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66–757—PDF 2010

S. HRG. 111–996 

TRADE AND TAX ISSUES RELATING TO 

SMALL BUSINESS JOB CREATION 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

FEBRUARY 23, 2010 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

BLANCHE L. LINCOLN, Arkansas 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

CHUCK GRASSLEY, Iowa 

ORRIN G. HATCH, Utah 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

JOHN ENSIGN, Nevada 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

RUSSELL SULLIVAN, Staff Director 

KOLAN DAVIS, Republican Staff Director and Chief Counsel 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee 

on Finance ............................................................................................................ 1 

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 15 

WITNESSES 

Sanford, Jim, Assistant U.S. Trade Representative for Small Business, Market Access, and Industrial Competitiveness, Washington, DC ........................ 3 

Williams, Spencer, president, West Paw Design, Bozeman, MT ......................... 5 

Toder, Dr. Eric J., institute fellow, Urban Institute, Washington, DC ............... 7 

Edwards, Chris, director, tax policy studies, Cato Institute, Washington, DC .. 9 

Rys, Bill, tax counsel, National Federation of Independent Business, Washington, DC ............................................................................................................. 10 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 27 

Edwards, Chris: 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 31 

Responses to questions from committee members ......................................... 39 

Grassley, Hon. Chuck: 

Opening statement ........................................................................................... 14 

Joint Committee on Taxation revenue estimate memorandum dated April 

8, 2009 ............................................................................................................ 42 

Rys, Bill: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 43 

Responses to questions from committee members ......................................... 50 

Sanford, Jim: 

Testimony .......................................................................................................... 3 

Prepared statement .......................................................................................... 55 

Responses to questions from committee members ......................................... 63 

Toder, Dr. Eric J.: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 68 

Responses to questions from committee members ......................................... 76 

Williams, Spencer: 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 80 

Responses to questions from committee members ......................................... 88 

COMMUNICATIONS

American Enterprise Institute for Public Policy Research .................................. 91 

National Venture Capital Association ................................................................... 98 

(III) 

(1) 

TRADE AND TAX ISSUES RELATING TO 

SMALL BUSINESS JOB CREATION 

TUESDAY, FEBRUARY 23, 2010 

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC. 

The hearing was convened, pursuant to notice, at 10:07 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Stabenow, Nelson, Menendez, Carper, Grassley, Snowe, Bunning, and Crapo. 

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; Cathy Koch, Chief Tax Advisor; Amber 

Cottle, Chief International Trade Counsel; Michael Smart, International Trade Counsel; Hun Quach, International Trade Analyst; 

Tiffany Smith, Tax Counsel; and Joseph Adams, Economic Development Advisor. Republican Staff: Stephen Schaefer, Chief International Trade Counsel; Jim Lyons, Tax Counsel; and Nick Wyatt, 

Tax and Nominations Professional Staff Member. 

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR 

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The hearing will come to order. 

Before I begin, I would just note that Senator Grassley will return very quickly. I have to leave to attend another meeting in 

about 10 or 15 minutes, and Senator Grassley will chair the rest 

of the hearing when he returns at about that time. 

The Greek physician Galen once said, ‘‘Employment is nature’s 

physician and is essential to human happiness.’’ Over the course of 

this Great Recession, more than 8 million Americans have lost 

their employment. And along with their jobs, millions of Americans 

lost their well-being, their health, and their happiness. 

Fortunately, the Recovery Act kept us from losing even more 

jobs. The nonpartisan Congressional Budget Office says that the 

Recovery Act lowered the unemployment rate by between 0.3 and 

0.9 percentage points from where it otherwise would have been. 

But in the past 2 years, the unemployment rate more than doubled. It rose from 4.9 percent in December of 2007 to 10 percent 

in December of 2009. 

Most economists do not expect significant improvement in unemployment any time soon. The Congressional Budget Office projects 

that the unemployment rate will not reach its natural state of 5 

percent until 2016. Much work remains to be done. We cannot wait 

until 2016; we need to act now. 

2 

So, what can we do? First, we must remember that the private 

sector is the backbone of American innovation and job creation, and 

within the private sector small businesses are the principal engine 

of job creation. Over the past 15 years, small firms have generated 

two-thirds of new jobs. Small businesses are the leading source of 

employment in my State of Montana. In 2008, small businesses 

employed 325,000 Montanans. That is nearly three-quarters of the 

Montana workforce. 

Small businesses have been hard hit by the Great Recession. The 

Small Business Administration reports that in 2008 alone, small 

businesses lost more than 3 million jobs. We know that small business and entrepreneurs play a very important role in recovery. 

Take, for instance, BioScience Laboratories, Inc., a small testing 

laboratory based in Bozeman, MT. Bioscience Labs was hit hard by 

the recession, but they adapted, and they are growing. In 1991, one 

person started the company. One person. Today, Bioscience Labs 

employs 51 Montanans. They hired 10 of them in recent months, 

and they plan to hire 7 more by the end of the year. 

We need to find ways to further support the creation and growth 

of small businesses like Bioscience Labs. Their flexibility and innovative solutions will be the key to economic recovery. The policies 

that we consider must provide immediate relief and must provide 

help when folks need it most, and we must be fiscally responsible. 

Creating jobs today should not come at the expense of fiscal stability tomorrow. We must create the most jobs at the least cost to 

the taxpayer. 

U.S. export promotion programs fit the bill. Exports have a big 

effect on the American economy. In 2009, we exported more than 

$1.5 trillion of goods and services. America is the world’s thirdlargest exporter. 

These exports supported nearly 10 million American jobs. Exports accounted for 11 percent of our Gross Domestic Product. 

These numbers are impressive, but they are not nearly good 

enough. Ninety-five percent of the world’s consumers live outside 

our borders. To ensure sustainable long-term economic growth here 

at home, we must do more to reach abroad. 

In his State of the Union address, President Obama called for 

doubling our exports over the next 5 years. These additional exports will create nearly 2 million more American jobs, but these 

new exports will not happen without our help. Our export promotion programs provide American small businesses with the tools 

that they need to reach foreign markets. A number of agencies help 

small businesses to navigate the confusing and costly road to exporting. 

First is the U.S. Trade Representative’s enforcement of existing 

trade agreements and negotiation of new ones; there is the Commerce Department’s assistance in identifying foreign customers; 

and there is the Small Business Administration’s financing of small 

business exports. 

We must ensure that these agencies have the resources that they 

need to boost American exports and create jobs. Our export promotion programs have a proven track record. The Commerce Department estimates that, for every $1 million spent in export promotion, $57 million in new U.S. exports are generated and 314 new 

3 

U.S. jobs are created. In my State of Montana, $206,000 in export 

promotion programs resulted in $26 million in exports last year. 

That means every $1 invested in export promotion resulted in more 

than $120 of Montana exports. 

These programs work, and we must make sure they work for the 

maximum number of people. The tax code also includes policies 

that offer a good bang for the buck. Among these are provisions 

that put money in the hands of small businesses and increase their 

buying power. The examples are the expensing of certain investments or increased deductions for start-up expenditures. Helping a 

small business’s cash flow, in turn, helps other businesses that will 

then be able to sell more of their products. As businesses rebound, 

they will need to retain and hire more employees. 

Another tax provision to consider is a capital gain exclusion on 

the sale of small business stock, that is stock held for 5 or more 

years. This tax cut gives people an incentive to invest in small corporations who are struggling to find the capital they need to grow 

their businesses. Senators Kerry and Snowe have championed this 

idea. 

New jobs are the cure for what ails the economy. Let us do what 

we can to help nature’s physician. Let us help to create more new 

jobs in America’s small businesses, and let us do more to restore 

the health and well-being of the American economy. 

As I noted, Senator Grassley will return shortly to chair the 

hearing and will speak when he returns, so I will now introduce 

the panel. 

The first witness is Mr. Jim Sanford. Mr. Sanford is Assistant 

U.S. Trade Representative for Small Business, Market Access, and 

Industrial Competitiveness, a position that was recently created 

based upon a request from Senator Snowe and myself. We created 

this position to help us do a lot better job and get more bang for 

our buck. Thank you, Mr. Sanford, for being here. 

The second witness is Mr. Spencer Williams. Mr. Williams is the 

president and CEO for West Paw Design, a business in Bozeman, 

MT. Thank you, Spencer, for being here, and also for creating the 

kind of businesses that we need for the future. You might explain 

what you do when you testify, but basically it is eco-friendly products for dogs. Well, you can explain it better when you testify. 

The third witness is Dr. Eric Toder. Dr. Toder is an institute fellow at the Urban Institute. 

Then Chris Edwards, who is the director for tax policy studies 

at the Cato Institute. Thank you, Mr. Edwards, for being here. 

