities in our tax laws. 

While fundamental reform may be years away, there is an opportunity to modernize some of the more antiquated provision which 

2

raise major obstacles and are particularly harmful to entrepreneurs. 

Today’s hearing will focus on those aspects of the tax code that 

can and should be updated or simplified without delay. In conjunction with this hearing, the Committee will also release a report 

outlining those reforms that will aid small businesses during the 

economic downturn and put us on the path to recovery. 

In its review of this nation’s tax laws and their impact on entrepreneurs, the Committee found that a number of provisions failed 

to adequately reflect the changing economy. Tax policies simply 

have not kept up with the shift to a service-based economy and 

lack adequate recognition of the role technology plays. 

Furthermore, home-based businesses are unnecessarily hampered by paperwork burdens and depreciation schedules that do 

not reflect the realities of the equipment and buildings that are 

part of today’s small companies. 

Last but not least, there are provisions in existing law that shift 

investment away from small firms. The report outlines reform for 

each of these problems, while reflecting a need to update the tax 

code to spur innovation and growth. 

Given that the last major reform of the tax code took place in 

1986, it is clear these changes are long overdue. 

Today we will hear from business owners who can provide us 

with additional insights into how the tax code is affecting this important sector of the economy. From what we already know, the 

facts are not encouraging. While small firms are America’s job creators, just last week we learned that 80,000 more jobs were lost in 

March. We must take action to stop these trends and instead of losing jobs make sure we are creating them. 

I believe there exists an opportunity to implement some reforms 

immediately. Doing so will have immediate benefits for small businesses. It will also insure the nation’s long-term economic growth. 

I would like to thank all of the witnesses for testifying today, and 

I now yield to the Ranking Member for his opening statement. 

OPENING STATEMENT OF MR. CHABOT 

Mr. CHABOT. I thank the Chairwoman for yielding, and good 

morning to everyone. I thank you all for being here as we examine 

ways to simplify the tax code for small businesses. 

I want to thank you, Madam Chair, once again for recognizing 

this pressing issue and for calling this timely hearing. 

April 15th is right around the corner, and it is this time of year 

that we all become more attuned to the tax burden placed upon all 

of us by our federal and state governments. Small business owners 

feel this burden profoundly as the question how will this affect my 

tax bill echoes all year long in each decision that they make. 

The complexity and uncertainty of the tax code limits small business growth, slows job creation and puts a damper on our overall 

economy. In many respects the tax code makes decisions for entrepreneurs, and all too often those decision are to not upgrade equipment or offer health insurance or make other key investments because of the tax complications. 

According to the Nonpartisan Tax Foundation, Tax Freedom 

Day, the day that we begin to work for ourselves as opposed to 

3

working to pay taxes, falls on April 23rd this year. So that means 

that the average person, from January 1st through April 23rd, all 

of the income that they earn goes to the government, either the 

federal government, state government, local governments, government in one form or another. It is not until after April 23rd for the 

rest of the year that the person is working for themselves or their 

own family. That is outrageous as far as I am concerned. 

That means we work 113 days of each year to pay Uncle Sam 

or the state or local versions of Uncle Sam before we earn a single 

dollar for ourselves. In 2001 and 2003, Congress passed legislation 

to cut taxes across the board on all Americans. Unfortunately, 

these tax cuts are set to expire at the end of 2010. In other words, 

taxes will go up in two years unless Congress takes action to prevent that from happening. 

That also includes one of the most, I believe, egregious taxes, and 

that is the federal inheritance tax or the death tax in which the 

federal government can take up to 55 percent of what a person has 

when they pass away, and that is generally property that has already been taxed during a person’s lifetime. 

And the two groups that are hit most acutely with this tax are 

small businesses and farmers. That is oftentimes why the business 

or farm does not make it to the next generation, because it has to 

be literally sold in order to pay for the federal death tax, and those 

employees lose their jobs oftentimes. 

Higher taxes, particularly on capital, cause the level of private 

investment to fall, a devastating blow to the many small businesses 

who rely on private investors for their livelihood. 

Before it sunsets, I want to see Congress make this tax relief 

permanent. It is not just the added benefit of paying lower taxes, 

but the certainty that comes with it. Small businesses are always 

better off when they can plan for the future, and having stable and 

predictable bills is a big part of that. 

The complexity of our tax code is staggering. At over 54,000 

pages or, if you stack it one on top of another, it’s eight Bibles 

thick, the code is a morass of laws and regulations that has been 

bloated to an unmanageable proportion. For small businesses just 

starting out, it can be especially difficult to know exactly what to 

do and when to do it. Small businesses simply do not have the 

technical expertise and in many cases the financial ability to hire 

accountants to help them understand what deductions and benefits 

they might be eligible for. 

There’s also a huge disparity in the way in which smaller firms 

compare with larger ones when it comes to tax compliance. In 

2001, the Small Business Administration’s Office of Advocacy released a report on the regulatory cost faced by small firms that 

contained an estimate of the paperwork compliance cost. The report 

showed that small businesses with fewer than 20 employees spend 

over $1,200 per employee to comply with tax paperwork, record 

keeping, and reporting requirements, more than double their larger 

competitors. 

Sounder, simpler tax policies would benefit both the government 

and small business owners by improving compliance and lowering 

cost. A local veterinarian near my district in Cincinnati found out 

the hard way just how complex the tax code is. Last April the pracVerDate 0ct 09 2002 17:37 May 09, 2008 Jkt 033615 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\40856.TXT LEANN
4

tice passed an employee wage threshold that required it to change 

how its 941 forms were deposited. Of course, the IRS didn’t notify 

the veterinarian until August. 

She contacted her CPA and followed his advice, but the next letter from the IRS was a fine. After sending a letter citing as she 

put it ignorance as first time business owners—that was her 

quote—she received not guidance but a new penalty bill, bringing 

her fees to more than $2,400. That is a lot and often too much for 

a small business to absorb. 

Her biggest argument was that she used the IRS’ electronic federal tax payment system and did not see why there wasn’t a system built in to alert users to things like passing into a new threshold. Most of all, she just wanted to know why things could not be 

simpler. 

We are here today because that is a fair question that deserves 

an answer. I am looking forward to hearing from our panel their 

recommendations for simplifying and modernizing the tax code. 

Outdated provisions simply do not reflect real world experiences 

and the way business is done domestically and globally. 

Again, I want to thank the Chairwoman for calling this hearing, 

and I look forward to working with the Chair to help our colleagues 

on the Ways and Means Committee provide real tax relief, simplification, and certainty to our small businesses. 

Once again, thank you, Madam Chair, and I yield back.

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Chabot. 

And now I recognize our first witness, Mr. Scott Mackey from the 

Wireless Association. He is with Kimbell Sherman. He consults to 

major wireless telecommunication providers, and is testifying on 

behalf of CTIA, the Wireless Association. CTIA represents all sectors of the wireless communication industry, including cellular and 

personal communications services. 

Gentlemen, you will have five minutes, and in front of you there 

is a timer that will let you know when your time has expired. 

Welcome. 

STATEMENT OF MR. SCOTT MACKEY, ECONOMIST/PARTNER, 

KIMBELL SHERMAN ELLIS, LLP, ON BEHALF OF CTIA - THE 

WIRELESS ASSOCIATION 

Mr. MACKEY. Thank you very much, Madam Chair, Mr. Chabot, 

members of the Committee, for holding this timely and important 

hearing. 

As you both said, tax policy is very important for small businesses. 

I am a partner at Kimbell Sherman Ellis in Montpelier, 

Vermont, and so I am here today wearing two hats, one as a part 

owner of a small business that has to comply with the regulations 

and provisions that you both mentioned, and also I have the privilege of representing CTIA, the Wireless Association and its many, 

many members that are involved in a very high tech and competitive business of wireless. 

The business that I am in, one of the things we do is provide an 

electronic bill tracking system for folks that are following what is 

going on in our states in terms of legislation that affects them in 

5

many ways, and so our business has been able to grow from eight 

employees in 2006 to 22 today, which that is not a lot of employees, 

but for us it is a lot. 

And quite simply, we could not have grown our business without 

the advances that have taken place in the last few years in wireless technology, communications technology, and information services. So when I talk to you about these provisions that affect the 

wireless industry, these are also indirect in our ability to be productive and make money and be successful in business. 

There are many issues I could be talking about today. Some of 

the other panelists will address some of these. I am only going to 

focus on three. The first one is the issue of cell phones as listed 

property. The second is extension of the research and development 

tax credit. And the third, which is slightly off point but very important, is a bill soon to be introduced which would impose a moratorium on discriminatory state and local taxes on the wireless industry. 

The first issue, listed property, is a very difficult paperwork burden that is being imposed on small business. I mean, basically 

what it says is if you provide a cell phone or a Blackberry for your 

employees, that is not deductible as a business expense unless 

those employees go through their bill and identify each and every 

call and its business purpose. 

