```

[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

  PROMOTING INTERNET ENTREPRENEURSHIP: SHOULD THE GOVERNMENT TAKE ANY 
                                ACTION?

=======================================================================

                                HEARING

                               before the

                   SUBCOMMITTEE ON REGULATORY REFORM
                        AND PAPERWORK REDUCTION

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                     WASHINGTON, DC, APRIL 3, 2001

                               __________

                            Serial No. 107-3

                               __________

         Printed for the use of the Committee on Small Business

                    U.S. GOVERNMENT PRINTING OFFICE
72-118                      WASHINGTON : 2001

                      COMMITTEE ON SMALL BUSINESS

                  DONALD MANZULLO, Illinois, Chairman
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD, 
ROSCOE G. BARTLETT, Maryland             California
FRANK A. LoBIONDO, New Jersey        DANNY K. DAVIS, Illinois
SUE W. KELLY, New York               WILLIAM PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio               DONNA M. CHRISTIAN-CHRISTENSEN, 
PHIL ENGLISH, Pennsylvania               Virgin Islands
PATRICK J. TOOMEY, Pennsylvania      ROBERT A. BRADY, Pennsylvania
JIM DeMINT, South Carolina           TOM UDALL, New Mexico
JOHN THUNE, South Dakota             STEPHANIE TUBBS JONES, Ohio
MIKE PENCE, Indiana                  CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey            DAVID D. PHELPS, Illinois
DARRELL E. ISSA, California          GRACE F. NAPOLITANO, California
SAM GRAVES, Missouri                 BRIAN BAIRD, Washington
EDWARD L. SCHROCK, Virginia          MARK UDALL, Colorado
FELIX J. GRUCCI, Jr., New York       JAMES P. LANGEVIN, Rhode Island
TODD W. AKIN, Missouri               MIKE ROSS, Arizona
SHELLY MORRE CAPITO, West Virginia   BRAD CARSON, Oklahoma
                                     ANIBAL ACEVEDO-VILA, Puerto Rico
                  Phil Eskeland, Deputy Staff Director
                  Michael Day, Minority Staff Director
                                 ------                                

            SUBCOMMITTEE ON REGULATORY REFORM AND OVERSIGHT

                     MIKE PENCE, Indiana, Chairman
LARRY COMBEST, Texas                 ROBERT BRADY, Pennsylvania
SUE KELLY, New York                  BILL PASCRELL, Jr., New Jersey
SAM GRAVES, Missouri                 CHARLES GONZALEZ, Texas
ROSCOE BARTLETT, Maryland            DAVID D. PHELPS, Illinois
TODD AKIN, Missouri                  JAMES P. LANGEVIN, Rhode Island
PAT TOOMEY, Pennsylvania             ANIBAL ACEVEDO-VILA, Puerto Rico
               Meredith Matty, Professional Staff Member

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on October 19, 1999.................................     1

                               WITNESSES

Clark, Joseph A., CEO, LocalWeb4U................................     3
Mellinger, Doug, Chairman, National Commission on 
  Entrepreneurship...............................................     5
Engel, Josh, General Counsel, Bigstep.com........................     7
Hughs, Ragan, Co-Owner, Capital Baby Rental......................     8
Draluck, Jonathan D., Vice President Business Affairs & General 
  Counsel, iBasis, Inc...........................................    10
McCord, Rob, President & CEO, Eastern Technology Council.........    12

                                APPENDIX

Opening statements:
    Pence, Hon. Mike.............................................    22
    Brady, Hon. Robert...........................................    25
Prepared statements:
    Clark, Joseph A..............................................    26
    Mellinger, Doug..............................................    31
    Engel, Josh..................................................    40
    Hughs, Reagan................................................    44
    Draluck, Jonathan D..........................................    50
    McCord, Rob..................................................    56

 
  PROMOTING INTERNET ENTREPRENEURSHIP: SHOULD THE GOVERNMENT TAKE ANY 
                                ACTION?

                              ----------                              

                        TUESDAY, APRIL 3, 2001.

              House of Representatives,    
      Subcommittee on Regulatory Reform and
                                         Oversight,
                               Committee on Small Business,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, 2:11 p.m. in Room 
311 Cannon House Office Building, Hon. Mike Pence, [chairman of 
the subcommittee] presiding.
    Chairman Pence. The hearing of the Subcommittee on 
Regulatory Reform and Oversight of the Committee on Small 
Business will come to order.
    Our hearing today is about the meteoric rise of Internet-
based economy and whether current federal government policies 
help or hinder small businesses that seek to utilize the 
Internet as a business strategy. Today's hearing will be the 
first in a series of hearings that this subcommittee will hold 
to examine the impact of federal regulatory policies on the 
ability of small businesses to deploy new technologies, develop 
new markets and generate economic growth.
    The expansion of commerce on the Internet is simply 
staggering, with numbers that are difficult to comprehend. 
Internet traffic in 1996, a mere five years ago, but in 
Internet time almost a generation ago, was doubling every 100 
days. Even analysts could not comprehend the growth in usage of 
the Internet. For example, in 1998, one report estimated that 
retail transactions on the Internet would reach 7 billion by 
the year 2000. Most analysts now believe that the estimate was 
reached in 1998. Just this past Christmas, retail sales of 
goods on the Internet reached $8.7 billion and the Bureau of 
the Census estimates that Internet business to consumer retail 
transactions hit the $20 billion mark in 2000. The use of the 
Internet by consumers to purchase goods pales in comparisons to 
estimates of business to business transactions on the Internet. 