Finally, we have Dr. Bill Rys, who is tax counsel for the National 

Federation of Independent Business. 

Thank you all for coming. As is our regular practice, your prepared statements will be in the record. I would ask you each to 

speak for about 5 minutes. 

So, Mr. Sanford, why don’t you begin? 

STATEMENT OF JIM SANFORD, ASSISTANT U.S. TRADE REPRESENTATIVE FOR SMALL BUSINESS, MARKET ACCESS, AND 

INDUSTRIAL COMPETITIVENESS, WASHINGTON, DC 

Mr. SANFORD. Thank you, Mr. Chairman, members of the committee. Thank you for convening this hearing today. I appreciate 

4 

the opportunity to provide testimony on the effects and the efforts 

of the Office of the U.S. Trade Representative to expand exports of 

small businesses, create U.S. jobs, and promote sustainable economic growth. 

As the President announced in his State of the Union address, 

agencies across the Federal Government are teaming up under the 

National Export Initiative to create jobs by expanding exports. 

USTR’s role in the NEI is reflective of our role as an agency: to 

tear down barriers to trade and to open new market opportunities 

for American businesses to grow and create jobs. 

In our efforts, USTR is partnering with the Small Business Administration, the Commerce Department, the Export-Import Bank, 

and others across the Federal Government to provide American 

businesses the resources and opportunities they need to succeed. 

America’s 30 million small businesses form the backbone of our 

economy. In the past 15 years, approximately 65 percent of net new 

private sector jobs were created at small businesses. Small businesses that export tend to grow even faster, create more jobs, and 

pay higher wages. But studies show that only 1 percent of U.S. 

Small and Medium Enterprises are currently exporting, and many 

of the SMEs that do export sell in only one country, and to only 

one customer in that country, so there is vast room for improvement. 

Last fall, Ambassador Kirk launched an initiative reexamining 

our trade policy enforcement efforts to ensure that we are being responsive to the challenges and priorities of small business. As part 

of this initiative last month, Ambassador Kirk, in consultation with 

Chairman Baucus and Senator Snowe, designated me as the Assistant U.S. Trade Representative to help coordinate small business interests within the agency. 

Working with Congress and other agencies across the government, our objective is to both increase the number of small businesses that export and to expand the number of markets and customers served by SMEs that do export. 

To better understand the key challenges that are constraining 

U.S. SMEs from fulfilling their export potential, we have reached 

out widely to trade associations, companies, and our interagency 

colleagues. We are working with our trade partners to reduce costly 

trade obstacles often cited by SMEs, and of course we have consulted with the committee, and others, to ensure coordination of 

our efforts. 

Here are some concrete steps we have undertaken at USTR. 

Starting in October of 2009, USTR launched an agency-wide review 

of our policymaking and enforcement efforts in relation to SMEs. 

Through our trade agreements and policy dialogues, we are examining ways to tackle obstacles to trade that loom particularly large 

for smaller businesses, issues like cumbersome or non-transparent 

regulatory procedures, complex customs processes, and requirements that force companies to open offices in foreign countries. 

Last October, Ambassador Kirk requested that the U.S. International Trade Commission prepare a series of reports on SMEs 

and international trade in order to better understand SME performance and to help U.S. trade policy and trade promotion activities. 

5 

In January, Ambassador Kirk hosted a widely attended conference focused on trade opportunities and challenges confronting 

SMEs. In conjunction with this event, USTR conducted an agencywide program of industry outreach activities on small business 

trade issues. Finally, we are increasing small business representation on our industry trade advisory committees; pursuing closer collaboration with SBA, Commerce, and the Export-Import Bank to 

improve the integration of our export promotion, finance, and policy 

activities; and broadening our business outreach beyond traditional 

trade circles. 

Moving forward, USTR is working to identify specific trade tools 

and activities that offer particular potential benefits for American 

small businesses. As part of our negotiations to expand U.S. trade 

in the Asia-Pacific region through the Trans-Pacific Partnership, 

for the first time we will have a point person for SME issues and 

we will consistently emphasize the needs of smaller businesses 

across negotiation topics. 

As an APEC agenda priority, we are seeking to make it cheaper 

and easier for companies, and particularly small businesses, to 

trade in the region. Under our existing FTAs we are seeking to establish working groups on small business to facilitate SME trade 

opportunities under these agreements. 

FTAs offer valuable export opportunities for SMEs and all businesses. USTR continues to work to address outstanding concerns 

regarding the pending agreements with Panama, Colombia, and 

South Korea. Approval and implementation of the pending FTAs is 

a priority in the administration’s export initiative. 

In addition to these market access activities, we are focused on 

robust enforcement of our trade agreements and WTO rules. When 

unfair trade practices inhibit the ability of smaller exporters to get 

their goods and services into global markets, we are committed to 

knocking them down through negotiations if possible, and legal action if necessary. 

In conclusion, the global economic downturn has adversely impacted all of our business sectors. Our effort to expand U.S. exports 

will have a critical role to play in advancing our economic recovery 

and the creation of quality jobs at home. USTR is committed to 

helping more small- and medium-sized businesses take advantage 

of opportunities to sell American goods and services overseas. 

Thank you for this opportunity to outline USTR’s efforts to expand exports of U.S. small business and support the creation of 

new jobs. 

The CHAIRMAN. Thank you, Mr. Sanford, very much. I appreciate 

that. 

[The prepared statement of Mr. Sanford appears in the appendix.] 

The CHAIRMAN. Mr. Williams? 

STATEMENT OF SPENCER WILLIAMS, PRESIDENT, 

WEST PAW DESIGN, BOZEMAN, MT 

Mr. WILLIAMS. Thank you, Chairman Baucus, Ranking Member 

Grassley, and the members of the committee for inviting me to testify before the Senate Committee on Finance. I am grateful for the 

opportunity to share my experience, observations, and opinions 

6 

with you regarding export trade and how small businesses can increase jobs in our country. 

West Paw Design is based in Bozeman, MT, and it has built a 

reputation of manufacturing high-quality bedding, toys, and apparel for dogs and cats throughout our 13-year history. Our team 

of 36 employees are extremely proud that 100 percent of our products are made in the United States, and we sell them to 2,800 domestic retailers around the country and export them to 24 foreign 

countries. 

The company is distinguished by a commitment to creating ecofriendly, safe, and quality products. West Paw Design has experienced continued sales growth, even during the economic downturn, 

with an increase so far this year of 33 percent. Part of this year’s 

planned growth is based on a 140-percent projected increase in exports. 

I would like to mention two Federal programs that West Paw Design has participated in: the SBA 504 Loan Program and the U.S. 

Commercial Service for Exporters. In 2009, we received SBA approval on a 504 loan for the expansion of our existing building. Because of the Recovery Act, two 504 Loan Program fees were eliminated. This resulted in over $26,000 in savings, and these monies 

were directed to other critical business investments. 

Regarding exports, West Paw Design has worked with the U.S. 

Commercial Service, which has provided us with technical assistance and market research. Additionally, we have used the Gold 

Key program. By selecting this service in 2002, we had hoped to 

improve upon a previous failure at an international trade fair. Unfortunately, due to my lack of experience with international pet 

product sales and the limited detail of research performed as part 

of Gold Key, this effort was not successful either. 

These past learnings have helped me to be more successful in my 

subsequent years and have also helped me develop two suggestions 

to improve the U.S. Commercial Service. First, I believe that people 

are the biggest asset to helping exporters succeed. The U.S. Commercial Service should spend more money and time on finding 

great people and training them well. 

Second, I believe that the fee to use Gold Key programs should 

be eliminated. Other countries, such as Canada, provide a great 

deal of free assistance to their exporters, and participants in this 

country are still contributing money toward all travel-related expenses to the foreign country, along with sample costs and staff 

time. 

Looking forward, I do have several concerns about growing our 

exports that I wanted to share. I will mention four of them, and 

my opinion of each. First, it is difficult for us to identify compatible 

markets and partners. We must expand into other markets, and I 

believe that the U.S. Commercial Service can help us accomplish 

this, enabling us to grow faster and create new jobs. 

Second, there is a great deal of intellectual property risk for our 

product designs and brand, and without strong and fair protection, 

IP infringement reduces the value of our innovation. 

Third, protectionism removes competition and slows U.S. innovation. As a proponent of liberal trade, I believe that innovation is 

7 

borne out through a quality education, a free business environment, and strong competition. 

Fourth, high-priced products slow our export sales. Thankfully, a 

weaker U.S. dollar has helped to keep prices low over the last few 

years. Yet, if the dollar increases dramatically, our prices will climb 

and our exports will drop. 