Now, we have ten employees that have cell phones. The time 

that it would take for those employees to go through and look 

through hundreds and hundreds of calls, it is just a paperwork 

nightmare, and the issue is that if the IRS were to audit us, they 

would say that this is not a nontaxable fringe benefit. It is a taxable item, and therefore, we would have to collect back payroll 

taxes, Social Security and other taxes, and so this issue needs to 

be addressed. 

Small businesses, most of the folks I talk to, do not even know 

it exists, and yet on audit potentially they could be paying hundreds or thousands of dollars in back taxes. So this issue needs to 

be addressed, and fortunately there is a bill pending, H.R. 5450, by 

Representatives Johnson and Pomeroy that would fix this, and we 

urge this Committee to support that. 

The second issue is the research and development tax credit. 

Many folks may not view the wireless industry as small business 

because of the number of customers that subscribe to wireless technologies, but having just come back from the CTIA show in Las 

Vegas, there were thousands and thousands of small entrepreneurs 

that are developing little niche products and services that were run 

over wireless networks, and the R&D credit is very important to 

those small businesses that are really on the cutting edge of technology and innovation. 

And while our firm does not use the R&D credit, we rely on those 

innovations and technologies that are coming out of the industry to 

provide us new tools to do business and be more productive and 

profitable. So I think all small businesses whether they claim the 

credit or not benefit from the innovation in technology that comes 

from providing that credit to our smaller entrepreneurs and other 

businesses as well. 

6

And then the final issue is a moratorium on discriminatory state 

and local taxes on wireless service. I recently published a study 

which found that a typical wireless consumer pays double the rate 

of taxes that other taxable goods and services that are taxed in the 

states, and so this is a very important issue for businesses like 

mine and other small businesses that end up having to pay a lot 

of money in state and local taxes on their wireless service. 

Fortunately, Representatives Lofgren and Cannon will be introducing either this week or next week, I hear, a five-year moratorium on discriminatory taxes. So this would allow states to tax 

wireless service if they are taxing other goods and services under 

the same tax, but would present the singling out of wireless services and wireless consumers for taxes just because 20 years ago 

telecom was a monopoly and, therefore, these old taxes are still on 

their books. 

So this is a very important piece of legislation that, while not 

covered under the Internal Revenue Code, is something that members of Congress could do to help small businesses that rely on 

wireless technologies to compete. 

So in conclusion, thank you very much for the opportunity to testify on these issues. I look forward to any questions that you might 

have at the conclusion of the panel. 

And, again, thank you. 

[The prepared statement of Mr. Mackey may be found in the Appendix on page 34.]

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Mackey. 

Our next witness is Mr. Jeffrey Hoops. He is with Ernst & Young 

in New York. He is here representing the American Institute of 

Certified Public Accountants. AICPA has served the accounting 

profession since 1887. The association has more than 350,000 members, including CPAs in business and industry, public practice, government, education, and international associates. 

Welcome, sir. 

STATEMENT OF MR. JEFFREY R. HOOPS, PARTNER, ERNST & 

YOUNG, LLP, ON BEHALF OF THE AMERICAN INSTITUTE OF 

CERTIFIED PUBLIC ACCOUNTANTS 

Mr. HOOPS. Good morning. Thank you for inviting me. 

Madam Chairwoman Vela ́zquez and Ranking Member Chabot 

and other distinguished members of the Committee, I am here on 

behalf of the American Institute of CPAs. Our 300,000 members 

represent literally millions of small businesses, and at this time of 

the year especially we see first hand both the staggering complexity that you mentioned and the unnecessary complexities that 

you mentioned that face small businesses when trying to comply 

with the tax laws. 

We have submitted a number of important changes that we think 

could be made to modernize the tax code and help small businesses 

be more competitive, especially in a global marketplace, and I 

would request that our previously submitted testimony be include 

in the official record of this hearing. 

Today I would like to focus on a few of those items that we believe could make the tax code simpler, as you suggested. Some of 

7

those have to do with S corporations. As you probably know, S corporations are a very popular vehicle for small business owners 

when it comes to forming their corporations. One significant hurdle 

that is faced by a C corporation that wants to convert to an S corporation is the LIFO recapture tax. This is a tax which is computed 

on the difference for inventories computed under the LIFO method 

of taxation and the FIFO method of taxation. And that recapture 

tax is paid that the date that the corporation elects to be taxed as 

an S corporation. 

We believe that this tax could be more than sufficiently addressed through the built in gains tax, and we believe that the repeal of this provision, Section 1363(d) of the Internal Revenue 

Code, would allow more small businesses such as car dealerships, 

jewelry stores and others, to participate in this popular form of 

doing business, the S corporation. 

A second corporate level tax that is paid by S corporations is 

what is known as the passive investment income tax or also more 

popularly known as the sting tax. This is paid by many corporations who have previously accumulated earnings as a C corporation, and when their gross receipts as an S corporation exceed more 

than 25 percent or royalties, rents and interest and dividends exceed more than 25 percent of their gross income. 

In addition, if this happens for three years in a row, the S corporation election is automatically terminated. We believe that the 

law should be changed to eliminate the termination provisions because we think that the penalty provision or the sting tax is 

enough and that business owners should not be penalized by having their S corporation status repealed. 

I would like to spend a couple minutes also focusing on partnerships. Many new businesses, small businesses form partnerships 

and partnerships or limited liability companies have become the 

preferred method for most new businesses that involve more than 

one person. Generally Subchapter K of the Internal Revenue Code, 

which governs the taxation of partnerships and partners, can be 

extremely complex, and yet there are only a limited number of de 

minimis rules or other ways for small businesses that are required 

to report under partnership rules to simplify their lives by electing 

out of Subchapter K. 

One recent enactment created what is called the qualified joint 

venture, and this was based on a noble congressional desire to simplify the tax life of husbands and wives operating businesses together and to make certain that both spouses receive credit for purposes of Social Security and Medicare. This election allows the two 

partnership participating spouses to forget about the complexities 

of Subchapter K and to file as separate sole proprietors. 

Unfortunately, a recent IRS interpretation of this new statute 

provides, if this interpretation is allowed to stand, it is very unclear as to which, if any, of these small businesses operating as 

husband and wives would be allowed to take advantage of this provision. That should be clarified. 

We agree, by the way, with Mr. Mackey with respect to the treating phone and personal PDAs as listed property, and we think that 

that should be repealed. 

8

And finally, we would like Congress to change the rules which 

currently provide that a taxpayer can take a position without penalty on the Internal Revenue Code that a tax preparer could not 

take without disclosure or being subject to penalty. We think that 

makes the playing field unfair, and we would like to see that 

changes as well. 

Thank you very much. 

[The prepared statement of Mr. Hoops may be found in the Appendix on page 39.]

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Hoops. 

Our next witness is Dr. Andrew B. Lyon. Dr. Lyon is with 

PricewaterhouseCoopers. He is a leader in NEC’s legislative and 

regulatory economic practice specializing in analyzing the revenue 

and economic effects of legislative and regulatory proposals. He is 

considered an expert in the tax field and contributed to the 2005 

President’s Advisory Panel on Tax Reform. 

Welcome. 

STATEMENT OF DR. ANDREW B. LYON, PRINCIPAL, NATIONAL 

TAX SERVICES, PRICEWATERHOUSECOOPERS, LLP 

Mr. LYON. Thank you. 

I thank the Committee for this opportunity to testify on the appropriate design of the tax system, especially as it applies to small 

business. My testimony is my own, and any opinions are not necessarily those of PricewaterhouseCoopers. 

I understand your interest is both with respect to the current 

economic environment and also a forward looking interest in the 

promotion of long-term economic growth. While short-run economic 

concerns may create deviations from the most desirable permanent 

tax structure, I believe the long-term growth of the U.S. economy 

and small businesses is best promoted by providing a simple, transparent tax system with the lowest possible tax rates. 

Small business plays a vital role within the broader private economy. In 2005, businesses with less than 500 employees represented 

99.7 percent of all businesses and accounted for half of all private 

employment. 

Government data also show that a relatively small number of 

large businesses also play an important role in the economy, and 

as an example, firms receiving more than $50 million in receipts 

represent just a tiny fraction of all firms, yet they account for about 

69 percent of total business receipts. 

Given the important role of both small and large businesses in 

the economy, there is a general consensus among economists that 

the tax system should not try to favor one form of business over 

another. The basic rationale is that in the absence of taxes, the 

market economy on its own would come up with the best allocation 

of small and large businesses that would maximize output in the 

economy. So in the presence of taxes, you would not want to try 

to change the outcome that would occur without taxes. 