Some analysts predict the value of global transactions on the 
Internet will exceed $6 trillion.
    The growth in commerce and use of the Internet demonstrates 
that it is the new central business district, the new Main 
Street, if you will, and the new shopping mall. And just as 
small businesses play a vital role in the central business 
districts, on our Main Streets and in the shopping malls, they 
also play a key role in the development of commerce on the 
Internet.
    Rather than hire a real estate agent and construction 
contractor to build a new store, Capital Baby Rentals decided 
to expand on the new American Main Street and sought the help 
of another business, Bigstep.com.
    However, the Internet is not just the new American business 
district. Digital convergence enables the Internet to be the 
next newspaper, the next telephone network and cable system. In 
my district, LocalWeb4U provides information that individuals 
currently receive from their local newspapers, broadcast 
stations and telephone directories. However, because of the 
ubiquity of the Internet, LocalWeb4U can provide that 
information not just for Anderson, Indiana but for communities 
throughout the United States. But we also have iBasis, a 
company that provides voice over Internet Protocol telephony. 
In other words, it uses the Internet to provide telephone 
service and, unlike the telephone company, its customers are 
not limited by geographic location.
    No one can doubt that an Internet-based economy provides 
significant opportunities for new small businesses, as well as 
new ways to expand existing small businesses. In fact, three of 
the businesses testifying here today simply would not exist and 
did not exist prior to 1995 without the ubiquitous availability 
of the Internet and the desire of Americans to log on.
    Before Congress takes further action to promote expansion 
of commerce on the Internet or hinder its unbridled growth, it 
behooves us to understand this new stream of commerce, the 
problems they face and whether they currently perceive 
government policies to help or hinder their operation and 
growth.
    The panelists here today will explain how businesses is 
done on the Internet, how they as small businesses discovered 
unserved or under served niches to expand their businesses and 
how this new technology will continue to open new opportunities 
for the pioneering small businesses. Finally, the panelists 
will highlight any issues of concern about existing federal 
policies or changes in federal policies that may help or hinder 
their businesses. Congress will then have the information it 
needs to rationally make decisions and ensure federal 
legislative and regulatory policies are partners in helping 
small businesses take advantage of this new stream of commerce 
and not act as a dam to its potential.
    Before turning to the ranking member, the distinguished 
gentleman from Pennsylvania, I would like to take a few moments 
to mention the superb work done by my predecessor, the 
gentlewoman from New York, Sue Kelly, who chaired this 
subcommittee in the last Congress. She demonstrated leadership 
in this subcommittee in doing oversight of the regulatory 
problems facing small businesses and she persevered in finally 
getting the Truth in Regulating Act passed. Her understanding 
of the regulatory problems faced by small businesses is second 
to none in this Congress and, as the new chairman of this 
subcommittee, I hope to follow in her footsteps.
    The ranking member not being in attendance, we will 
recognize our first speaker for the afternoon who is with a 
company known as LocalWeb4U and his name is Joe Clark, who is 
recognized for five minutes.
    [Mr. Pence's statement may be found in appendix.]

   STATEMENT OF JOSEPH CLARK, CHIEF EXECUTIVE OFFICER, LOCAL 
                      WEB4U, ANDERSON, IN

    Mr. Clark. Thank you, Mr. Chairman. It is a huge honor to 
be able to be here and I greatly appreciate you extending us 
that privilege. LocalWeb4U was founded on the belief that 
people need to be heard and to be found, especially on the 
Internet. LocalWeb4U was established to give individuals, 
businesses, non-profit organizations the ability to state their 
opinion, give dates for events, even brag about their 
children's accomplishments within a local community.
    The sad news is economies of scale have reduced local 
content providers such as newspapers and radio stations for 
two-thirds of America so that their voices cannot be heard, the 
Internet having a virtually unlimited amount of space. It lets 
you get out into every community of every size without the cost 
of raw goods and capital expenditure matter.
    LocalWeb4U was blessed to create a concept in November of 
1999, the peak of the Internet days. It incorporated two days 
before the largest Nasdaq record reporting in terms of the 
market. We came to market in a wonderful time and were placed 
to deal with this economy.
    As a certified financial planner, I have looked at my 
clients who often talk about their new 201(k) versus the 401(k) 
and they literally feel that they have been cut in half. As a 
result, LocalWeb4U has had the trials and tribulations and had 
to tick through periods of time of slow capital infusion.
    As all good businesses should, we have listened to the 
market and we have been forced to go more from a conceptual 
build up period of time to an immediate let-us-produce-net-
revenue type of company. We have changed with the times and I 
am proud today to tell you that we are here intact and with a 
strong vision.
    There is much talk about the new economy versus the old 
economy. And, in my opinion, I think you need to understand 
that the whole world is really changing with new innovations 
and new technologies.
    There is no company that really has a stronghold, whether 
they are an old company or a new company, on this marketplace. 
Not Oldsmobile, not Sunbeam, not even Yahoo!. As an example, 
there were 200 companies in 1920 that produced automobiles, 23 
alone in Anderson, Indiana, my hometown. In 1930, we were down 
to three, Studebaker barely holding on.
    During this phase of the economy, the same one that we are 
in today, there is a mighty shake-out and a race for 
leadership. This change in corporate profitability and 
survivability during these economic times forces us to address 
the taxation of our business economy for one simple reason. The 
largest barrier to entry for our business was not a failing 
business model, it was not a mistake in assumptions, but it was 
a lack of capital. The best way to get capital is to inspire 
investment.