There are two other areas that make our foreign competitors’ 

prices artificially low and unfair, and that is low standards for 

basic human rights and poor environmental protection practices. 

When the companies that compete with us on the world stage take 

advantage of people and/or the environment, their products are 

cheaper because the true cost is not valued in the price. Consequently, our products have a high relative price to theirs. On the 

other hand, I want to say there are several advantages to growing 

our exports, and I will mention three of them, briefly. 

First, many of our international buyers seek U.S.-made products 

because of their known high quality in comparison to other products from other markets. 

Second, in general, I am a proponent of free trade agreements; 

however, I believe that, although small companies may know about 

FTAs, many of those companies will first export to the countries 

where the market and economic trends are the greatest. 

Third, I believe that the reemergence of a positive Brand USA 

is a great benefit to U.S. exporters. The more open and cooperative 

position the U.S. is taking in its view toward the global, political, 

and economic community is reflecting positively on U.S. companies, 

products, and its citizens. 

In summary, let me underscore that the livelihoods for approximately six employees at West Paw Design are dependent on exports. With nearly 17 percent of our sales being to foreign companies, West Paw Design exports more than twice the amount of an 

average Montana manufacturer. 

By making the U.S. Commercial Service an even better organization through great hiring and training and by providing more manufacturers access to its programs by eliminating fees, the U.S. 

small manufacturers can grow their exports and increase employment. 

Chairman Baucus, Ranking Member Grassley, and members of 

this committee, thank you for this opportunity. I appreciate your 

time and interest in helping small manufacturers succeed and create new jobs. 

The CHAIRMAN. Thank you very much, Mr. Williams. It is very 

clear you are organized and you are focused, and you have a plan 

and you are executing. I congratulate you. 

Mr. WILLIAMS. Thank you. 

[The prepared statement of Mr. Williams appears in the appendix.] 

The CHAIRMAN. Dr. Toder? 

STATEMENT OF DR. ERIC J. TODER, INSTITUTE FELLOW, 

URBAN INSTITUTE, WASHINGTON, DC 

Dr. TODER. Thank you, Chairman Baucus, Ranking Member 

Grassley, and members of the committee. Thank you for inviting 

me to testify today on tax issues related to small business job creVerDate Nov 24 2008 17:47 Jun 20, 2011 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 R:\DOCS\66757.000 TIMD
8 

ation. The views I express are my own and should not be attributed 

to the Tax Policy Center or the Urban Institute, its board, or its 

funders. 

For immediate job creation in periods of high unemployment, the 

size of any overall fiscal stimulus matters much more than its composition. Both small and large businesses will benefit from policies 

that increase demand for goods and services, but tax policies that 

provide cuts to those consumers and businesses most likely to 

spend them quickly will do the most to accelerate recovery. 

My written testimony discusses three tax incentives the administration is proposing to help small businesses: the Temporary Incremental Jobs Tax Credit, the extension of increased limits on section 

179 expensing, and the elimination of capital gains tax on qualified 

small business stock. 

I make the following points: the Incremental Jobs Credit provides an incentive for employers to add to their workforce or payroll, but one cannot tell what employers would have done without 

the credit. Defining 2009 jobs as the baseline means the credit will 

reward growing firms for jobs they would have added anyway and 

fail to reward firms experiencing a decline in demand for retaining 

workers. 

Past experience with a similar incentive in the 1970s was mixed. 

Many employers were unaware of the credit and most who were 

did not add workers, but there is some evidence the credit increased jobs. Those who knew about the credit hired more workers 

than those who did not. The credit’s likely biggest impact will be 

to accelerate some hiring that would have occurred in 2011 into 

2010. 

Finally, the credit’s effectiveness will depend a lot on design details, and in particular additional restrictions, including limits on 

categories of workers who are eligible, will reduce additional jobs 

created per dollar of budgetary cost. 

Small business expensing. Raising limits on the amount of investment small businesses can expense will reduce the cost of capital for some firms and will lower compliance costs. There has been 

no research, however, on how much section 179 expensing affects 

the level of timing and investment; we think it is positive, but we 

do not know how much. 

Temporarily extending the higher 2008 and 2009 limits into 2010 

could cause businesses to shift some investment forward from 2011, 

but because these temporary higher limits have already been in the 

law for 2 years, some of the investment that might have been accelerated may have already happened. 

Finally, capital gains. The administration is proposing to exempt 

capital gains on qualified small business stock. Exemption will substantially increase the size of this tax benefit, which is, under current law, quite small, or will be quite small after 2011. 

Most small businesses do not qualify for the exemption, either 

because they are organized as flow-through enterprises or because 

they are in economic sectors that are excluded from the benefit. 

The short-run stimulus in this proposal is likely to be small because the tax cuts adding to demand will not be realized for many 

years. The proposal would spur some new ventures, but also divert 

9 

capital from investments which might be more productive that do 

not receive a tax break. 

Finally, it is important to consider compliance. This exemption 

has been in the law for many years, but there are very few reporting requirements. Now that it is being made a lot more generous, 

there should be additional reporting requirements, if this should be 

enacted. 

These points are developed more fully in my written testimony. 

Thank you. 

[The prepared statement of Dr. Toder appears in the appendix.] 

Senator STABENOW. Thank you. I will assume temporarily until 

our ranking member joins us. Chairman Baucus has had to step 

out. 

Mr. Edwards, proceed. 

STATEMENT OF CHRIS EDWARDS, DIRECTOR, TAX POLICY 

STUDIES, CATO INSTITUTE, WASHINGTON, DC 

Mr. EDWARDS. Thank you, Senator Stabenow. Thank you, Senators Snowe and Bunning, for inviting me today to talk about taxes 

and small business job creation. 

The administration has offered some narrow tax breaks for small 

business job creation, but I think that is the wrong direction for tax 

policy. Instead, I believe Congress should focus on creating a simple and neutral tax structure with low marginal rates for all businesses, large and small. 

I want to focus on the administration’s proposal to raise the top 

two individual income tax rates. Higher marginal rates, I believe, 

will reduce incentives for productive behavior, such as working and 

expanding businesses, and they will increase incentives for unproductive behavior, such as tax avoidance. 

How large are those behavioral responses to tax rate changes? 

The academic literature on this is pretty solid. If you raise the top 

income tax rate by 5 percentage points, reported income will drop 

by at least 3 percent. That is a lot. That 3-percent drop in reported 

income would result in at least a 40-percent revenue feedback or 

offset to any expected revenue gain. 

Empirical studies find that taxpayers at the top end have larger 

behavioral responses to rate changes than other tax filers; they can 

more easily adjust their working and investment behavior. Today’s 

highest earners are generally not passive investors/inheritors of 

wealth. They are self-made, talented, and entrepreneurial. 

If you scan through the Forbes 400 Richest Americans edition 

every year, you find that the people at the top end are extremely 

entrepreneurial, extremely important to the economy. Many with 

high incomes are angel investors who help fuel small business 

growth. According to the Small Business Administration, there are 

at least 300,000 angel investors in the United States. If their taxes 

go up, they will have less money to invest and perhaps park more 

of their funds in tax-free muni bonds and other low-risk activities. 

There is a lot of business income in the top two income tax 

brackets. A Joint Tax Committee analysis provided to this committee found that 44 percent of business income on individual returns is in the top 2 tax brackets. A similar Tax Foundation analVerDate Nov 24 2008 17:47 Jun 20, 2011 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 R:\DOCS\66757.000 TIMD
10 

ysis found that, if the top two rates rise, 40 percent of the entire 

tax hit at the top end will be on business income. 

My written testimony summarizes academic studies that look at 

the negative effects of these higher marginal rates on small businesses, but basically there are two negative effects: you raise the 

marginal rates on small business and they will have less incentive 

to earn additional profits; second, they will simply have less cash 

flow for further investment. 

Finally, let me put these issues into international perspective. 

Ten years ago, before we dropped our top marginal income tax 

rates, the top U.S. rate, with average State taxes, was about 47 

percent. Coincidentally, that was the same average top rate in the 

30 nations of the OECD. So, that was 10 years ago. 

Today, our top rate is 5 percentage points lower, but the OECD 

average rate has also fallen by 5 percentage points over the last 

10 years. So today, both the United States and the OECD are at 

a top rate of 42 percent. If we raise our rate back up to 47 percent, 

we will be one of the major industrial countries with a high tax 

rate. In fact, we will have the ninth-highest tax rate in the OECD. 

So the world has changed over the last decade. We cannot simply 

go back to where we were in 2000. 