The one complication with this argument is that the very presence of a tax system can impose inordinate compliance burdens on 

small businesses, and while to some this might justify the use of 

special incentives to try to offset this compliance burden, the speVerDate 0ct 09 2002 17:37 May 09, 2008 Jkt 033615 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\40856.TXT LEANN
9

cial incentives themselves may create new compliance burdens, and 

the cost of claiming those special incentives, again, the burdens, 

may fall disproportionately on small businesses. 

My written testimony touches upon several provisions in the tax 

code that create some distinctions between small and large businesses. Some of those differences are favorable to small businesses. 

Some are unfavorable. The point I want to emphasize is the inordinate compliance cost placed on small businesses today. 

IRS data indicate that there are both significant amounts of 

under reporting of income by small businesses and significant compliance costs placed on small businesses, and there may be a correlation between the two. While noncompliance is not to be condoned, it can be understandable how the heavy compliance burdens 

may generate the result of noncompliance with some of the rules 

of the tax system. 

Examining compliance costs, one IRS study found that busi- nesses with less than $10,000 in annual receipts faced compliance 

costs that were twice as large as the total receipts of the business. 

Even as you expand to slightly larger small businesses, for example, those businesses with receipts between $100,000 and $500,000, 

compliance costs are estimated to be about five percent of total receipts. Again, that is measured relative to receipts, not income. 

Income for such firms on average is about seven and a half percent of total receipts. As a result, compliance costs for these businesses represent an additional 60 percent tax on their income. 

In summary then, as you think about reforming the tax system, 

it is essential to drive down the cost of complying with the nation’s 

tax laws by reforming them with the goal of producing a clear, simple, and transparent tax system. As I mentioned at the beginning, 

I think this can best be achieved by creating a tax system with the 

lowest possible tax rates on business and with a minimum of special incentives. And in this way we can best foster entrepreneurship, innovation, and the long-term investment that will raise this 

nation’s living standards. 

Thank you. 

[The prepared statement of Dr. Lyon may be found in the Appendix on page 49.]

Chairwoman VELA ́ ZQUEZ. Thank you, Dr. Lyon. 

Our next witness is Mr. Frederick Rosenthal, National Restaurant Association. Mr. Rosenthal is the president of Jasper’s Restaurants. Jasper’s has been in operation for over 25 years and has 

three locations in Maryland. Mr. Rosenthal is testifying on behalf 

of the National Restaurant Association, founded in 1919. The association is the leading advocate for the restaurant industry. It’s 

945,000 members employ 13.1 million people. 

Welcome, sir. 

STATEMENT OF MR. FREDERICK ROSENTHAL, PRESIDENT, 

JASPER’S RESTAURANTS, ON BEHALF OF THE NATIONAL 

RESTAURANT ASSOCIATION 

Mr. ROSENTHAL. Thank you. 

I would like to thank the members of the Committee for giving 

me this opportunity to offer testimony on behalf of the National 

10

Restaurant Association about ways to update the tax code and help 

stimulate the economy. 

I have been an entrepreneur in the restaurant business for over 

40 years, building catering halls first in Baltimore, and restaurants 

since 1981 in Prince George’s, Montgomery, Anne Arundel, and 

Calvert Counties in Maryland. 

I am proud to be a part of an industry that plays such a critical 

role in this nation’s economy. The restaurant industry is the second 

largest private sector employer outside of the federal government, 

with more than 13 million employees, representing more than nine 

percent of the job base. The first is the health care industry, but 

we are a close second. 

The restaurant industry sales for this year are projected at $558 

billion equaling four percent of the U.S. gross domestic product. 

Nationwide there are 945,000 restaurant and food service outlets. 

More than seven out of ten of these are small businesses, more 

than seven out of ten! We are truly a small business industry becoming an economic powerhouse more and more so each year. 

I am here today to discuss the need for reforms in depreciation 

schedules, specifically to shorten the write-off for restaurant buildings and improvements to 15 years. This change would create immediate economic activity within the industry, which in turn would 

reverberate throughout the economy. 

There is currently legislation pending in the 110th Congress 

which addresses the accelerated restaurant depreciation for new 

construction and improvements. H.R. 3622 championed by Congressman Kendrick Meek from Florida and Patrick Tiberi from 

Ohio would make permanent a 15-year depreciation schedule for 

newly constructed restaurants, as well as restaurant improvements. 

The bill currently enjoys bipartisan support with 113 sponsors, 

including ten members of this Committee. There is no question 

that restaurant depreciation schedules are outdated. According to 

the tax code, restaurant buildings have a life of 39 and a half years 

in which they are written off. To suggest that a restaurant building’s actual life is 39 and a half years is ludicrous. In fact, I wonder 

how many of you have know a restaurant that has even been in 

existence 39 and a half years. 

Would any of you eat in a restaurant that had not been updated 

40 years? I cannot even imagine the condition of the bathrooms 

and the carpeting in the building. 

One hundred and thirty-three million individuals patronize this 

industry on a daily basis. Restaurants must constantly make 

changes to keep up with the daily assault of traffic in their buildings. In fact, most restaurants remodel and update their buildings 

every six to eight years, a much shorter time frame than is reflected in the current depreciation schedule. 

Over the years Congress has made numerous changes in the depreciation schedules. They have granted specific benefits to gas stations and convenience stores, recognizing the need in those industries, and there have been other changes that create faster writeoffs creating economic advantages. 

The tax code should not pick winners and losers in the restaurant industry. It should allow a level playing field on which all 

11

can play. In today’s environment with high commodity costs, restaurants and small businesses are now yielding bottom lines of 

three to four percent, down from ten percent in the 1980s. Most of 

these small businesses are unable to remodel their buildings. It is 

a spiraling effect, downturn of sales, increasing costs, and in many 

ways forcing small businesses to close when the patronage drops 

below an economic level of sustainability. 

All of these changes are addressed in my written testimony as 

well as a detailed explanation of the issue, and in respect for everyone’s time, I will just hit a few points. 

The restaurant industry is projected to spend $70 billion over the 

next ten years for building construction and renovation. Finally, 

there is no question as to whether or not this provision would immediately spur economic activity. Look what happened when Congress enacted a provision to provide restaurants a 15-year schedule 

for improvements to restaurant structures in 2004. In 2005, that 

provision was in effect. The restaurant industry spent more than 

$7.5 billion on improvements, a 42 percent increase over the previous year before enacted. 

We urge the members of this Committee to consider the information as evidence to keep a strong restaurant industry in order to 

help this nation’s overall economy. 

In conclusion, on behalf of the National Restaurant Association, 

thank you for allowing me to testify, and thank you to those members of the Committee who have co-sponsored and championed this 

important legislation. 

I will be happy to answer any questions when my turn comes. 

[The prepared statement of Mr. Rosenthal may be found in the 

Appendix on page 61.]

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Rosenthal. 

Our next witness is Mr. Drew Greenblatt, National Association 

of Manufacturers. He is the president of Marlin Steel Wire Products, established in 1968 in Baltimore. He is testifying today on behalf of the National Association of Manufacturers. 

NAM has advocated for small manufacturers since 1895. Founded in Cincinnati, Ohio, it has 14,000 member companies in all industry sectors located throughout the nation. 

Welcome. 

STATEMENT OF MR. DREW GREENBLATT, PRESIDENT, MARLIN 

STEEL WIRE PRODUCTS ON BEHALF OF THE NATIONAL ASSOCIATION OF MANUFACTURERS 

Mr. GREENBLATT. Thank you. 

Good morning, Chairwoman Vela ́zquez, Ranking Member 

Chabot, and members of the Committee. My name is Drew 

Greenblatt. I am the president and owner of Marlin Steel Wire 

Products in Baltimore, Maryland. 

Marlin was founded in 1968. We manufacture wire baskets, 

hooks, and wire forms. We have the capability to produce a wide 

range of custom products for our customers. Our products are used 

in industrial, aerospace, medical and automotive, factories and industries. We have clients like Caterpillar, Toyota, Boeing. 

12

Thank you for the opportunity to let us appear today and on behalf of the National Association of Manufacturers, we appreciate it. 

The NAM is the nation’s largest industrial trade association, and 

we represent small and large manufacturers in every industrial 

sector in all 50 states. I am pleased that you have addressed this 

subject of updating the Internal Revenue Code. It will help small 

businesses stimulate the economy. 

The NAM’s tax policy agenda is designed to promote U.S. jobs 

and competitiveness and insure continued economic growth. I 

would like to touch on a few of these specific concerns that we 

have, and they include making the income tax cuts permanent, providing a strengthened R&D credit, and repealing the three percent 

withholding requirement on all government contracts. 

Because Marlin Steel is an S corporation, we pay taxes at an individual rate. Many manufacturers like us are in the same boat. 

In fact, about half of all NAM members are similarly organized as 

flow-through companies, meaning they pay individual rates. 