    I believe it is imperative that we create a method so that 
investors do not pay taxes on growth. As long as the money that 
they have stays in the market for the development of companies, 
whether they be new companies or old companies trying to re-
tool to stay alive in this great economy. We must give intra-
stage investors support in the investment process, not 
obstacles that they need to overcome. And I realize to some of 
the people in this room that a 20 percent tax does not seem 
like a lot of money, but let me remind the committee that a 25 
percent reduction in the stock market is titled as a crash.
    Mr. Chairman, the only way for people to get money out of 
one company and to invest in another company is to go through 
their own little economic crash. I think people forget that 
regardless of which party you represent, people are scared to 
death of taxes. That is represented by the fact that 70 percent 
of all money in qualified plans, in IRAs, stays in the plan 
until age 70 and a half when the government forces them to pull 
it out. People cannot bear the loss of their net worth on 
paper. They cannot bear their own little economic crash.
    I dare to wonder how many people would have left the money 
in some of these high flying Internet stocks last year with 
several hundred return in one year and not diversified if they 
had not been trapped by the psychology of the tax code. If 
people take money out of the market to spend on themselves, if 
we must tax them, tax them then, but do not stop investors from 
supporting companies that have the ability to do what it is 
they need to do.
    I think it would be much easier for Congress, it would be 
much easier for American citizens, if our tax basis was taxed 
only when all the money left the market. We would not have to 
deal with the 3 billion shares trading every day and people 
trying to determine what basis was and it would spur investment 
based on the company's merits of that day. Do not punish 
investors and make them stay with their original decision if 
the market offers a better opportunity.
    I do not feel it is the government's place to make sure my 
business works and survives, but I do look at it this way: I 
feel it is my best interests to protect my customers, the 
people that provide my living and buy my product. Investors are 
one of the IRS's best customers because even if they get it 
wrong once or twice, they end up staying with it and truly 
enhance government revenues.
    Entrepreneurs live and die by the willingness of investors 
to bet on their success. Do your best as legislators to 
encourage investment, to encourage new innovation and to 
encourage willing compliance to the tax code.
    Thank you for this wonderful opportunity. May you be filled 
with wisdom and God's inspiration to lead our country into the 
best economic time in history.
    Thank you.
    [Mr. Clark's statement may be found in appendix.]
    Chairman Pence. Thank you, Mr. Clark. An excellent 
presentation.
    The next witness to testify is Mr. Douglas Mellinger, who 
is chairman of the National Commission on Entrepreneurship in 
Washington, D.C.
    Mr. Mellinger, you are recognized for five minutes.

 STATEMENT OF DOUGLAS MELLINGER, CHAIRMAN, NATIONAL COMMISSION 
              ON ENTREPRENEURSHIP, WASHINGTON, DC

    Mr. Mellinger. Thank you, Mr. Chairman. Thank you for 
inviting me to testify today. As you said, I am chairman of the 
National Commission on Entrepreneurship, an organization whose 
charter is to help government policymakers at the federal, 
state and local level better understand the needs and interests 
of entrepreneurs and to elucidate a set of public policies that 
support a strong entrepreneurial economy.
    Over the past few years, we have brought together some of 
America's top entrepreneurs as commissioners and have gone out 
across the country to talk to thousands of entrepreneurs and 
policymakers. We have learned from our research and interviews 
the opportunities and issues that face entrepreneurs related to 
infrastructure needs and policy implications. My testimony 
today reflects some of the highlights of the work that we have 
done.
    While the media likes to write ``dotcom, dotgone,'' the 
fact is that Internet technologies are revolutionizing how we 
communicate and transact business. We will look back 20 years 
from now and realize that we are just now beginning to see the 
radical change that this technology will have on everybody's 
lives, both personally and professionally.
    Let me give a little bit of my background. I started my 
first entrepreneurial activities in my early teens before I 
knew there was such a word as entrepreneur. My first real 
company was started in college at Syracuse University, which 
was where I learned the meaning of the word entrepreneur and 
realized how critical people such as myself were to the economy 
and to the communities in which we operated.
    When I was 25, I started my first technology firm, which I 
had started with $12,000 in 1989, and built its sales to $85 
million in 1998 with about 800 employees. When I started PRT, 
the venture capital industry was tiny as compared to today. 
Banks did not want to provide funding and the SBA was of little 
use due to its focus on small business rather than on 
entrepreneurship. I was creating a software services business 
which had as its main assets intellectual capital ratherthan a 
manufacturing or retail business with hard assets. We struggled with 
financing and growth of the business for many years and were fortunate 
six years later to attract venture capital to fuel our growth.
    Today, I am a partner in Interactive Capital, which helps 
early stage companies and Internet-enabled companies get 
founded, funded and go through the issues of hiring management 
teams and accelerating their sales. My two partners and I have 
been involved with more than 40 companies in our careers and 
have raised more than $400 million in investment capital to 
fuel these companies. I live all the issues that you are 
looking at today, including investment and regulatory 
infrastructure, labor, globalization, and hope that through my 
personal experiences and my commission I can give some insight.
    Some entrepreneurs think that the government should just 
get out of the way, but I think it is very naive and 
reactionary since they often feel they are all alone with the 
world on their shoulders. I believe that the government plays a 
crucial role and can be a positive player or it can be a 
hindrance, depending on the actions it takes.
    I hope that you and your fellow policymakers take the time 
to understand entrepreneurship, as well as small business, and 
what the differences are. Before enacting legislation take a 
moment to understand the impact on entrepreneurs and their 
companies.
    I will focus on a couple of the areas today. The first is 
human capital. In my experiences are in talking to my 
colleagues, I know that finding the right employee is the most 
difficult task. For many Internet entrepreneurs, finding 
talented engineers is an overriding concern. We also see that 
finding strong management teams and entry level employees is 
just as hard. Today, it is a little bit easier than it was 
three to six months ago, but certainly my belief is that over 
the next big of years we are going to have as strong an issue 
in finding people as we have in the past.