In a world of capital mobility and mobility of entrepreneurs, I 

think this is very important. If you look, for example, at Silicon 

Valley, a number of studies have found that one-quarter of all businesses in Silicon Valley were founded by immigrant entrepreneurs, 

mainly from India and China. It seems to me, at the margin, if we 

are raising our income tax rates here and other countries are reducing their income tax rates, people who are internationally sort 

of mobile will tend to gravitate to the countries with lower marginal tax rates to start their businesses. 

So, to conclude, it seems to me, rather than raising our income 

tax rates next year, we should be revisiting the approach of the 

Tax Reform Act of 1986, which reduced tax expenditures and used 

the revenue to lower statutory, personal, and corporate tax rates, 

which would benefit businesses across the board in every industry, 

big and small businesses. 

Thank you very much. 

[The prepared statement of Mr. Edwards appears in the appendix.] 

Senator STABENOW. Mr. Rys? 

STATEMENT OF BILL RYS, TAX COUNSEL, NATIONAL 

FEDERATION OF INDEPENDENT BUSINESS, WASHINGTON, DC 

Mr. RYS. Thank you, Senator. Thank you for the opportunity to 

appear on behalf of the National Federation for Independent Business. It is the Nation’s leading small business advocacy organization, representing over 350,000 small business owners. 

Small business accounts for about two-thirds of the net new jobs 

created, so, as the committee focuses on ways to incentivize job creation, small business is the proper place to focus. 

Unfortunately, small business continues to struggle through the 

current economic recession. The NFIB conducts a monthly small 

business economic trend survey, and all the leading indicators in 

11 

that survey continue to be at or near all-time lows. For 7 straight 

quarters, in fact, we have been below 90, when the average is 100. 

The biggest problem found in that survey, and in a study we released today, is lost sales. Small business owners simply do not 

have customers coming in the door. In fact, in June and July of 

2009, lost sales hit an all-time low in the 35-year history of the 

small business economic trend survey. 

This continues to be the number-one problem plaguing small 

business owners. This also means businesses have less capital, 

which means less investment in small businesses. Capital expenditures are at an all-time low, and plans to hire continue to be slow. 

We asked small business owners, ‘‘Why is this not a good time to 

invest in their business?’’ Economic conditions continue to be the 

first reason, and policy concerns that may raise their costs follow 

behind that. 

The committee’s focus on tax policy is an important way to help 

spur job creation with small business owners, so here are some 

ideas of what the NFIB’s position is on a number of the proposals 

that are out there, and a few additional suggestions. First, NFIB’s 

members believe that the current individual and capital gains rates 

should be extended. 

Individual rates are very important to small business owners. 

About 75 percent of small businesses are organized as pass-through 

businesses, meaning they pay their tax at the individual level. This 

after-tax income is the money most small businesses use to invest 

back into their business. Some have proposed raising those taxes 

on those who make more than $250,000. 

Based on an NFIB survey, about 10 percent of small business 

owners could see their taxes go up under that proposal. If we dig 

a little deeper into those numbers, businesses with between 20 and 

250 employees are the most likely to be hit by those tax increases. 

Those businesses account for more one-quarter of the American 

workforce. Regardless of how many and which, no small business 

should see their taxes go up in the current economic environment. 

In addition, the lower capital gains rate should also be kept in 

place. 

Second, the Senate is soon to consider legislation to provide tax 

credits and payroll tax relief for hiring workers. While this will 

provide some small business owners with a tax break, and that is 

certainly a good thing to get through the current economic situation, we are skeptical that this is going to be a large incentive to 

hire. Demand is simply down. If there is no work for the employee 

to do, there is no reason for a small business owner to hire. 

But that being said, there are ways to make a proposal like this 

more effective. As Dr. Toder said, we need to consider the amount 

of the credit, we need to consider how complex and how complicated the credit is, what kind of conditions are on that credit, 

and we need to make sure that awareness of the credit is out there. 

Finally, timing. The proposal that Senators Schumer and Hatch 

put forth that would provide payroll tax relief gets the timing right. 

Payroll tax is an expense that a business pays on a regular basis. 

When businesses do not have cash and cash flow coming in to the 

business, providing payroll tax relief is a way to continue to help 

12 

remedy some of the cash flow problems that businesses have right 

now. 

Increasing section 179. This, in general, is a very important provision to small business owners, and increasing the limit to 

$250,000 is important for businesses that may be making investments this year, and maybe will move some businesses around the 

edge. Again, the challenge is going to be capital and demand, but 

there are ways to make that proposal better. 

Senator Grassley’s bill, S. 1387, would make those expensing provisions permanent. Senator Snowe has a very similar proposal. We 

think this is a good idea. This is going to be a long recovery. The 

current higher limits of 2007 expire at the end of this year. Let us 

give businesses the certainty that those tax benefits are going to 

be there as we continue to move through this recovery. 

Second, section 179 currently only applies to equipment. Expanding the investments that can be deducted to include real property, 

such as new windows, new doors, new roofs, could increase the 

number of businesses and increase the business activity available 

for that deduction. In addition, this could help the struggling construction industry—which has seen a tremendous downturn over 

the last couple of years—that would be hired to put on the new 

roofs, windows, et cetera. Another proposal was to eliminate capital 

gains on certain investments. This is a good incentive. Unfortunately, it is somewhat narrowly focused, as Dr. Toder said. 

Finally, uncertainty. Small business owners continue to struggle 

through this recession, and if they are going to get back into the 

game they need to know what the rules are. There are a lot of unresolved issues which we believe the Senate should move on as 

quickly as possible, things such as the estate tax, potential higher 

unemployment taxes, and expiring tax provisions such as restaurant depreciation and a shorter depreciation period for farm 

equipment. 

Many of the proposals that will be considered by the Senate soon 

will help some small business owners. The biggest concern that we 

have is that these incentives require an investment of capital up 

front, and many businesses just do not have this capital right now. 

We believe that small business owners need broader tax relief and 

they need certainty. This is why extending the 2001 and 2003 tax 

rates is so important. Small business owners took a risk to start 

their business. They know how to make their business succeed, but 

they need the capital and certainty to do it. 

I appreciate the opportunity to present the NFIB’s views, and I 

look forward to any questions. 

[The prepared statement of Mr. Rys appears in the appendix.] 

Senator STABENOW. Well, thank you very much to each of you. 

I will lead off at this point while we are waiting for our ranking 

member to join us today. 

There is no question, as all of you have said, that small businesses have created 64 percent of the new jobs in the last 15 years 

and that, in the last year, almost 85 percent of the jobs that have 

been lost have come from small business. 

So I am very pleased that the chairman is focusing on small 

business and that we will be moving forward to consider, and hopefully support, the President’s initiatives on eliminating capital 

13 

gains taxes and other provisions that relate to capital availability 

for small businesses. 

I guess the first thing I wanted to do, though, is, Dr. Toder, ask 

you if you might just respond to some of the other testimony on one 

area, because for those of us who want very much to focus on small 

business, and a majority of small businesses, I would just ask you 

to respond. 

Secretary Geithner has stated that 97 percent of taxpayers, 97 

percent with business income, would not be affected by the tax policy that is about to expire, and in fact it would be more wealthy 

folks, corporate executives, Wall Street traders, and so on. The 

CBO has issued, this month, an analysis, again, that extending 

that tax policy would be the least effective of all the spending and 

tax options in terms of creating jobs. 

So, as somebody who has the highest unemployment rate in the 

country and wants to be laser-focused on how we are creating jobs 

and supporting small business, I am wondering, do you agree with 

those numbers, that in terms of 97 percent of the taxpayers with 

business income would not be affected by the tax provisions expiring? 

Dr. TODER. We actually have our own numbers. They are fairly 

close to that, but that is in the ball park. I mean, the last time we 

looked was a year ago. If you define somebody who gets 50 percent 

or more of their income from schedule C, E, or F as a small business owner, about 1.9 percent of those tax returns are in the top 

two tax brackets. So, essentially that is correct, most small business owners will not be affected by this tax increase. 

Now, that does not contradict what Chris was saying, which is 

that most high-income people—many high-income people—do have 

some small business income. But, if you were looking at sort of the 

majority of small business owners, they will not be affected. 

With regard to the CBO statement, I think I agree with that, but 

I think you have to understand the context of it. They are really 

saying, in the short run, as I said in my statement, the most effective way to get more jobs quickly is to get demand up so businesses 

can sell the products they produce. You want to get tax cuts into 

the hands of people who will spend a lot. 

Generally, the high-income people will not spend that much of 

their tax cut so, as an anti-recessionary policy, keeping the rates 

low is not necessarily an effective anti-recession policy. However, 

you do have to look at other issues in the long run as to what the 

incentives are in the economy from having higher rates, and that 

is a very different issue than talking about what is going to happen 

in the next year or two. 