For us, the legislation passed in 2001 and 2003 lowered the top 

individual tax rates. This has been very good for us. Lower tax 

rates mean more money after taxes to expand our operations and 

create new jobs. When enough manufacturers expand, we fuel economic growth. This translates into more money for the government 

to spend and lower deficits. 

It is paradoxical but true that lower rates mean higher tax revenues. Conversely, letting the Bush tax cuts expire effectively raises 

taxes in 2011. This will mean that we will be thinking about cutbacks right in the middle of an economic downturn. 

There has been a lot of talk recently about raising taxes only on 

the upper brackets, but many folks in Congress think this means 

that they are only raising it on the super wealthy, but I am here 

today to remind you that these rates will strike at the heart of 

small business. My tax return includes all of my business income, 

even though we have never paid a dividend. We pour every penny 

of profit back into the company to let it grow. This so-called profit 

that the IRS is taxing me on is not cash in my pocket. It is money 

that I keep in my company so we can buy another welding machine 

to make a basket like this right here. 

If my taxes go up, I will have to have less money to buy that 

welding machine or less money to hire a welder in Baltimore. The 

toll will not only be paid by manufacturers like myself, but it is 

also going to be one less machine that the welding machine company sells, and it is also going to be another unemployed person 

in Baltimore City. 

Wouldn’t it be better off if I was buying new equipment? 

Wouldn’t it be better off for me to be hiring new people an the unemployment rolls to be smaller? 

The R&D tax credit is also instrumental in maintaining our competitive edge. We are the primary innovator in the United States. 

Manufacturers understand that R&D drives new productivity. R&D 

is how we stay fresh, how we stay competitive. I cannot compete 

with other countries when it comes to wages. So I have to win on 

innovation. 

Chairman Vela ́zquez, let me give you a concrete example. 

Travers Tool is one of the excellent companies in your congresVerDate 0ct 09 2002 17:37 May 09, 2008 Jkt 033615 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\40856.TXT LEANN
13

sional district. They buy this basket right here from me. They resell it worldwide. No one is going to get rich from just this one basket model. Travers needs a steady flow of new, fresh ideas, new 

products that are competitive, that are different. 

We use this R&D tax credit to do our Thomas Edison imitation 

so that we can be different, innovative, and fresh. This tax credit 

helps Marlin stay innovative and contributes to jobs in our district, 

in your district. Unfortunately, because it is a temporary nature, 

this R&D tax credit, on again, off again, the fact that we are never 

certain whether it is going to be extended, it is very hard for me 

to decide whether or not we should continue plowing ahead reinvesting into the company. 

As of right now, the tax credit has expired. Because Congress 

failed to act, we are going to get hit with a big tax increase. Making this credit permanent would end the years of speculation, and 

it would give the business the certainty we need to plan ahead. 

In conclusion, the tax relief enacted in 2001 for families and 

businesses have played an important role in stimulating economic 

growth and job creation. Making this tax relief permanent would 

be an insurance policy for continued economic growth. Lowering 

tax rates, doing the permanent R&D credit are critical. 

Simplifying the tax code by repealing the three percent withholding, consolidating the AMT and the existing tax structure, and 

repealing the estate tax would go a long way towards helping the 

small business community. 

I want to thank you again, the Committee, for the opportunity 

to be here today and talking about the tax code and its impact on 

Marlin Steel Wire. I am happy to answer any questions. 

[The prepared statement of Mr. Greenblatt may be found in the 

Appendix on page 76.]

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Greenblatt. 

There is going to be a series of votes. So what I am going to do 

is I am going to ask the first question, and then defer to the minority members. Then when we come back after those series of votes 

we will continue the hearing. 

I would like to address my first question to Mr. Rosenthal. 

In your written testimony, you spoke about the connection between your industry and the construction trade. Obviously, because 

of the housing crisis, construction is one sector of the economy that 

is particular struggling. Can you discuss in greater detail how do 

you think that tax benefits that help restaurants will stimulate 

growth in your industry and in others? 

Mr. ROSENTHAL. That is a very good point. To give you an example, right now we have one of our restaurants is overdue for remodeling and refurbishing. We have plans on the drawing board to 

redo our first floor, redo the exterior, redo the roof and ceiling line 

at a cost of approximately $175,000. 

We are looking as to whether or not we can do this this year, and 

part of the problem is our bottom line at that store has dropped 

to about three percent. We are facing a perfect storm right now. 

Usually when we see economic dips like we are seeing right now, 

we find that demand drops and, therefore, our cost of doing business, supplies and food costs drop. 

14

But with the weak dollar and extremely high commodity costs, 

our costs, the food costs and products, have exceeded a five percent 

increase over the last year, with high labor costs dropping our bottom line to under three percent. 

Candidly, in an environment where we are only at a three percent profit line, we do not know if we can take the risk to make 

that investment. If we knew that we had the ability to look at getting accelerated depreciation, which would mean that approximately double our deduction next year, we would then be more 

likely to make that. 

As far as the building is concerned, yes, all of the construction 

companies are eager to do business. Three years ago we could not 

find a company to remodel and today we have 20 biting at the bit 

to do the job because they are hurting. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Chabot. 

Mr. CHABOT. Madam Chair, I am going to reserve my questions. 

Before I yield to my colleagues here, I just want to thank the 

panel, and I think their testimony was really excellent. I certainly 

agree that we need, rather than more special incentives complicating the tax code, to simplify it is the best thing that we could 

do and make the tax cuts that we already passed permanent so 

that businesses know what they are going to be dealing with down 

into the future and can plan for that now. I think that is the best 

thing that we could do for the economy, and hiring more people. 

But I will yield my time to the gentleman from Tennessee, Mr. 

Davis. 

Mr. DAVIS. Thank you so much. I appreciate each of you being 

here today. Thank you for what you do in our economy. 

You know, as I look around northeast Tennessee where I represent, I have been a small business owner myself before coming 

to Congress about 20 years. So I know what it is to make a payroll 

and have to pay taxes and hire accountants to make sure that I 

do everything the way I am supposed to. 

And I appreciate the opportunity, Madam Chairman, to have this 

hearing on taxes because I honestly believe that you cannot tax 

and regulate yourself into prosperity, and I think we are seeing 

that now especially with energy costs that are going up. As energy 

costs go up, commodity costs go up, and you are starting to see 

that. 

I signed onto a piece of legislation that several members of the 

House have signed onto called an economic growth package. I voted 

for the economic stimulus package. I think we actually need a 

growth package, and the best economic growth package is a good 

paying job. It is not higher taxes and more regulations. 

That legislation does basically three things, and I would like for 

you to talk to me about how you see this working in the economy. 

It would lower the top corporate rate from 35 percent to 25 percent. 

That would bring us in line with the European Union nations. That 

would bring jobs back to America that have actually left America 

in my mind. 

The second thing it would do is allow for immediate indexing for 

new equipment and buildings. 

15

And finally, the third thing it would do is decrease the top corporate capital gains rates to 15 percent bringing it in line with individual capital gains rates, putting more money back into small 

businesses so that they can go out and create those jobs, the ultimate best economic stimulus package. 

If each of you or some of you could talk about an economic 

growth package with those fundamental principles and what it 

would do to our economy, I would appreciate hearing your 

thoughts. 

Thank you. 

Mr. HOOPS. Thank you. 

I think that any package that reduces taxes will improve the 

economy. You certainly put more money into the pockets of small 

business owners. I think it is a fruitful debate and discussion to 

take into account whether those provisions will simplify the code 

or make them more complex. I appreciate the fact that the title of 

this hearing is modernizing the code, not simplifying it, and in an 

economic downturn, I suppose that modernizing is more important 

than simplifying. 

So I would say in general although your stimulus package will 

undoubtedly make the code more complex, it could very well have 

the effect of stimulating the economy by putting more money in the 

pockets of small business owners. 

Mr. LYON. Let me address the corporate rate reduction. If you 

look back prior to 1986, the United States had one of the highest 

corporate tax rates in the world. The 1986 Tax Reform Act reduced 

the corporate rate from 46 percent to 34 percent, and at that time 

did give the U.S. an advantage over most of our trading partners. 

However, what happened since 1986 in the 20-plus years is that 

all of our trading partners reduced their rates, and so as you mentioned, today the average combined federal and local corporate tax 

rate in the European Union is less than 25 percent. It is about 24 

and a half percent. So the U.S. corporate rate, by not changing on 

its own, became out of line with our trading partners and in many 

cases creates a competitive disadvantage for U.S. companies. 

And even at a 25 percent federal rate, companies would still be 

liable for state and local taxes, which on average would add close 

to four or five percentage points on top of that 25. So many companies might say that that is not even going far enough. 

Mr. ROSENTHAL. I think it was said here before that most of us 

in small business are taking the money from our, quote, unquote, 

profits and putting them back into our businesses. What this does, 

to lower the tax rate it enables us to invest and expand at a greater rate when we are burdened with higher taxes. 