    There are couple of the areas that I think need to focus 
on. The first and foremost is that we are not graduating enough 
science and engineering graduates in the United States today. 
The K-12 education system is certainly a problem. We need 
computer literate employees with strong analytical abilities 
and competencies in the three Rs. We also need employees who 
understand the free enterprise system. More universities should 
be offering entrepreneurship programs. And, most importantly, 
from a technology standpoint, one of our limitations today is 
getting the engineering talent and for that, we are looking 
overseas more and more.
    Investment capital is a second major issue. Today, the 
venture capitalists, the large ones, have become very large and 
there is a gap which I think needs to be addressed between the 
angel capital at the small end and the large venture 
capitalists.
    Another area of focus is the communications infrastructure. 
There is not enough broadband access across this country and 
the costs are sometimes prohibitive.
    Regulations, as we look at both H1B filings, business 
formation, compliance, capital raising and others is a big 
issue.
    Intellectual property, being able to protect the ideas that 
we have is critical.
    And, finally, as we look at Internet taxation, the impact 
of lifting the moratorium has to be studied.
    Finally, a couple of specific recommendations that I have. 
First, devise incentives that will encourage more students, 
especially women and minorities, to major in science and 
engineering. Secondly, explore changing our immigration system 
to take into account the education and training of our 
immigrants, rather than focusing primarily on family 
relationships. And we should also be looking at the student 
visas and allowing graduates to stay in. Finally, explore 
options such as enhancing the effectiveness of Section 1202 of 
the IRS code providing preferential capital gains treatment for 
individual investments in emerging start-up companies, relaxing 
the restrictions on the Investment Company Act to allow 
formation of more professionally managed funds, and, finally, 
allowing a small portion of 401(k) funds to be invested in 
venture funds targeted to the capital gap.
    Thank you very much.
    [Mr. Mellinger's statement may be found in appendix.]
    Chairman Pence. Thank you, Mr. Mellinger.
    The chair now recognizes Mr. Joshua Engel, who is general 
counsel for BigStep.Com and comes to us from San Francisco, 
California.

 STATEMENT OF JOSHUA ENGEL, GENERAL COUNSEL, BIGSTEP.COM, SAN 
                         FRANCISCO, CA

    Mr. Engel. Good afternoon. First of all, thank you very 
much for inviting BigStep to testify today on behalf of our 
customers. Our customers are small businesses from around the 
country.
    We at BigStep recognize, as I am sure all the members of 
this committee do as well, that small businesses are a critical 
piece of the business ecosystem. They are the nucleus of 
virtually all corporate geneses. They fill local and 
specialized places around the globe and often fill critical 
gaps in rural communities through their focus on services. In 
fact, this coveted role in our national fabric is recognized by 
reputation. Fully 85 percent of all Americans recognize small 
businesses as a positive influence on American life. We also 
share that belief.
    In July of 1998, BigStep was founded with a simple premise. 
We wanted to help level the playing field for small businesses 
using the Internet. We wanted to give them power and tools to 
compete with the big boys on line: websites, e-mail, marketing 
tools and e-commerce tools.
    Today, nearly three years later, we are succeeding. With 
over 300,000 members, BigStep is helping small businesses do on 
line what they do best off line: build businesses based on 
unique products and services, building meaningful, personal 
relationships with customers and providing enhanced value.
    While we are proud to serve the small businesses, we cannot 
support them alone in their success. As the power of the 
Internet and broadband access and universally acceptable e-
commerce becomes a reality, these businesses that fuel our 
economy will need greater advocates.
    There are two particular areas of concern where we believe 
small businesses can benefit from your support. First, is 
taxes. We have already heard mention of that day. By their very 
nature, small businesses are challenged with juggling several 
duties, making time their most precious commodity. The 
complexity of small business taxation, particularly for home-
based businesses, is challenging enough. What we hear over and 
over again from our 300,000 members is that on-line commerce 
tax management is a huge challenge.
    Just handling sales taxes today over the Internet is 
extraordinarily complex. If the tax moratorium were lifted and 
electronic commerce were conceptually opened and new taxation 
at all levels of government, small businesses will spend an 
enormous amount of time trying to figure out how much tax they 
owe and to whom do they pay it.
    This is time that would be much better spent running their 
small businesses.
    As you mentioned in your opening statement, access to 
technology is also an incredibly important issue. Most analysts 
agree that an internet presence and tools to communicate with 
customers via the Internet are critical to business success.
    One very interesting fact is this. The research firm IDC 
has found that businesses without any kind of Internet presence 
average--and this is small businesses up to 100--average 1.74 
million in total revenue per year. That number increases to 
2.07 million for small businesses with some kind of Internet 
presence and that number jumps to 2.15 million per year for 
small businesses with at least a home page. So I think the 
message there is clear that the Internet can work for small 
businesses.
    Indeed, every member of Congress has both e-mail and a 
website and nearly 100 percent of the Fortune 1000 have 
websites and they have broadband access.
    As recently as last month, the research firm IDB found that 
over 20 million small businesses do not even have websites. 
This disparity in access and deployment often has as much to do 
with a lack of time and resources as it does to access to the 
offering. However, access that is affected by regulatory 
controls does have a real impact on small business 
capabilities.
    In particular, broadband access is a crucial hurdle for 
small business success on line. As I mentioned earlier, time is 
the most precious resource to a small business. Using 
applications like BigStep, with transaction tools and other e-
business management services, these things become incredibly 
valuable when used over broadband connections. With high speed 
lines, small businesses can truly compete with the large 
corporations who have had this access for years and continue to 
provide over 50 percent of Americans their jobs.