Senator STABENOW. Sure. Well, and certainly I am hearing—and 

I know in talking to colleagues—concerns when we are talking to 

small businesses right now that the ability to access capital is absolutely critical to be able to grow businesses. We have also been 

hearing concerns about collateral depreciation and cash flow shortfalls that relate to the ability to get loans as well, that I am hopeful we are going to take up. 

But Dr. Toder, you mentioned demand, and Mr. Rys. But both 

mentioned, and others have mentioned, the lack of demand for 

products, and I could not agree more, which really means jobs and 

14 

people having money in their pockets. It means middle-class families having money in their pockets to be able to buy. I wonder if 

you have any other suggestions as it relates to the demand-side or 

increasing sales. 

I have to say, as the author of Cash for Clunkers, that was a demand program. We got people into showrooms, they bought automobiles, and it also ended up putting people back to work making 

automobiles. That was a demand-side proposal. I am wondering if 

either of you have other suggestions for us. Certainly we have to 

address the tax side and issues related to loans, but any ideas on 

the demand side as well? 

Dr. TODER. Well, I mean, if you read that CBO report that you 

cited, they do talk about other things, like extending Unemployment Insurance, there is the Making Work Pay credit, there are 

other ways of getting more money, in the short run, into the hands 

of those consumers, whether on the spending or tax side, who will 

be most likely to spend. 

I think you do have to consider with some caution how markets 

will proceed if they think that we are not getting our fiscal house 

in order over the long run, so it is a very delicate balance. You 

want to have more demand now, but I think it is also important 

to take some credible steps so people can say that once we recover 

we are going to do something about these deficits. That is very important as well. 

Senator STABENOW. And I know my time is up, but, Mr. Rys, if 

you had any quick comment on demand, any new ideas for us. 

Mr. RYS. Well, that is really the big conundrum, how do you get 

demand out? We had proposed a payroll tax holiday for both the 

employers and the employees about 2 years ago so it would put 

money back into both the business and the employees’ pockets 

right away. We think that would have been an effective way to at 

least get more money into the hands of consumers. But you are 

right, demand really is the challenge. Until that is addressed, a lot 

of these problems are going to continue to be there. 

That gets to the capital issue that you are talking about. When 

demand is down, businesses do not have capital. It is their cash 

flow that they use to run their business, to make new investments. 

If that is not there, then the fuel for the engine just is not going 

to be there. So it is a challenge, but I think the payroll tax holiday, 

if we would have done that last year, I think would have put more 

money back into people’s pockets. 

Senator STABENOW. Thank you. 

I see our distinguished ranking member. I will turn it back over 

to you, Mr. Chairman. 

Senator GRASSLEY. All right. Senator Baucus is necessarily absent; he probably explained that. I was at another meeting. 

What I will do here, for the benefit of my colleagues, is I will give 

my opening statement, and I will not ask questions, and then I will 

go to the four of you. Then I will ask my questions after you are 

done. 

15 

OPENING STATEMENT OF HON. CHUCK GRASSLEY, 

A U.S. SENATOR FROM IOWA 

Senator GRASSLEY. I appreciate the partial focus of this hearing 

on the value of international trade and promoting job growth, but 

I am skeptical of the forced distinctions among beneficiaries of 

trade, particularly when it comes to the job of U.S. Trade Representative. 

The role of the USTR is to eliminate tariff and non-tariff barriers 

to U.S. exports and to enforce and defend U.S. rights and privileges 

under our international trade agreements. In doing so, the USTR 

benefits all American firms that export, not just firms of a particular size. 

While small- and medium-sized enterprises—the purpose of this 

hearing—may have specific resource constraints to contend with in 

seeking export sales, no U.S. business will be internationally competitive in the face of tariff and non-tariff barriers to our exports. 

Reducing or eliminating such trade barriers should be our top priority. It is the single-biggest step we can take to increase exports. 

The most effective and proven means of reducing tariff and nontariff barriers is through the negotiation and implementation of 

trade liberalization agreements among nations, yet this administration and its leadership in Congress have demonstrated that they 

are unwilling to do so when it comes to implementing our pending 

trade agreements with Colombia, Panama, and South Korea. 

So I am concerned with this administration’s recent focus on export promotion because it comes as a distraction. We all want to 

see more exports, but that does not mean that we should throw 

more money and earmarks at export programs and call it somehow 

a day without taking into consideration Colombia, Panama, and 

South Korea. 

I am particularly concerned when I learn that the President’s 

new national export initiative has monies budgeted, and yet the 

participating executive department still has—can you believe it— 

180 days to submit detailed plans to the President on how such 

monies would be spent. Most bureaucracies will find a way to 

spend money if they are told to spend it, but that does not necessarily make good policy. 

Unprecedented budget deficits are forecast for years to come. It 

is more important than ever that we scrutinize any proposals for 

increased spending. Those who seek to spend more must be able to 

explain why our current spending level is insufficient. What is the 

imperative for spending more taxpayers’ money? 

I want to discuss the tax portion of this small business hearing 

now. The first rule that Congress should follow is: when you are 

in a hole, stop digging. With unemployment at unacceptably high 

levels, Congress should not be raising taxes on small business, 

which creates 70 percent of the net new jobs in America. The worst 

thing that could happen to small businesses’ abilities to create new 

jobs is to hit them with a job-killing tax hike. 

Small business will be hit with this job-killing tax hike if Congress does not act to extend all of the lower tax rates that are set 

to increase at the end of this year. These lower tax rates are the 

result of the 2001 tax bill that passed with broad bipartisan support. 

16 

Congressional Democrats and the President have proposed increasing the top two rates from 33 percent and 35 percent to 36 

percent and 39.6 percent, respectively. Now, let us look at what the 

Joint Committee on Taxation says. Everybody knows that this is 

the nonpartisan official scorekeeper on congressional tax issues. It 

provided data that shows that 44 percent of flow-through business 

income will be hit with a tax hike that will result from the increase 

of the top two tax rates if Congress does not act to stop it. 

I will put that in the record so it is there for everybody to see. 

So it is not my statement, it is from the nonpartisan Joint Committee on Taxation. 

[The memorandum appears in the appendix on p. 42.] 

Senator GRASSLEY. Now, some on the other side will state that 

only a small percentage of the small businesses will be hit with tax 

hikes from the top two rate increases. We just heard that. 

However, talking about the percentage of small businesses that 

are hit is misleading because it treats a small business with one 

employee the same as a small business with 400 employees. What 

we should be concerned with is the amount of income and the number of jobs in those small businesses that are affected and not what 

percentage of small businesses are affected. 

This hearing will also cover small business tax issues that do not 

affect small business job creation as much as the tax hikes, but we 

should keep in mind this 800-pound gorilla in the room as we discuss the other tax issues that affect small business and job creation. 

Senator Bunning? 

Senator BUNNING. Thank you, Mr. Chairman. 

Senator GRASSLEY. Thank you. 

Senator BUNNING. For Mr. Williams. Mr. Williams, in your testimony you listed a number of countries to which your company exports, including Taiwan. Why is China not on your list, and is China’s practice of devaluing its currency a barrier to exporting your 

products there? 

Mr. WILLIAMS. That is a very good question, Senator Bunning. 

Senator BUNNING. I am having trouble hearing your answer. 

Mr. WILLIAMS. I think the mic is on now, is it not? 

Senator BUNNING. Now. Fine. 

Mr. WILLIAMS. All right. I appreciate the question about Chinese 

currency and if that impacts us in our exports towards China. It 

is a consideration. Our primary concern in the Chinese market is 

intellectual property protection. We have already suffered once 

from a very significant copying of our product by the Chinese, by 

a Chinese firm, and that was very damaging to our company. So 

our first concern is intellectual property, a secondary concern 

would be currency. 

Senator BUNNING. Thank you. 

Mr. Rys and Mr. Edwards, the Treasury Department has repeatedly said that only 2 to 3 percent of small businesses will be impacted—and Senator Stabenow brought this out also—by raising 

the two top marginal rates, which the administration plans to do. 

Why does this understate the true impact on small businesses, 

besides the facts that were brought out by my ranking member? 

17 

Mr. EDWARDS. Well, one additional interesting fact that I have 

in my written testimony is that Robert Carroll, a former Treasury 

Secretary—well, first of all, there are many individual tax returns 

that have very small bits of small business income on them, so 

Robert Carroll looked at just the individual tax returns where more 

than 50 percent of the income came from business, so these are essentially full-time businesses. Of this group of full-time businesses, 

fully one-quarter of the returns are in those top two brackets. 

Senator BUNNING. Twenty-five percent? 