Most people do not realize that our industry, the restaurant industry, today is a highly professional industry. We are not providing the stereotype of minimum wage jobs. We are providing 

major jobs for folks who have growth opportunities in executive positions, many of whom are in six figures or more, running restaurants, and in order to expand that, getting a great job, we need 

to expand our business. And at a time when taxes are high and we 

are unable to use that money to plow back into our business, then 

they obviously are not going to provide those jobs. 

16

Mr. GREENBLATT. this is a wonderful idea. We need you to win. 

We need more jobs to grow. We need to invest more back into the 

company. We need all of our other factories to invest back in. 

We are not competitive. Right now our structure is not competitive against France. It is not competitive against our major trading 

partners. This is crazy. We should be a low tax environment so 

that we can fight the French, so that we can fight the Germans, 

so that we can fight the Canadians and be more competitive. 

And by you leading the charge on this, we encourage you to do 

that because we really need the relief, and now is the time. Thank 

you for doing what you are doing. 

Chairwoman VELA ́ ZQUEZ. Your time has expired. Ms. Hirono. 

Ms. HIRONO. Thank you, Madam Chair. 

I know that the tax code has not been revised substantially since 

1986, and so what we have had to add to the complexities is basically piecemeal legislation. So I commend the testifiers for focusing 

on those things that can modernize the tax code, and thank you for 

the specific bills that have been introduced. 

I do have one question for Mr. Greenblatt. You mentioned in 

your testimony that the impact of sunsetting the Bush tax cuts will 

have a terrible impact, negative impact, on small businesses like 

yours. Do you have any information or data to support your contention and the extent of that kind of a negative impact on small businesses? 

Mr. GREENBLATT. Thank you for the question. 

It will be the biggest tax increase in American history, and that 

is the wrong thing you want to do when the economy is on shaky 

grounds, number one. 

Number two, we pay on a flow-through level. So the money that 

is coming into us is money that we are reinvesting everything back 

into the company. So mean you cream off 35 percent at the top 

rate, that is a lot of money. 

Ms. HIRONO. Well, I understand that. What I was asking was 

whether you have information from a much more industry-wide 

basis what the impact would be. Because these tax cuts are due to 

sunset, and if they do not get sunsetted, we are going to need to 

apply pay-go rules, and there are going to be massive cuts in many 

other programs in order to pay for the extension of the tax cuts 

that were supposed to be sunsetted. 

So, you know, I am interested in the adverse impact of the 

sunsetting on small businesses. So if you can direct me and this 

Committee to information that would allow us perhaps to look at 

the impact on small businesses as a separate matter, then I think 

that would be very helpful. 

Mr. GREENBLATT. I would be delighted to send you the information. The bottom line is we are the ones that create jobs, and our 

people pay the taxes that make this all work. And if we are scared 

because the money is going to go away, then we are not going to 

hire as many people, and that is going to impact how much the tax 

receipts are in the future. 

Ms. HIRONO. Dr. Lyon. 

Mr. LYON. I could mention again there are a huge number of 

small businesses, I believe something on the order of 21 million 

businesses, and the income they earn is taxed at individual rates 

17

largely. I believe Treasury has produced data showing that about 

70 percent of the income in the top two individual tax brackets derive from flow-through businesses. So most of the income in those 

top brackets is essentially business income that would be impacted 

by a tax increase. 

Ms. HIRONO. Thank you. Thank you, Madam Chair. I yield back. 

Chairwoman VELA ́ ZQUEZ. Mr. Buchanan. 

Mr. BUCHANAN. Mr. Rosenthal, I want to mention my background has been 30 years self-employed. So I share your experience 

as an entrepreneur. I was chairman of the state Chamber last year 

in Florida a couple of years ago, but let mention I hear what you 

are saying. I would like to extend that to 15 years from 39 for all 

businesses. 

But what about component depreciation and leasehold? We write 

off over five years’ component over five years. When you took your 

position on the improvements for 175,000, how much of that could 

go in the one category over the other one? I would like to get it all 

to 15, but I would like to see us get 15, not just in restaurants but 

other businesses as well. 

But I would like to just have your thoughts on that. When I open 

a business or something, we put it in two categories, the land at 

zero, 39 on the building, and five years. Most of it is whatever we 

can component or leasehold. So I would just be interested in your 

thoughts. 

Mr. ROSENTHAL. Well, we play that juggling game, you know, in 

small business, small business entrepreneurs. We spend as much 

time trying to figure out how we are going to categorize things to 

maximize our depreciation. 

However, as you know, there are restrictions on what we can use 

for components. For example, if we put a kitchen in, the only thing 

we can accelerate to the five-year level is actual equipment that is 

used for cooking. So we have tried to expand that to say, well, is 

the duct work over the stove part of that? And we have been rejected often by the IRS saying, no, that is not. It is very literally 

interpreted. 

So we wind up with a minimum amount that we are able to put 

into a five-year category, and we wind up with most of our leasehold improvements carrying the full term of full 39 and a half year 

depreciation. 

If you look at most restaurant expansions today, 15 years ago a 

kitchen cost $150,000 to equip a casual dining 7,500 square foot 

restaurant, and today we are looking at a half a million dollars for 

that same kitchen, the majority of which has to be depreciated over 

39 and a half years. so the answer to your question is there is not 

enough in that lower category to offset the 39 and a half year category, and that is why I think it is important to get the accelerated 

depreciation. 

Mr. BUCHANAN. Yes, I support you on that. 

I wanted to mention, Mr. Greenblatt, on your comment one of the 

things I think a lot of people do no understand up here because 

they are not in business, a lot of small businesses pass through income, and what that means, and someone said, well, that puts 

more money in the small business person’s pocket. It really do not. 

I mean, it does, but it does not, I mean, with net worth. 

18

But the reality of it is if you make 300, you pay 150 in taxes. 

You buy some more inventory. By the end of the day I have seen 

so many business people say, ‘‘Where is my cash?’’ So not much of 

it really flows through to the owner, and then you need that 

money. 

So when they look at raising taxes from 35 to 45 or add four and 

a half percent on taxes over 150,000, some of the surtax up here, 

that mentality, a lot of that goes right to the heart of small business. And I know a lot of people that make 500, 700, 800, but it 

flows back into their businesses to create jobs, buy equipment, expand. You have got to have it for the banks if you want to try to 

grow your business. 

Has that been your experience? 

Mr. GREENBLATT. Absolutely. That is the key. That is the thing 

that is critical that we must understand, that we are reinvesting 

everything back to stay competitive. We are righting China. We are 

fighting Japan. We are fighting Mexico. And the only way we can 

be competitive is by reinvesting, reinvesting. 

You know, it is critical that we stay competitive, and that is only 

going to happen because we keep the tax rates low and we plow 

more money into the company. 

Mr. BUCHANAN. Thank you. 

That is it, Madam Chair, for me. 

Chairwoman VELA ́ ZQUEZ. Mr. Fortenberry. 

Mr. FORTENBERRY. Thank you, Madam Chair. 

Thank you, gentlemen, for coming today. 

Just a side comment regarding Mr. Greenblatt; is that right? I 

am sorry. I cannot see your sign. You were talking about manufacturing. Just an anecdotal story. 

A businessman I was speaking to recently was talking about the cost of manufacturing a particular item in the United States $13; 

in Mexico $3; in China 28 cents. And that is the disparity of what 

we are facing and the incentives to shift more and more manufacturing out of this country are very real because of differences of 

currency, because of differences of labor and environmental standards and perhaps tax code differentials as well that discourage 

manufacturing investment here. 

And this is a very serious problem. That is not my question. My 

question is I like to participate in these hearings in order to try to 

discuss big ideas. Now, all of you have generously given of your 

time to come today, but we are still kind of in the framework of 

discussing on the margins what already is. You know, tweak this 

area of the tax code, simplify this, depreciate that. 

I just walked out of the room to talk to a group of people who 

have a very legitimate concern that their depreciation schedule is 

not consistent with the actual life of the equipment, very legitimate. 

But what are the big ideas that are out there that can start to 

fundamentally address the earlier problem that I talked about, encouraging a new spirit of innovation and entrepreneurship? 

We have a new philosophical direction that is coming in to work 

for us. Mr. Rosenthal, you have got employees that are working for 

you right now and are looking for learning as to how to potentially 

get into business to compete with you one day, and do you know 

19

what? We accept that as a way of doing business in this country, 

and that is the spirit of innovation and entrepreneurship that I 

think we do need to encourage because this is where most new jobs 

that help families come from in the country. 

Let’s reframe the question. What are the big ideas out there that 

can further draw an entrepreneurial spirit beyond what we traditionally think about, which is access to capital and proper education and less regulatory barriers? 