    Finally, small businesses need a friend. They do not have 
organizations like the ITAA as a support system. If we are 
indeed moving toward an economic slowdown, we need to show 
small businesses that we understand their integral role in 
today's economy. We need to help them flourish and not be 
stifled by the perplexity involved with more taxation or lack 
of access to technology.
    Thank you very much.
    [Mr. Engel's statement may be found in appendix.]
    Chairman Pence. Thank you, Mr. Engel.
    The chair recognizes Ragan Hughs, who is co-owner of 
Capital Baby Rental in Falls Church, Virginia, for five 
minutes.

STATEMENT OF RAGAN HUGHS, CO-OWNER, CAPITAL BABY RENTAL, FALLS 
                           CHURCH, VA

    Ms. Hughs. Thank you very much, Mr. Chairman. I would like 
to express my gratitude for being invited to speak. I am not a 
large company, I am actually a small business owner, so I am 
speaking to you from the people would be most directly affected 
by action of the committee.
    Mr. Engel told you about the two areas of concern to the 
small business market. As a small business owner doing business 
both on and off the Internet, the issues of equal access to the 
Internet and to new Internet technologies as well as the 
moratorium on Internet taxation are extremely important to me 
and my businesses.
    As you said, I am a co-owner of Capital Baby Rental, which 
is a baby equipment rental company meeting the needs of 
business and leisure travelers to the Washington, D.C. area. My 
experience with Capital Baby Rental demonstrates the importance 
of equal access to the Internet and to new Internet technology.
    The company itself is a brick and mortar business. We make 
physical deliveries and pickups of our equipment at the 
customer's location. However, the Internet is extremely 
important to the success of our business. Approximately 80 
percent of our customers come to us via our website. Since most 
people making a trip use the Internet in some form or fashion 
for research and planning, our Internet presence is absolutely 
critical to us to reach international and domestic consumers 
traveling to the D.C. area with small children before they 
absolutely arrive to get them in that planning stage.
    To use traditional methods of advertising to reach 
potential customers would be absolutely outrageously expensive 
and completely prohibitive. Using the Internet, however, we 
have been able to expand our reach considerably for very little 
cost. Using services like BigStep which are free to the 
Internet consumer, it is amazing what you can do.
    Having an informational website where a potential customer 
can learn about Capital Baby Rentals, who we are, what we do, 
what services we provide, what costs are going to be incurred, 
has become a major part of our marketing plan. Without our 
website, we would be limited to serving the needs of local 
residents and last minute travelers and true success just would 
not be possible.
    I also operate ThePartyBug.com which I wholly own, which is 
a party supplies company that is solely an Internet-based 
business. ThePartyBug.com markets, promotes and sells all of 
its products on line. The most important issue to us without 
question is the issue of Internet taxation, the state 
imposition and collection of sales and use taxes on e-commerce 
transactions.
    Currently, when an on-line sale takes place, we collect 
sales tax when the items are being shipped to the state in 
which we have a physical location. Therefore, we are taxed 
exactly the same, no different, no more, no less, than a brick 
and mortar store. If a small business owner were operating on 
the Internet also had to collect and report sales tax for 
several other states and localities, it would make it almost 
impossible for them to do business. Should the moratorium be 
lifted, the confusion that would ensue would be outrageous.
    By nature, Internet transactions actually take place in 
several different locations. For example, a web business' 
physical location may be in D.C., but the site is hosted in 
California, the traffic from that site is routed to several 
different servers in several different states, the consumer is 
located in Nebraska. Which state has the right to impose its 
taxes? Are several or, even worse, all of these states, going 
to be permitted to impose sales taxes on this one transaction? 
If this is the case, e-commerce will soon become a thing of the 
past. Merchants who either cannot or will not keep up with the 
different regulations will close their Internet businesses. 
Further, consumers who do not want to pay the excessive taxes 
would most likely choose to shop only at brick and mortar 
stores.
    I feel that the current e-commerce taxation is much more 
than sufficient.
    The Internet has opened up several doors for up and coming 
entrepreneurs like myself and as we move to the next phase of 
the Internet age, I would like to hold onto the hope that the 
World Wide Web will continue to make business easier, not more 
complicated.
    Thank you very much.
    Chairman Pence. The chair also will recognize Jonathan 
Draluck, who is Vice President for Legal Affairs of iBasis and 
comes to us today from Burlington, Massachusetts, recognized 
for five minutes. Thank you.

    STATEMENT OF JONATHAN DRALUCK, VICE PRESIDENT FOR LEGAL 
                AFFAIRS, iBASIS, BURLINGTON, MA

    Mr. Draluck. Thank you, Mr. Chairman, for the invitation to 
address the issue that this subcommittee has correctly 
identified as critical to the success of Internet-based 
businesses, that is, an environment free from legal barriers.
    My name is Jonathan Draluck. I represent iBasis. It is a 
company that has succeeded in large part due to Congress' 
resolve to keep businesses that provide Internet-based services 
as free as possible from burdensome regulatory oversight.
    Please allow me to share with you briefly what iBasis is 
and what we hope to become. Our core business is wholesale 
Internet telephone service. We carry the long haul portion of 
international telephone calls over the public Internet. We 
provide this service to over 100 telephone carriers around the 
world, including nearly all of the big U.S. long distance 
carriers that you are familiar with.