Mr. EDWARDS. Twenty-five percent of essentially full-time businesses would be hit by the increase in the top two rates. 

One additional point. I would like to sort of respond to a couple 

of the panelists earlier, on this whole issue of the demand-side 

stimulus. I mean, the last couple of years we have had the biggest 

demand-side stimuluses in world history. If you look at our annual 

Federal deficits—— 

Senator BUNNING. I know about that. 

Mr. EDWARDS. It is $1.5 trillion a year. It seems to me—and Mr. 

Williams’s business is in the global marketplace, big American corporations are in the global marketplace. The demand we are worried about is global demand. China and India continue to grow rapidly, so the question is the supply-side question: how do we get 

businesses to supply those foreign countries that are growing 

quickly; how do we get them to locate here in the United States? 

That is a supply-side question. 

Businesses are forward-looking. If you are a small business like 

Mr. Williams’s, or a big business like Intel Corporation, you know 

that demand is growing around the world, and at the margin Congress can change tax incentives so that either those businesses that 

supply those world markets are located here, or they are located 

abroad. So we have to look at the supply side. 

Senator BUNNING. Mr. Rys? 

Mr. RYS. Well, Senator, part of the challenge here is trying to 

find which small businesses we are talking about that are going to 

get hit. But what we can do, as an organization representing 

350,000 small business owners, is we can talk directly to them and 

we can hear what they have to say about these tax rates and the 

concerns they have. This is not going to show up in any kind of economic model, but small business owners are concerned that their 

taxes are going to go up. 

I can give you an example from Kentucky. We have a small business owner in Kentucky who owns a series of convenience stores. 

He would fall under this bracket where he would be hit with these 

tax increases. That money is what he has been using for the last 

5 years to redo a number of his stores. This year, he has decided 

to sit that out. 

The problem is, it is not just his stores and his employees that 

get hurt by that, it is the general contractor that he does not hire, 

and the subcontractors that that guy does not hire, and the equipment that they do not buy, and so on and so forth down the line. 

Just as Chairman Baucus said, there is sort of a snowball effect to 

all this. So it is that confidence that is out there. 

What we have seen when these proposals have been offered from 

State to State is, they just do not work. I mean, the revenue is not 

18 

there. So, not only do you create uncertainty for the businesses 

that would be hit by those taxes, but how much further down do 

they have to creep to get the kind of revenue you need to deal with 

budget shortfalls, which sort of locks the small business owner up? 

They are uncertain as to what their tax rates are going to be. If 

they do not have customers coming in the door and they do not 

have cash flow, they are going to hold back, especially on the back 

end of such tough economic conditions. 

Senator BUNNING. A last question. Mr. Sanford, is the administration’s position that implementing the pending free trade agreements with Colombia, Panama, and South Korea will create jobs, 

including small business jobs? If that is the administration’s position, why is the administration not taking concrete steps to implement them as soon as possible? If it is not the administration’s position, why did the President mention the free trade agreements in 

his State of the Union? 

Mr. SANFORD. Thank you, Senator. Look, FTAs are a value instrument for promoting exports of all our businesses, including 

small businesses. The President has instructed USTR to resolve 

the outstanding issues that are relating to the existing FTAs with 

Panama, Colombia, and South Korea. USTR is working on that 

now. It is a priority. 

Senator BUNNING. We have experienced that. We have experienced it for 3 years prior to this administration taking office. Now 

we are experiencing it for 1 year since the administration took office. Would you like to clarify what they are doing? 

Mr. SANFORD. Well, we continue to work with the three countries 

to resolve the outstanding issues. It is a priority in the administration’s trade agenda. I know that Ambassador Kirk will be up here 

next week to testify on the trade agenda, and he can address this 

issue in more detail. But just to stress, yes, we do view the FTAs 

as a priority. They are a vehicle for promoting exports for all businesses, including small business, and we would like to see the approval and implementation proceed. Thank you. 

Senator BUNNING. Thank you. 

Senator GRASSLEY. Senator Snowe? 

Senator SNOWE. Thank you. 

Well, Mr. Sanford, I am delighted to see today here in this expanded capacity in your position because I have been championing 

it for the better part of a decade. So in any event, I think it is so 

crucial to enabling small businesses to be in a position to be able 

to export their goods. The fact is that small businesses, although 

they create two-thirds of all the new jobs in the country, export less 

than 1 percent. So, that truly is not acceptable. I think the key is, 

now, do you have the sufficient support to implement your mission, 

and exactly how will you be targeting and focusing on ensuring 

that small businesses do have an expanded export capacity? 

Mr. SANFORD. Thank you, Senator. And thank you for your work 

in encouraging the position to be created, the designation. This is 

very much a priority within USTR in terms of, how can we provide 

more attention to SME issues? I think part of my new capacity at 

USTR is to ensure that, across the agency, we are coordinating all 

of our SME activities, all our negotiations, to ensure that, whatever 

the particular venue may be, that we are taking full advantage of 

19 

the opportunities that trade agreements or that dialogue may provide to knock down barriers that SMEs may be facing. 

It means some new activities at USTR, frankly. We are expanding outreach that we are doing at all levels. Ambassador Kirk is 

traveling around the country and doing a lot of domestic outreach, 

and when he does that he is meeting with small businesses around 

the country. We need to make sure that we understand the barriers SMEs are facing. 

The second level is, how do we more effectively reflect those barriers in our trade negotiations and our trade dialogues, and that 

is another element. If we look at what we are doing on TPP, for 

instance, we have dedicated a specific individual to work on SME 

issues across all the negotiating topics in TPP. It does mean that 

we have some new activities, and we will have to look at how we 

can allocate our resources to make sure that we are taking full advantage of that. 

Senator SNOWE. Do you think you have the resources now? 

Mr. SANFORD. I think, if we are taking this initiative seriously, 

we need additional resources to be devoted to these activities. 

Senator SNOWE. Yes. Because I think it would be disappointing 

if it was just an adjunct in your position, in your capacity, adding 

small business as an adjunct but not having the means to implement it for small businesses. That is going to be key. 

Mr. SANFORD. Yes. 

Senator SNOWE. I just noticed in the administration’s budget, 

they devoted, I think, two additional personnel within USTR. So, 

that is a concern, and I hope that we can work together on that 

to make sure it is being fully funded in the way that it should, because it is really key to job growth. We have to do everything we 

can, frankly, and move heaven and earth for job growth and job 

creation. Exports is a wholly under-utilized dimension and arena 

that we ought to explore and maximize. 

Mr. SANFORD. We would welcome that. We look forward to working with you and other members of the committee to ensure that 

we are meeting expectations in terms of addressing SME issues, 

making sure that we have the resources that we need to devote to 

these issues. 

Senator SNOWE. I appreciate that. 

Mr. SANFORD. You are welcome. 

Senator SNOWE. Mr. Rys, you mentioned a number of issues that 

are important to small business. I, frankly, have been really spending a lot of time having discussions with both the administration 

and here within the Senate regarding a truly targeted focus on 

small business initiatives now, not a month from now, not 2 

months from now. We need to get it done now. There are a number 

of issues that clearly could be crucial to job creation, and at least 

to create the confidence among small businesses in terms of the direction of Federal policy, particularly with respect to taxes. Frankly, last night we passed an initiative. It is a good first step. It is 

a baby step, in many ways. 

When you talk about expensing, which was my initiative in the stimulus and now has declined to $134,000, but it is only a 10- 

month extension. I do not think a 10-month extension creates the 

kind of predictability that we need to assure small businesses that 

20 

that policy is going to stay in place. The same is true for the tax 

rates and the expiration of the tax rates. We have to provide some 

certainty, otherwise there is going to be a tremendous vacuum. 

That is what I am hearing at home in a number of small business forums, and that is certainly what I have been trying to impart here, that we have to take actions now and have one major 

small business initiative so that there is an explicit direction in 

terms of the types of policies that are going to be in place here at 

the Federal level for an extensive period of time until we can turn 

this economy around. 

Mr. RYS. Senator, I think you are exactly right. It does need to 

be fast, and it needs to be certain. Small business owners have 

gone through what in many cases is maybe the worst recession 

they have seen since they opened their doors, so they are coming 

out of a very rough economic time, a very rough economic patch, 

and they are not seeing any improvement. When they see policies 

on the horizon that are going to increase their costs or are going 

to increase the costs of maybe the businesses that they are working 

with, they are going to be less likely to get back into the game. So 

I think we do need a lot of certainty. We do need certainty so that 

we know what the tax rates are going to be. And as you said, with 

section 179, it is about $130,000 this year; it was $250,000 last 

year. Most businesses do not have the capital right now to make 

those expenditures. This is going to be a long-term recovery. 