One of which, and we have held many hearings in this Committee, is the problem of health care. We have tethered health care 

benefits generally to business because of the way the 60-year history of this has been, and it is the way it is written into the tax 

code. That is a possibility of untethering that linkage so that people have portability, and yet at the same time can afford to insure 

themselves from vulnerable circumstances. 

The other is have we structured the tax code, and Dr. Lyon, perhaps you can address this, in a way that facilitates the congregation of people in one place because we depreciate real estate a particular way or assets a particular way versus allowing people to be 

dispersed and entering in new types of contractual arrangements 

from home or by telecommuting and giving incentives to do that, 

which is much more consistent in many ways with a lot of the new 

workplace philosophical paradigms that we are seeing in terms of 

this entrepreneurial spirit. 

That may not work in all businesses where you have to have certain economies of scale, either restaurant or manufacturing, but in 

a lot it may, and are we impeding that progress because of certain 

structures that we have in the tax code? 

These are the kinds of ideas that I want to try to get under and 

use you as experts in this field to help think constructively 

through, all with the vision toward enlivening and animating the 

spirit of entrepreneurship in this country, which we all agree is for 

the benefit and well-being of American families. 

So who wants to take that on? 

Mr. LYON. I will start, and the others can be more creative. 

You ask some very challenging questions. If you look at the compliance costs facing small businesses, you certainly want to do everything possible to minimize the paper work that they are required to do in order to claim tax benefits. One of the virtues of 

a system like expensing is they do not have to worry about depreciation schedules. 

Mr. FORTENBERRY. I read your comments on expensing right before I came. 

Mr. LYON. But short of trying to eliminate burdens in that way 

by just allowing complete write-offs, I would say that the next best 

thing you can do is strive for the lowest possible rates on business 

income, and by doing that, it becomes less important whether 

something has a 15-year life or a 20-year life. The return to the 

business is being taxed at a lower rate. Entrepreneurs can spend 

their time generating income instead of trying to comply with the 

tax law. 

Mr. FORTENBERRY. My time is done, but, gentlemen, if you will 

ruminate on these broad questions, we are available for input and 

ideas. I would appreciate your input because of your expertise. 

20

Thank you. 

Chairwoman VELA ́ ZQUEZ. Your time has expired. 

Ms. Fallin. You do not have questions? 

Mr. Akin. 

Mr. AKIN. Just kind of piggybacking on the last question, it 

would appear from even the experience of the last, say, six years 

that if you take a look at 2000, we are coming into a recession. In 

2001 and 2002, we did some sort of feel good tax cuts, and then 

the first quarter of 2003, we did dividend and capital gains, and 

almost instantly you go from a barely over one percent GDP jump 

to about four. Unemployment reverses almost overnight to losing 

140,000 jobs a month to gaining about 160,000 within a period of 

a couple of months, and you have got five or six years of a very 

strong economy. 

And most interestingly enough to people in government, particularly the people that like to spend government money, the government revenues go up significantly. So here you have a situation 

where we have actually cut taxes on businesses or at least made 

money available to businesses through the dividends/capital gains 

tax cut, and it appears to be paralleling what is going on in Ireland. 

You know, the Irish about 15 years, 20 years ago decided to cut 

their taxes on business to be some of the lowest in the entire European Union, and now everybody in Europe is trying to copy Ireland 

because the economy is just going like mad. 

It would seem like what we are talking about here is not that 

complicated. What we need to do is get capital working in small 

businesses. That seems to be the basic principle, and instead the 

Fed. keeps cutting interest rates and creating liquidity. The dollar 

is just going down like a submarine. It seems like we have got our 

hand on the wrong lever and what we should be doing is, even 

though it is not very popular, is to just cut the dividends and capital gains, get the taxes off of business. 

Somebody said it is better to tax the people than to tax the peach 

tree. It seems like we are just doing it the wrong way. Does anybody want to comment? 

Mr. MACKEY. To comment on your question and the last gentleman’s question together, I mean, I agree we need a lower compliance cost. We need to lower rates, but more importantly, I think, 

when you look at the global economy, we need to do whatever we 

can to make sure that dollars are invested in the United States of 

America because there are a lot of places for investors to put dollars right now, and we are truly in a global economy when it comes 

to investment. 

There are very few barriers to investment flowing to China, to 

Europe, to other countries. And so we need to look at everything 

we can do to make sure that investment happens here, the research and development, the things that give us a competitive advantage. 

If that money is not spent here, we are going to lose that competitive advantage, and unfortunately the industry that I work 

with closely, the wireless and telecommunications, we are saddled 

with a lot of tax provisions that still date back to the 1980s when 

computers depreciated over 30 years, and we have many, many 

21

problems with depreciation schedules with outdated federal, state 

and local tax provisions that increase the cost of investing. 

When I look at my business and when I look at the data on productivity and what is creating wealth in the United States, it is investments in information technology and communications that are 

not just helping those industries, but all of the other small and 

large businesses that rely on that innovation, like in my business, 

to be able to make money, to be able to create jobs, to be able to 

provide the kind of health insurance and other benefits that we 

provide for our workers. 

So I do not know if that necessarily qualifies as thinking outside 

the box in the way that you were doing, sir, and I appreciate your 

question, but we have got to get a tax code that, number one, 

makes sure that investment is here and stays here so that our 

businesses will benefit. 

Mr. AKIN. That was my only question, Madam Chair. If somebody else wants to respond, you can. 

Mr. GREENBLATT. If I may, I think the two idea that you are trying to create is wonderful. If we could create a one-page tax code, 

one page, we would save so much money in compliance costs and 

being nervous that the IRS is going to do something to us and hiring accountants. Right now I could hire a full person that would 

make 40-something thousand dollars a year to weld or to design or 

to engineer as opposed to paying it to an accountant. It is insane 

that I am spending it that way. 

In China they do not do that. In France they do not do that. So 

we should have a one-page document for our taxes. 

Chairwoman VELA ́ ZQUEZ. The time is expired, but, Mr. 

Greenblatt, before we recess, I just would like to comment on Mr. 

Mackey’s assertion that we should have tax policies that should be 

rewarding companies that are creating jobs in America, not companies that are creating jobs abroad. 

What are your comments on that? 

Mr. GREENBLATT. I make 100 percent of everything in Baltimore 

City and we import nothing from China. We import nothing from 

the Orient. So we are 100 percent American made. 

We believe that if you make the environment so good for Americans, they will never think about, you know, putting a factory in 

Mexico or putting a factory in Canada. So what we need to do is 

make it so that we are such a competitive environment that you 

would not consider going elsewhere. 

Chairwoman VELA ́ ZQUEZ. Okay. The Committee will stand in recess until we vote on the floor. We are going to have three votes. 

So it will be like 30 minutes. 

[Recess.] 

Chairwoman VELA ́ ZQUEZ. Mr. Chabot. 

Mr. CHABOT. Thank you. 

Mr. Mackey, I will begin with you if I can. 

Chairwoman VELA ́ ZQUEZ. It was fixed by a Democrat. 

[Laughter.] 

Mr. CHABOT. Well, since the Democrats broke it, they ought to 

fix it. 

[Laughter.] 

22

Mr. CHABOT. Just kidding. We actually get along very well, as 

most people know that follow this Committee. 

Mr. Mackey, you mentioned before H.R. 5450, and I happen to 

be a co-sponsor of that, which would deal with your problem of 

wireless phones and the reporting requirements, personal versus 

business and that sort of thing. Could you tell us how much time 

is wasted in having to comply with the existing law? 

And how often in the final analysis is it really enforced in any 

event? So are people just spinning their wheels? 

Mr. MACKEY. That is a great question. I think not a lot of time 

is spent enforcing it or complying with it, quite frankly, because I 

do not think most businesses even know they are supposed to be 

complying with it, and I think that the entities that have received 

audit notices from the IRS have spent a lot of time trying to figure 

out, gee, should we just basically do away with providing our employees with cell phones because the prospect of having to comply 

with this is so onerous that it just not worth it, which of course 

means that employees then lose the productivity benefit from having these hand-held devices and phones that are so critical, you 

know, to their ability to do their jobs. 

I think if nothing is done about it and information about the provision and enforcement starts to be more widespread, then I think 

you are going to see a huge amount of time and effort spent by 

small businesses, first, to figuring out what to do and what the exposure is and trying to hire folks, you know, to calculate the back 

tax liability, and then secondly, sort of deciding what to do about 

it. 

And then if they do decide to continue to provide it, I can see, 

you know, just for myself when I travel around the country, you 

know, everybody is going to have to have a policy about whether 

you can call your husband or wife and talk to your family when you 

are on the road. I mean, there is just an endless amount of time, 

so much time I think that companies are going to really have to 

rethink whether to provide the benefit at all. 

So it is a very onerous burden, and should it be more enforced, 

it is just going to grow exponentially. 

Mr. CHABOT. Okay. Thank you. 