    We began our operations in a basement in suburban Boston 
three years ago. We now carry millions of ordinary phone 
traffic minutes every day, using more than 426 Internet 
telephony facilities in 46 countries. And, today, if you dial 
an international long distance call using your regular long 
distance carrier, the odds are up to one and three that for any 
of 15 countries you may be trying to reach, including China and 
Russia, that your call is being carried by iBasis.
    Our global network operates using Internet protocols which, 
like the Internet itself, are more efficient, versatile and 
scalable than the transport offered by traditional networks. 
Because of this, we are uniquely well suited to provide 
innovative web-based voice applications over our network. For 
instance, our Speech Solutions business based in Northern 
Virginia developed speech-driven applications that are 
available to anyone with a phone. Some of you may have already 
used a speech-recognition application such as that employed by 
major U.S. airlines. The service enables customers to dial in 
to a number and using spoken command make a flight reservation 
without ever using a touch tone.
    Think of speaking into your mobile phone anywhere in the 
world and having the answer you seek spoken back to you, but 
never speaking to a person. That is the potential of the iBasis 
network.
    The Internet's open protocols offer a lot more. We take for 
granted the use of the Internet. We all log on and surf, but if 
you think about it, there are only 300 million PCs in the 
world, that as compared with 2 billion telephones. So the idea 
is to leverage the phone and leverage the power of the 
Internet. For instance, unified communications which we offer 
lets you hear and respond with your voice to your e-mail or 
your voice mail from any phone. We also see a world in which 
ordinary Internet content is accessible over the phone with 
what we call Global Spoken Web. It is a worldwide 
infrastructure of interconnected voice enabled websites that 
respond to spoken requests.
    Finally, we offer our global IP voice infrastructure as an 
incubator for other small developers for new applications we 
can barely imagine now. In this way, we hope to bridge the 
digital divide by becoming an Internet access device and 
developing applications for it that are navigated by human 
voice.
    A key driver in these kinds of applications is 
deregulation. On the U.S. front, therefore, iBasis urges the 
U.S. Government to maintain its current hands-off policy to 
regulating the Internet. In other words, let us keep the status 
quo and I will tell you the three issues that we are following.
    First is international settlement regimes, which 
historically have maintained a balance of payments for 
terminating international telephone traffic between any two 
countries. The international settlement regime is rapidly 
becoming a relic of the monopoly era on competitive routes, 
though some countries that continue to have monopolies are 
persisting in imposing some form of settlements on 
international Internet traffic.
    So iBasis encourages Congress to send a signal that it 
opposes such efforts by some foreign regulators. The absence of 
such charges has resulted in dramatic increase in international 
long distance traffic and a commensurate decrease in rates and 
has benefitted consumers worldwide.
    Second, unlike in the U.S., where Internet services are not 
subject to licensing or tariffing requirements, some foreign 
governments erect obstacles to market entry. We attempt and are 
often successful in negotiating with the regulatory organ in 
these countries, but in some cases, countries impose all sorts 
of obstacles that prove insurmountable.
    There are also significant delays and obstacles in getting 
local telephone numbering resources and international codes for 
signalling and set up. The U.S. Government and in particular 
Departments of State and Commerce have been an enormous source 
of support. They have carried our torch and that of others at 
the ITU, which is an international organization laden with 
monopolist regulators who still do not see the benefits of 
competition, innovation and technological change.
    We are concerned about access charges for the same reason 
in this country because it requires higher communication 
services costs for consumers and it is a subsidy that is a 
relic of the traditional telephone network era.
    We are hoping to deliver the new, more dynamic flexible and 
efficient voice services of the 21st century all over the 
world. We are giving a voice to the Internet, but we need this 
committee's voice to speak together with ours to help maintain 
the deregulatory momentum that preserves our invaluable freedom 
to innovate.
    Thank you very much for your time and for your efforts on 
behalf of small business.
    [Mr. Draluck's statement may be found in appendix.]
    Chairman Pence. Thank you, Mr. Draluck.
    The chair as our last witness recognizes Mr. Robert McCord, 
President and CEO of Eastern Technology Council, and I do so on 
behalf of the ranking minority member, who was detained but who 
I know would want you to feel very welcome as a fellow citizen 
of Philadelphia. I bring greetings on behalf of the Honorable 
Robert Brady and welcome Mr. McCord of Eastern Technology 
Counsel in Philadelphia for five minutes of testimony.

   STATEMENT OF ROBERT McCORD, PRESIDENT AND CHIEF EXECUTIVE 
              OFFICER, EASTERN TECHNOLOGY COUNCIL

    Mr. McCord. Thanks so much. It is a real pleasure to get to 
be here and an honor to meet you and spend time with you. With 
the chair's permission, of course, I would like to submit my 
written testimony as my official testimony and just speak 
extemporaneously and be open for questions.
    As you noted, I have the pleasure of serving as president 
and CEO of the Eastern Technology Council which has 1300 member 
companies, dues paying member companies, many of which are 
venture capital firms and many of which are technology oriented 
leaders nationally. I am also joined today by my colleague 
Donna Gentile O'Donnell, who is a strong civil, political and 
business leader in her own right and is the managing director 
of our Philadelphia office.
    I am out in the suburbs in what is called the Route 202 
Corridor, recently labeled as one of the three hot new areas 
nationally to develop tech companies. And Donna, in addition to 
heading up all of our city-based activities and a close 
colleague and a close friend of your colleague, she also heads 
up all of our bio-pharma activities and one of the things that 
I would very much like to emphasize is that much of the 
Internet-oriented wealth creation that will flow into America 
over the next few years will have to do with the convergence of 
biotechnology, the pharmaceutical industry and the IT industry.