Senator SNOWE. Exactly. 

Mr. RYS. We would go back down to $25,000 if section 179 expires at the end of this year. I mean, that is a very small amount, 

especially if we are sort of beginning to move our way out of the 

recovery. You are going to have more and more businesses that 

have to replace equipment. They may be on the last legs of their 

truck or last legs of a piece of equipment in their factory, when 

they are holding out, to say, look, I do not have any money right 

now, but we can make do with this today. If they hit January of 

2011 and the incentives are not there, they waited for nothing. 

Senator SNOWE. Thank you. 

Senator GRASSLEY. Senator Menendez? 

Senator MENENDEZ. Thank you very much. 

Mr. Edwards, unless we act soon, millions of Americans will find 

themselves no longer receiving Unemployment Insurance benefits 

to feed their families and pay their mortgages. Do you support the 

current level of Unemployment Insurance? 

Mr. EDWARDS. No. Let me put it this way. I think that for every 

Federal aid program there are always negatives, and the negatives 

for Unemployment Insurance are that it ultimately increases burdens for taxpayers, our children, down the road, because it increases the Federal debt. Second, I think any economist would tell 

you that at the margin, higher Unemployment Insurance increases 

the unemployment rate slightly, because then people are willing to 

wait longer to accept a perhaps lower wage or do what they have 

to do to get a job. 

Senator MENENDEZ. Well, let me ask you then, if debt is an issue 

that we should be concerned about, extending the tax breaks that 

exist under the Bush tax cuts would cost $443 billion. How do you 

reconcile that? How do you reconcile the view that people will just 

21 

sit back and collect their unemployment benefits when there are 15 

million Americans looking at 3 million jobs? So, if every one of 

them went out there, that is a 5:1 proposition, so obviously in the 

hunt for jobs, at least at this point in time, people would be left, 

despite their best efforts, still being unemployed. 

Mr. EDWARDS. Well, I mean, on that issue we all agree that the 

way to get jobs back is economic growth. The American economy 

can create millions of jobs every year if it is growing, as we all 

agree. On the issue of the deficit, I would rank all the Bush tax 

cuts, sort of, from the highest and most efficient, the most likely 

to create growth, and then those tax cuts that are least likely to 

create growth. For example, the $500 additional child tax credit, in my view, is 

a lot less likely to create growth than the top marginal tax rate. 

So I would not necessarily be in favor of extending all the Bush tax 

cuts. I am in favor of extending the Bush tax cuts that are the 

most inefficient taxes in our whole array of taxes, and those are the 

top marginal rates. 

Senator MENENDEZ. Well, I find it interesting, and the reason I 

want to pursue this with you is—I read your testimony—there are 

other economists, like Mark Zandi, who suggest that unemployment benefits produce a multiplier effect of $1.64 in economic demand for every dollar spent. In contrast, extending the Bush tax 

cuts is, like, 27 cents. 

I look at CBO, that all of us depend upon here, to give us analysis. Their analysis issued this month found that extending the tax 

cuts for high-income households would be the least effective of all 

spending and tax options the CBO examined for boosting a weak 

economy and creating jobs. 

It talks about, in fact, how extending those tax cuts for the 

wealthiest people in the country would cost us $443 billion, which 

is, of course, added to debt. In their analysis of job proposals—I 

would like to ask Dr. Toder this—they said the following: the three 

most cost-effective policy options—this is the CBO—to encourage 

economic growth and employment in 2010 are, according to the 

CBO, increasing aid to the unemployed since they spend a larger 

fraction of their income relative to the rich. It ‘‘boosts economic 

growth,’’ ‘‘drives employment growth.’’ These are their words, not 

mine. Two, implementing an employer tax credit, making it cheaper for employers to hire workers and increase employment. Three, 

reducing the payroll tax an employer pays. What do you think of 

those? 

Mr. TODER. Well, again, I think the operative word here is 2010. 

If you are talking about the extraordinary circumstances we are in 

today, where there is 10-percent unemployment, there has been a 

major financial crash, we are not living in normal times. The most 

important thing for the economy is to get demand up. I would say, 

largely, I would agree with them. I have a little bit of skepticism 

about the Incremental Jobs Credit, whether it is quite as effective 

as they think, but it certainly is up there relative to other things. 

However, if you are talking about what is going to cause economic growth in 5 to 10 years, for the longer haul, we do need to 

think about what incentives we have in the economy, and then I 

am sure CBO would give you a very different answer if you asked 

22 

them, what would be the most effective way to have long-term economic growth? 

Senator MENENDEZ. Right. 

Mr. TODER. But you do have to make that distinction. 

Senator MENENDEZ. Undoubtedly there would be other opportunities for longer-term economic growth, but the focus of this hearing is, how do we create jobs in the short term? How do we use 

2010 as beginning to create that job growth? It just seems to me, 

that some of the policies I have heard here certainly are not a 2010 

focus. 

Mr. TODER. That is correct. 

Senator MENENDEZ. They are far beyond that. I will just close on 

this. Mr. Edwards, I found it interesting, in the last page of your 

testimony you cite a 1999 study noting that 24 percent of Silicon 

Valley firms were founded by Chinese and Indian immigrants, 

which is very interesting. You cite the study to underscore your 

point that you believe that raising individual tax rates could damage the Nation’s historical role as a magnet for smart and productive people. 

What I find interesting is that the study that you cite was released during a period in which all of America’s income tax rates 

were higher than they are today, so it just seems to me, if tax policy then produced such positive results as you cite, one could argue 

that moving back to that policy only for the highest of earners 

would not be debilitating to the long-term prospects of the American economy. So we attracted all of those people even though all 

of America’s tax rates were much higher. So, it is certainly food for 

thought. 

Thank you, Mr. Chairman. 

Senator GRASSLEY. Yes. Thank you. 

I am going to ask my first question of Mr. Rys and Mr. Edwards. 

The Joint Committee on Taxation, which is the nonpartisan official 

scorekeeper, as you have heard me say now for the third time 

today, provided data that shows that 44 percent of flow-through 

business income will be hit with tax hikes that will result from the 

increase in the top two tax rates if Congress does not act to stop 

that by December 31. Most small businesses are flow-through businesses. 

So to you two, Congress should be concerned with the impact 

that these tax increases have on jobs and not the percentage of 

small businesses affected. Would that be right? If you want to explain, go ahead. 

Mr. EDWARDS. Well, I mean, obviously we have found out over 

the last few decades that more and more American businesses are 

being organized not as C corporations, but as S corporations, and 

LLCs and partnerships. Some of these businesses are very, very 

large businesses. Now, half of all business income in the United 

States is in these flow-through businesses and not C corporations, 

so some of these are very large. That is why your statistics of 44 

percent works the way it does. There is a fairly small group, relatively, of very large businesses who file through the individual 

code, and obviously they are very, very important businesses. 

I think the academic literature on the effect of marginal tax rates 

on these flow-through businesses is pretty clear. There is a whole 

23 

series of papers done in the 1990s by Robert Carroll and Doug 

Holtz-Eakin, co-authors who looked at the effect of marginal tax 

rates on small business hiring and investment. Their results were 

pretty unequivocal that, at the margin, if you increase the rates on 

small business, they hire less and they invest and expand less. 

I want to make one more point in response to Senator Menendez’s point about academic models. There was a very interesting 

2005 study by the Joint Committee on Taxation, JCX–4–05, where 

they had two macroeconomic models and they looked at three different possible tax rate cuts: a corporate rate cut, individual rate 

cuts, and then an expansion in the personal exemption that would 

not affect marginal incentives. 

They found that by far the biggest positive effect was with the 

corporate rate cut, the second-best tax policy would be lowered individual rate cuts, and then the least effective was a policy that 

does not affect marginal incentives. So, in counter to Senator 

Menendez, I think that marginal incentives are very important, especially because we live in a global economy, American businesses. 

We want businesses to invest here, to serve world markets, so we 

have to look at their cost of business. 

Senator GRASSLEY. Do you want to add anything, Mr. Rys? 

Mr. RYS. I think he summed it up pretty well. I think when you 

look at the way the business files its taxes, what they are reporting 

on that income is basically the profit of the business. It is after the 

expenses. That money eventually is going to go back in the business. This is not money that they are going to sit on. Right now, 

when capital is at such a premium, I do not think we should be 

siphoning a portion of that off from the top, we should let the business owner keep that. I mean, they are the ones who know what 

they need to keep their businesses operating. 