Yes, Mr. Hoops. 

Mr. HOOPS. You know, when cell phones were first made listed 

property, they first of all weren’t nearly as common as they are 

today, and they were much more expensive on a per unit basis. So 

there was probably a good reason for treating them as listed property, but now the cost of using a cell phone is so inexpensive. You 

do not pay by the minute anymore. You buy as many minutes as 

you need, and it is one flat rate so that, you know, the cost benefit 

of treating this as listed property is not even close to being a cost 

benefit in terms of the revenue generation. 

So we really fully support eliminating this as listed property. 

Mr. CHABOT. Mr. Hoops, let me follow up with you on a different 

question at this time. Yesterday, and, again, to show the bipartisan 

cooperation on this Committee, the Chairwoman and I together 

met with and addressed the Association of Equipment Distributors 

who were here from all over the country in this room yesterday, 

and we both gave a little talk, and then we answered questions. 

23

And one of the first questions that we got was relative to LIFO 

that you referred to. Could you go into a little more depth relative 

to what the problem is and what you believe that Congress should 

do to address that problem? 

Mr. HOOPS. Well, sure. I would be happy to. You are talking 

about the LIFO provision for S corporations? 

Mr. CHABOT. Yes. 

Mr. HOOPS. Okay. Many businesses adopt the LIFO method of 

computing their inventory and cost of goods sold, and just briefly 

the way the LIFO method works is that the costs associated with 

a particular sale, you match up the cost of the last inventory that 

you purchased with a particular sale. So if I sell something tomorrow, I would match up my cost with a product that I purchased 

today or the day before, not with a product that I purchased some 

time ago. 

So for a business that has been in existence for a long period of 

time, what typically happens is that the inventory on their balance 

sheet is reported at something significantly less than fair market 

value because that inventory has accumulated over many years, 

and as costs rise the cost of replacing that inventory is much more. 

The benefit of that, of course, is lower cost of goods sold and 

lower taxes by corporations. When a corporation goes from being a 

C corporation to an S corporation, the corporation no longer pays 

a corporate tax, but the shareholders pay an individual tax on the 

profits, as Mr. Greenblatt alluded to before. 

The provision states that when you elect S status, that built-in 

gain in the inventory that had accumulated when you were C corporation has to be reported in income before you elect that status. 

So it’s a tax on the C corporation at conversion. 

That is a very expensive tax for a small business, and the truth 

of the matter is that if they had remained as a C corporation, they 

probably would never have paid that tax or they would only really 

pay the tax if they reduced their levels of inventory significantly. 

So our suggestion is that you do not penalize a corporation that 

wants to elect S status by making them report that income immediately. Rather, they would report it at the time a C corporation 

would report it, when the inventories were reduced. 

Mr. CHABOT. Thank you very much. 

Dr. Lyon, you had mentioned in your testimony that it is your 

belief that what we should have is as clear, simple, transparent a 

tax system as we possibly can at the lowest possible rates and 

should, if possible, stay away from special incentives. I assume 

what you mean basically, one thing you do with that is you are further complicating the code. We are trying to help, but we are adjusting things and new forms and figuring it all out. 

Could you again tell us why you believe that that is important 

and that is the better route to take? 

Mr. LYON. Well, there are a number of reasons. One is just to 

question whether the special incentives themselves really make our 

economy more productive on the whole. It is a little like industrial 

planning where we think certain activities are more meritorious 

than others, and as we observed Japan at one time engaged in that 

a great deal, their economy has not done very well over the past 

24

decade. So there is a question of whether we can really outguess 

the market in terms of what the best activities are. 

But the other point is that simply to claim these benefits requires a lot of time spent in understanding how the rules work, 

showing that you are in compliance, documenting it, and especially 

for small businesses the cost of going through that paperwork can 

eat up much, if not all, of the benefit that was intended from the 

provision. If instead we had simply channeled that reduced tax collection through lower rates, businesses would have incentives simply to go out there and earn income in the best way that they see 

to do it. 

Chairwoman VELA ́ ZQUEZ. Would the gentleman yield? 

Mr. CHABOT. Yes, I would be happy to yield. 

Chairwoman VELA ́ ZQUEZ. Would you say the same is true with 

179 expensing and bonus depreciation? 

Mr. LYON. It is a difficult angle. There are some clear benefits 

of Section 179 that businesses do not have to keep paper track of 

depreciation of the property. They write it off all at once. That is 

a big simplification advantage. 

However, not all property qualifies for Section 179. Investment 

in structures or inventory do not, and so again, we are doing a bit 

of industrial planning in rewarding investment in equipment that 

does qualify for it over other investments. 

Chairwoman VELA ́ ZQUEZ. Thank you for yielding. 

Mr. CHABOT. Absolutely, and reclaiming my time, Mr. Rosenthal, 

you are next if I can. One of the kind of common things you hear 

about the restaurant industry is that when new restaurants are 

started there is a fairly good chance that they are not going to 

make it, that only so many make it beyond a certain year, and that 

sort of thing. How much of the challenge that a new restaurateur 

or perhaps even somebody that has been in business for a number 

of years, how much of a challenge is the dealing with the paperwork that is involved, the red tape, an outside force telling you 

what wages you have to charge when we say minimum wage is 

going to be this, that, or the other thing? 

And various governmental involvement in your business, how 

significant is that in the whole success or failure of a restaurant? 

Mr. ROSENTHAL. Well, we are in a business that the mortality 

rate for restaurants unfortunately is very high, and there are many 

reasons for that, but over the last decade, and I have been doing 

this for over four decades, so over the last decade, the paperwork, 

the administrative level of trying to maintain compliance has gotten so out of hand. 

I will give you an example. We have an employee, a very qualified employee who does nothing but work on I-9s, handles our I9 compliance issues because this is a major issue today. And we 

pay about $50,000 a year individually in benefits for someone to do 

nothing but handle our I-9s. We have about 600 employees, and we 

like most restaurants are turning about twice a year. So we have 

a ton of this coming through, and we have begged for a better system, a system where we can get on line and qualify people without 

us having to do all of these paperwork faxing, re-faxing. This is the 

best example. 

25

Additionally, you are right. All of the paperwork utilized for compliance with tip reporting has become onerous to a point that we 

have had to actually invest in a computer system that will insure 

that tips are declared properly and spread properly, and we have 

a human resources person that handles basically our tip employee 

wages, and that is all they do. So the administrative level of handling not only the paper work but the people in there and the 

qualified people to do these jobs. 

Additionally, we are faced with and all of our businesses are operated as separate corporations for many reasons. They may have 

another investor or someone else in there. So they are set up separately, which means we now operate seven businesses including the 

property, which means we have seven federal and state tax returns, and our accounting bills have gotten to a point that we do 

not have a general manager making what our accountants get paid 

a year to handle our taxes. 

So a long answer to a short question, but the answer is it has 

become very onerous and getting worse every day as new regs come 

in, health department regs, trans-fat bands, menu labeling. It goes 

on and on and on to a point in a narrow margin business you begin 

to wonder, as many operators begin to wonder, is it really worth 

it. Is it worth expanding? 

Mr. CHABOT. Thank you very much. 

And finally, Mr. Greenblatt, I think one of the main points that 

you emphasized was the importance of making the tax cuts that 

were already passed, the capital gains tax relief, the marginal rates 

across the board, all of the above, make them permanent. That is 

one of the main things that we could do. 

You also talked about how many business owners are not really 

taking a whole lot out of the company. They are plowing it back 

in the business. So whereas it may look like they are rich people, 

wealthy people who some would argue deserve to be taxed more, 

in reality by plowing it back into the business, they are growing 

that business and hiring a whole lot of other folks, giving them a 

job. 

Is that a fairly accurate portrayal that I just made, and would 

you like to expound up that? 

Mr. GREENBLATT. I think you summarized it wonderfully. We are 

the job machine. The small business manufacturer, the small business in general is the job machine, and we are going to get us out 

of the recession, and as you give us more impediments, it is going 

to take us longer to get out of the recession. 

When you tax us, we are less prone to reinvest back into the 

company. We are going to be less competitive, and we are going to 

lose more jobs to China. We are going to lose more jobs to some 

of these other countries. 

So the way for us to get motivated and to start hiring again is 

to let us reinvest back into the company and grow the company, 

and that is our future. 

Mr. CHABOT. Thank you very much. 

Madam Chair, I yield back my time. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

26

Mr. Hoops, we have talked about cell phones as listed properties. 

Are there any other listed properties, like automobiles, that are out 

of date and need to be updated? 

Mr. HOOPS. I would eliminate all of the listed property rules, to 

be honest. That is one way to simplify the code, make life easier 

for small businesses and really eliminate a disparity that really 

should not exist. 