    Indeed, if Donna is successful in the development of 
various projects related to the human genome project and also 
specifically in recruiting the Wellcome Trust, the largest 
single funder of human genome research in the world to have 
some sort of an operations in North American, specifically in 
the United States, that single project is likely to mint more 
Internet-oriented wealth creation than any 50 publicly traded 
Internet companies are today. That is a matter of scale.
    And then, of course, you also are able to create real human 
progress in a lot of these cases, thanks to leadership from the 
pharmaceutical sector. So I hope you will recognize that 
convergence and invite your direct questions to Donna or to me 
and, of course, we are informally available to you because we 
are a hop, skip and a jump away. We can commute down here by 
train.
    Informally, I would just want to highlight for you, first 
of all, I would want to associate us with the remarks made 
across the table here. I believe that Ms. Hughs made a terrific 
point, that there is serious peril out there if we do over-
regulate, over-tax, complicate the lives of a lot of these 
really inspiring early stage company entrepreneurs like her.
    There is a real hazard here. It is not the go-go, late 
1990s any more. It is harder to get these companies started and 
funded and it is very important that we not hurt these 
companies, indeed, that we look for ways to help them.
    Furthermore, Mr. Mellinger's remarks were a great sort of 
laundry list of specific actions that I hope this subcommittee 
will embrace and we would be eager to help. And in terms of the 
spirit of things going on, I think you have a reputation as 
somebody who is likely to emerge as a young leader in Congress, 
I would hope to highlight for you that in terms of the new, new 
economy, it is a time for reconsideration, it is a time for 
activism, and it is also time for immigration.
    In terms of reconsideration, in general, the era of hype is 
out. Hype is out and margins and profitability are in. Part of 
what that creates, candidly, is opportunity for leaders from 
regions like yours and mine. Companies with many more mature 
companies and lower cost factors.
    Companies that do have bricks and not just clicks to offer 
because you are going to get much more mature business leaders 
looking to use the Internet to lower costs or increase revenues 
and if it does not do one of those two things, they are not 
interested in it. It is not the Internet for its own sake.
    The era of sort of 24-year-old with little more than an 
ego, a business plan and a tricycle being heavily funded is 
going away. And that will create tons of opportunities for low-
cost platforms that show open affection for these early stage 
entrepreneurs especially if they bolt into more mature 
companies.
    Secondly, I mentioned activism by intent. While we want to 
be very careful about regulation and preserving an era of 
deregulation, and I had the great honor of working for a 
variety of members of Congress who were avid about 
deregulation, including of the aviation industry and the 
trucking industry and so on, I was honored to get to work a bit 
for Bob Walker in a bipartisan setting when I was staff 
director of the Congressional Clearinghouse on the Future and 
Bob Walker, a conservative Republican, was very good at 
highlighting the need to have real activism at the federal 
level on behalf of science and technology, that this is one of 
those areas where you have a massive, if you will, externality, 
an external good is created.
    And with funds drying up for what we call pre-product, pre-
revenue companies, having federal and local governments take a 
look at ways to play here with relatively small but very 
meaningful amounts of money could be huge. In Pennsylvania, we 
have the Ben Franklin Partnership that was created by Governor 
Thornburg. There are tons of other examples.
    And, finally, on immigration, we do hope that you will help 
us get more aggressive on the H1B visas. It is one reason that 
I was hoping to speak with our great leader from Philadelphia 
because in particular leaders who are close to labor I believe 
should be brought to think more creatively about this.
    We have had tens upon tens of millions immigrate from 
Central Europe, Eastern Europe, Ireland, Great Britain in the 
19th and 20th century to be an aggressive importer of 
brilliant, talented, skilled labor. It could make a big 
difference in the early 21st century.
    Chairman Pence. Thank you, Mr. McCord.
    [Mr. McCord's statement may be found in appendix.]
    Chairman Pence. I want to thank the panel for a very 
exceptional and informative presentation. I will recognize him 
in a moment, but I do want to acknowledge the presence of my 
colleague and a genuine young leader in the U.S. Congress, Mr. 
Toomey from Pennsylvania, who I will recognize in a moment to 
participate in questions.
    We appreciate you being here.
    Also a subcommittee chairman on the Small Business 
Committee.
    A few questions, if I may. There have been several common 
denominator themes that I have heard from the witnesses and I 
want to get a sense from each of you about the role and the 
threat of Internet taxation. I think Ms. Hughs raised that 
issue in the most practical way.
    But before that, Mr. Clark, you in your presentation talked 
about creating incentives to investment. You as not only a 
constituent of mine, but a successful entrepreneur, attracting 
investment capital. Others have talked about attracting 
investment capital.
    As this committee moves foreword and makes an effort 
particularly to promote incentives for investment, I wondered 
if you might give more detail to the idea that you introduced 
of having a similar profusion in the new technologies area that 
we have that allows people to roll over their capital gains on 
the sale of a house toward the purchase of a new home. Is that 
what you were referring to? And briefly describe how we would 
do that in Internet investment.
    Mr. Clark. Very similar. And it is not--I do not think you 
should necessarily have to limit it just to the Internet side. 
And he mentioned the 1232. Section 1045 of the tax code is 
there that allows you if you have a qualified business interest 
stock, it has to be a qualified interest, which means you had 
to currently have purchased it at the very beginning stages, 
something that momsand pops and certainly those of us in 
Indiana are rarely eligible to participate because of other securities 
rules and regulations, rarely do we ever get to see them.
    We need to figure out a way to allow the average American 
investor the opportunity to help build companies, whether they 
are old companies that are trying to re-tool to become part of 
this new economy as they watch the manufacturing jobs leave, or 
whether it is new companies that are coming along, where people 
want to invest. We need to give them ways to encourage it and 
when you look in a market and you realize you are going to lose 
25 percent of your wealth when you count estate taxes, it is 
very difficult to sell, to go from one company to another.