When they see higher taxes down the line—and some of this is, 

you have demand low, you have sales low right now, but if they 

know in 2007, for example, they had a good year and they reported 

enough to put them in the top bracket, maybe they are down a little bit this year, but if things start to pick up they are going to see 

themselves into those tax brackets again, and they need the capital 

they have to make their business run. They are also then going to 

have to pay their tax liability, and that can be a real challenge in 

the next year or so. 

Senator GRASSLEY. All right. 

Small business tax relief made up less than one-half of 1 percent 

of the stimulus bill, $787 billion big. Considering that small business creates 70 percent of the net new jobs in the economy, it 

seems kind of a puny amount of money for a bill that was sold by 

the President as creating millions of jobs in the private sector. The 

administration stated that 90 percent of the jobs that would be created from the stimulus bill would be private sector jobs, yet when 

it came to small business tax relief, that stimulus bill basically ignored small business. That is the engine of private sector job creation. 

So, Mr. Rys and Mr. Edwards, should the stimulus bill have provided more than one-half of 1 percent for small business? Then let 

me follow up with some ideas that I propose in my Small Business 

Tax Relief Act, such as elimination of the capital gains taxes for 

24 

certain small businesses, as well as a 20-percent deduction for 

small business income. 

Mr. RYS. Well, at the NFIB we did not support the stimulus bill, 

the first bill, just for the reasons that you mentioned. I think the 

tax relief was far too small for small business owners. As you said, 

it was around 1, 1.5 percent. But for a lot of that relief, it required 

you to invest some form of capital, capital that businesses just did 

not have at the time. 

I think some broader tax relief that would have hit all small 

business owners—like I said, we proposed a payroll tax holiday for 

both the business and the employee. That would have put money 

immediately back into the business. It certainly would have helped 

to reduce the job loss in businesses because it would have reduced 

the cost of labor. We think that would have been the best solution 

at the front end of 2009. 

But I think some of the proposals you are talking about as well, 

where we reduced the tax rates for a broader group of small business owners, is certainly going to be helpful because it is going to 

let them keep more of the capital, keep more of the money they 

have to reinvest back in the business and meet their expenses. 

Senator GRASSLEY. Do you want to add, Mr. Edwards? 

Mr. EDWARDS. I mean, the U.S. economy has returned to growth 

now. I think Congress should start shifting its focus more towards 

looking at long-term tax reform and long-term incentives for business. I think that there is a lot we can do for long-term growth and 

reform in the tax code that would also help in the short term because, of course, businesses are forward-looking. So, let us make 

that 179 expensing permanent, let us make the R&D tax credit 

permanent, let us lower the rate on multinationals, let us keep 

those top income tax rates, and let us put these permanently into 

law to give long-term stability so it will help in the short run and 

the long run. 

Senator GRASSLEY. Mr. Sanford, you said this, and I want to ask 

you a question about your comment that, ‘‘USTR is prioritizing the 

particular barriers confronting our small- and medium-sized exporters when we deal with our trading partners.’’ 

Now, from my point of view, a specific trade barrier may have 

a disproportionate impact on small- or medium-sized businesses, 

but I do not see how the barrier itself is particular to small- or 

medium-sized exporters. We all want to see more U.S. businesses 

engaged successfully in international trade, but why is it appropriate for the U.S. Trade Representative to be prioritizing its agendas this way, based on the relative impact of trade barriers? 

Mr. SANFORD. Well, thank you, Senator. Perhaps the word 

‘‘prioritize’’ is not the right word to use there. I agree with your 

statement that, in terms of the barriers that we are looking at, 

they are not unique SME barriers. They are typically barriers that 

disproportionately impact small- and medium-sized businesses. 

Some examples would be the cost of demonstrating that your product complies with foreign regulations; the testing costs, for instance; the process of exporting, in terms of understanding rules of 

origin and customs documentation issues. These are types of issues 

that present bigger challenges for our SMEs. There are issues that 

the big companies are having to deal with as well. 

25 

What I meant by that is that we want to make sure that there 

are no gaps, that there are no unique SME issues that we are not 

addressing that we should be. Second, when we are tackling some 

of these obstacles that impact all of our businesses, that we are 

conscious of the ones that are disproportionately impacting SMEs 

and that we are thinking creatively about how we can try to address some of these. 

An example is, within APEC, for instance, we are looking at a 

lot of efforts to try to streamline customs documentation, for instance, make tariff information more accessible and transparent for 

small businesses. These are things that we are hearing from small 

businesses that are of concern to them, and they are things that 

we can address. It does not mean that they are a bigger priority, 

but it means that we need to be conscious of the fact that many 

of these issues do disproportionately hit SMEs. 

Senator GRASSLEY. I want to look at what you said about the potential for increasing exports for small- and medium-sized businesses, Mr. Sanford. Just because there are a large number of 

small- and medium-sized businesses that are not currently exporting does not necessarily mean that each has the capacity to export 

competitively, at least in the short term. 

So, this is my question. Two questions. Are you aware of any 

analysis of what makes a small- or medium-sized U.S. business a 

competitive exporter, and are there any lessons or best practices 

that apply regardless of the size of the exporting business? 

Mr. SANFORD. I agree. I think this is an issue where it requires 

a lot of interagency cooperation in the sense that, at USTR, our 

bread and butter is to knock down barriers and open markets. It 

is a matter for our other colleagues, and particularly the Commerce 

Department, in terms of trade promotion activities, SBA and ExIm Bank in terms of the finance programs, to make sure that companies are able to take advantage of those opportunities. 

I think many small businesses are not ready to be exporters. I 

think that Mr. Williams touched on some of these issues when he 

was first trying to export and the challenges that they were facing. 

I mean, there are programs out there that can help assess whether 

small companies are ready for export. 

I think at USTR we are very conscious that not all small businesses are ready to do that, and that is not really our role in this, 

but we need to work with our interagency colleagues so that there 

is more education to SMEs, there is more outreach to SMEs, so 

they are aware of the opportunities, the market access opportunities that USTR has been able to obtain through its trade negotiations. 

Senator GRASSLEY. Mr. Williams, according to your testimony, 

your company was only about 3 years old when you first pursued 

export opportunities. In retrospect, was that an appropriate time in 

your company’s development to do that? If you had to do it over, 

would you have done anything differently? 

Mr. WILLIAMS. Thank you, Senator. That is a really good question. The determination to export after really being in business 

about 31⁄2, 4 years was driven by my personal interest in export. 

I have a degree in German. I am fluent in German and have lived 

overseas, and felt that I was comfortable enough to just do business 

26 

overseas. It was a grave mistake, and we spent a lot of money 

learning that that mistake was in fact the reality. What we tried 

to do was push into the market not knowing enough, not being 

export-ready. The challenge that we had was, we looked at the cursory data of market size and we felt that we knew enough about 

market size to then choose the biggest markets. 

It was not based on our products and our company’s ability to actually export, to know the regulations that would be required, to 

know the export codes, the harmonized codes for our products, to 

know the VAT rates in different countries, to know the distribution 

models. There was so much knowledge that we were lacking, that 

this is why I recommend that we really focus on the good services 

that are existing at the U.S. Commercial Services, because they 

can help a small business create demand for sales and increase 

their exports to foreign markets. 

But first, small businesses have to know what the market has to 

offer, where the niche is, and how we can grow. Small businesses 

like mine do not have the resources to hire an export specialist or 

a sales professional who is well-versed in international trade relating to pet supplies. So we rely, now, very much on the U.S. Commercial Service for a lot of different services that really are impacting our business and driving demand. 

Senator GRASSLEY. To what extent does a small company’s success in exporting come down to its human capital? 

Mr. WILLIAMS. I think that the human capital makes a big difference in a small company, because that is what drives innovation, 

that is what drives sales. When a small business has very tight 

constraints on the ability to hire in anticipation of sales, that is a 

very risky proposition for a business to enter into. 

As a small company, it is very difficult to hire a professional who 

can drive that demand before a business owner is confident the demand exists. So internally, we suffer from having limited capital 

that we can put towards those kinds of experiences, and therefore 

we rely on these programs from the U.S. Commercial Service to 

sort of augment our internal staff’s understanding of the markets. 

By working with them and asking them to help us into new markets, we look first to the market potential: where are the sales 

going to be the greatest, where is our product most capable of fitting into the niche in that country, and that is why we push first 

there, and then, of course, we look at other barriers to export trade. 

Senator GRASSLEY. I have asked my last question. I may have 

some that I will submit for answer in writing. Let me check with 

Senator Baucus on what he wants me to do. Senator Baucus, if he 

were here, would thank you very much for your participation on 

this very important issue. Small business is very, very important. 

We appreciate your testimony and participation and the hard work 

you took in preparation for it. Thank you very much. 

The hearing is adjourned. 

[Whereupon, at 11:25 a.m., the hearing was concluded.] 

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