Chairwoman VELA ́ ZQUEZ. Okay. And my question is to you. On 

the first day of the 110th Congress I introduced H.R. 46, the Small 

Business Tax Flexibility Act. One of the provisions in that bill 

would give small start-ups the ability to choose the fiscal year that 

best fits their business cycle. 

This hearing is all about modernizing the tax code to make it 

more small business friendly. With that in mind, why is it important for our tax code to be flexible with regards to small businesses 

that are in the start-up stage? 

Mr. HOOPS. Well, first of all, thank you very much for introducing that bill. It is something that the AICPA has supported and 

believes is necessary and has really thought that for a long time. 

So thank you very much. 

Mr. Rosenthal mentioned that most of the businesses in his industry and, in fact, most small businesses, many small businesses, 

too many small businesses fail in their first year of existence. Right 

now almost all small businesses are required to adopt a calendar 

year. There are a couple of problems with that. 

First of all, that may not match up against the corporation’s natural business year. 

Second, if a new business starts up in October or November, 

after being in business in those first critical months, it has to stop, 

close its books and prepare a tax return. This would give small 

businesses an opportunity to have a fiscal year that matched up 

with their business cycle and for a new business to have an opportunity to operate for a full 12 months before it has to close its 

books. 

As an aside, both Mr. Rosenthal and Mr. Greenblatt mentioned 

the fees that they are paying to accounting firms. I would personally like to thank you for that. 

[Laughter.] 

Mr. HOOPS. But because most of our small business clients are 

on a calendar year basis, there is an enormous amount of work 

that CPA firms have to compress in terms of serving their clients 

into a very short period of time. 

I think that having fiscal year flexibility would allow CPAs to devote more time to smaller, new businesses at a time of year when 

they are not so incredibly busy. So that is another important part 

of this provision. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Rosenthal, I know that Jasper’s has been business for over 

25 years, and I wanted to get your thoughts on the recent stimulus 

package that includes tax rebate. In 2001, Congress passed similar 

legislation that sent out tax rebate checks to millions of Americans. 

At that time, did your industry or restaurants see a significant 

boost in revenues? 

27

And do you anticipate higher volumes of business when the 

checks start arriving in May? 

Mr. ROSENTHAL. Well, we are all hopeful, but that is a question 

which we have been pondering because the last time that happened, we did not face some of the issues we are facing today, and 

that is at the current rate it probably would fill up someone’s tank 

maybe two or three times, and I do not know if they are going to 

have any money left to spend in restaurants. 

So I am not overly optimistic that we are going to see that trickle 

down. The real problem—

Chairwoman VELA ́ ZQUEZ. But in 2001, you did see that? 

Mr. ROSENTHAL. It did help. It did help at that time. 

Chairwoman VELA ́ ZQUEZ. Mr. Mackey, the R&D tax credit obviously is of great importance to your industry. Traditionally, that 

credit has been mainly utilized by larger companies. 

How, in your view, could the credit be modernized or simplified 

to make it more attractive for small businesses or more friendly? 

Mr. MACKEY. Well, as I mentioned before, I mean, when you 

think about the wireless industry, you are thinking about big businesses, but I do think there are a lot of smaller companies that are 

able to use the R&D credit. My firm, for instance, we do not use 

it because we end up outsourcing a lot of the development of software and things like that to other companies which I assume are 

using the credit. So we benefit indirectly. 

I do think that perhaps more small businesses are able to take 

advantage of the credit than some people may generally realize, 

and even if they do not take advantage of it directly, indirectly they 

are able to benefit from the new products that are being developed 

by small businesses that do take advantage of the credit. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Hoops, how would the changes that you discuss make small 

businesses more competitive? And do you believe that these reforms could encourage greater small business formation? 

Mr. HOOPS. Yes, I do believe it would encourage greater small 

business formation. I think the changes that we discussed, most of 

which are relatively minor and simple to fix, would go an enormous 

way, would make enormous strides towards making it easier for 

small businesses to comply with the tax law and to put their time 

and efforts to earning more profits. 

One of the other members was looking for the big idea. I have 

been in this business now for over 30 years, and in those 30 years 

everyone is always looking for the big idea, but my experience and 

judgment tells me that there really is no big idea and that we 

would make a lot more progress, especially in a down economy, by 

focusing on fixing the hundreds of things that could be fixed relatively simply in the current tax code to make it more efficient and 

easier to comply with for small businesses. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Dr. Lyon, in light of the budget deficit, the tax gap is a major 

concern for the federal government and has received a lot of increased attention, given the budget deficit. One of the drivers of the 

gap is the increasing complexity. How would updating the tax code 

potentially reduce the tax gap? 

Mr. LYON. Thank you, Madam Chairwoman. 

28

The actual studies have not been able to determine whether complexity drives noncompliance. I think there is a lot of common 

sense that when it takes more time to compute your taxes, businesses that have many other valuable things to do with their 

scarce time and resources may find it more valuable to generate income instead of devoting resources to the compliance costs. 

And so I do think as we simplify the tax laws and especially 

lower rates, it makes it much easier, less painful to report income 

and the tax gap would go down. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Yes, Mr. Hoops. 

Mr. HOOPS. I think that there is no tax code simplification that 

could ever cure the tax gap when it comes to simply not reporting 

the income that everyone knows should be reported, and sadly for 

the small business owners, sadly the evidence is irrefutable that 

when you have increased reporting, you have increased compliance. 

But also I would say based upon my experience and practice and 

just dealing with my neighbors is that when there is a perception 

that the tax code is extraordinarily complex and unfairly favors 

some groups over the other, that people are even less enthused 

about paying the taxes that they should pay. 

So I think that that tax code in some cases contributes directly 

to the tax gap with its complexity and certainly in other cases indirectly to the tax gap. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. CHABOT. Would the gentle lady yield? 

Chairwoman VELA ́ ZQUEZ. Sure. 

Mr. CHABOT. Yes I thank the gentle lady for yielding. 

The term ‘‘the tax gap’’ was one that sort of came up a few years 

ago, and some—certainly not the Chairwoman because she does everything right—but some people have used that term—

Chairwoman VELA ́ ZQUEZ. Make sure that is reflected in the 

record. 

Mr. CHABOT. That is right. 

[Laughter.] 

Mr. CHABOT. But some people, I think, have used that term because they think that the problem is Congress has been spending 

this much and we have been taxing this much. So we are spending 

more than we in. So there is sort of this idea out there that there 

is a gap between what we spend and what we bring in in taxes, 

and some people are not paying their fair share of their taxes. If 

we can just get them, we can keep spending this extraordinary 

amount of money that we are spending up here. 

And the bottom line is we just spend too much in Congress. That 

has been true under Democratic control now and it was true certainly when Republicans were in control as well. 

So it is just a term that sort of has political implications. Certainly those that are not paying their taxes are not being fair to 

those that are, but I think the IRS and others try as hard as they 

can to make people comply with the tax code, and I just would not 

want to leave that impression out there that all we have to do is 

try harder or simplify the code, which I do think we ought to simplify, but then we will have more money. Then we can keep spending all of this exorbitant money, you know. 

29

We need to get control of spending. 

Chairwoman VELA ́ ZQUEZ. Yes, it really grew during this last 

eight years. 

Anyway, any more questions? 

[Laughter.] 

Mr. CHABOT. Including this eighth year, too. So I have no other 

questions. 

Chairwoman VELA ́ ZQUEZ. Okay. So let me take this opportunity 

again to thank all of you for your participation and insights, and 

we will continue to work. 

Today we release this report that I will encourage you to read 

and to make any comments that you might want, and I ask unanimous consent that members will have five days to submit a statement and supporting materials for the record. Without objection, so 

ordered. 

This hearing is now adjourned. Thank you. 

[Whereupon, at 12:36 p.m., the Committee meeting was adjourned.]

30


40856.001
31


40856.002
32


40856.003
33


40856.063
34


40856.004
35


40856.005
36


40856.006
37


40856.007
38


40856.008
39


40856.009
40


40856.010
41


40856.011
42


40856.012
43


40856.013
44


40856.014
45


40856.015
46


40856.016
47


40856.017
48


40856.018
49


40856.019
50


40856.020
51


40856.021
52


40856.022
53


40856.023
54


40856.024
55


40856.025
56


40856.026
57


40856.027
58


40856.028
59


40856.029
60


40856.030
61


40856.031
62


40856.032
63


40856.033
64


40856.034
65


40856.035
66


40856.036
67


40856.037
68


40856.038
69


40856.039
70


40856.040
71


40856.041
72


40856.042
73


40856.043
74


40856.044
75


40856.045
76


40856.046
77


40856.047
78


40856.048
79


40856.049
80


40856.050
81


40856.051
82


40856.052
83


40856.053
84


40856.054
85


40856.055
86


40856.056
87


40856.057
88


40856.058
89


40856.059
90


40856.060
91


40856.061
92

Æ


40856.062