    And I believe that there are--very similar to the stock 
exchange on section 1031 as we transfer property there is no 
limitation there to the amount of money that you can have 
little or big. And it would be a very easy process.
    As a financial planner, the most trying time I see all year 
long in my client's face is not just having to pay Uncle Sam on 
April 15th, but it is sitting down with years and years of tax 
returns and trying to figure out really what their tax basis 
is. They try to be honest. They try to do the right thing. Many 
of them are in my church. And it is a challenging day.
    I have to believe with trading 3 billion shares of stock 
every single day on the United States markets that it is 
tedious and expensive for the IRS.
    Senator John Breaux from Louisiana pointed out that 90 
percent of the money that comes from federal estate tax is used 
to operate the system. I have never heard the percentage quoted 
for capital gains tax, but I have to believe it is a very 
expensive process for the IRS to really mandate and watch.
    If we could figure out how to let people put money in, they 
would have to keep track of it one time, and allow them to go 
and invest in companies big and small that are right for that 
time and right for that economy and have the merits and 
deserving of the investment without regard to taxation, I think 
you would see a lot of the littler investors able to help 
promote companies like my own.
    Chairman Pence. Mr. Mellinger, you talked about devising 
incentives during your testimony. What specific incentives 
would you like to see this committee promote to encourage 
investment capital in high technology?
    Mr. Mellinger. Well, there are a couple of things I think 
that could be looked at. One, from a standpoint of individuals 
investing, is the change in ERISA regulations, specifically the 
prudent man rule, which enabled public pension funds to invest 
a portion of their money in risk capital.
    And really the result of that, which I do not think was the 
main intention at the time that the legislation was enacted, 
was what we know of today as the venture capital industry. 
While it was a small, small industry before that, the amount of 
public pension funds that came into the venture industry was 
enormous.
    As we look at it today, one of the biggest pools of money 
is out there is the 401(k) fund. A lot of people would love to 
be able to invest in private companies but do not have the 
ability to today, I think looking at enabling some small 
portion of 401(k) assets to be allocated towards riskier 
investments is something that would be a very interesting area 
and create a whole new class of capital that could come in to 
the market.
    And I would hope that that would be looking at more than 
the capital gap. Because right now, one of the biggest problems 
we face as we help young companies is the first couple hundred 
thousand dollars that might be invested in a company while 
funds coming from the angels, friends, families, and people 
like that is great, but it is harder today than ever to raise 
these funds because of what has happened in the public market.
    So, as Joe said, we should be able to give people more 
incentives around this capital gains issue and be able to, as 
we talked about, to provide the Section 1202 preferential 
capital gains treatment for individual investments. We very 
much support looking at both these ideas.
    The last issue I would raise, and I do not have a specific 
recommendation on how to do it, but we should support the 
people that have organized loosely--some more officially, but 
into these angel networks.
    I think we need to encourage people to invest. The biggest 
thing that we have found with the National Commission that has 
been troublesome is looking at a map of the United States and 
seeing where all the venture capital has been invested and then 
taking that next step which is where all the angel capital has 
been invested. And then very much match each other, more then 
two-thirds of all venture capital that has gone into five 
states in the United States.
    Investments are not being shared equally across this 
country. What has happened is that successful companies that 
have cashed out through either selling the companies or IPOs, 
and have become angel investors. Lo and behold, they are right 
in the areas where those first companies started. And so we see 
more concentration happening over time, not something that is 
spreading out. And I think that the more we can do to encourage 
people across the country to invest and build companies the 
better.
    Chairman Pence. Mr. Engel, you talked about the mission of 
your company was to level the playing field for small 
businesses and I commend you for that. In the public policy 
realm, are there specific instances where in the high tech area 
you think we in Congress and on this committee could pursue 
that goal?
    Mr. Engel. Absolutely. In fact, I will stick to the two 
points that I raised in my statement. The first is anything you 
can do to keep the tax system as simple as possible for small 
businesses like Ragan the better. Again, if the moratorium is 
lifted in October, who knows what may come out of that as local 
and state jurisdictions from around the country start to say, 
hey, I want a piece of the pie, too? And the second is an 
overall point of increasing just access to technology, 
broadband especially, the services such as BigStep but there 
are a ton of others out there that can help a small business 
actually level the playing field and really that was our 
mission. Big businesses have money, they have staff and they a 
lot of time have technical expertise. They will have a whole IT 
department just to get themselves up on the web.
    Ragan does that all herself. So a broadband access helps 
her do those things and to get on the web and really establish 
her Internet presence in order to help her business.
    So I will stick with those two and anything that this 
committee can do, that would be great.
    Chairman Pence. Thank you.
    Ms. Hughs, you focused on Internet taxation at a very 
practical level. If the moratorium was lifted, do you believe 
that the Capital Baby Rental could survive? Would you have the 
capability of complying with the wide range of taxes or would 
you see that as a threat to your business survival?
    Ms. Hughs. Well, I think that was what was interesting 
about me being selected to come before you today. Since I have 
two different businesses that do totally different things with 
the Internet, a business like Capital Baby Rentals is not going 
to be affected by the taxation moratorium unless there are new 
taxes that are going to be imposed on Internet access because 
we are not actually selling anything on the Internet; it is 
just an informational site where peoplecan find out and then 
call us, fax us, e-mail us to set up a reservation. The transaction 
does not occur over the Internet.
    But for businesses like ThePartyBug, it would just 
devastate it. It is very difficult for a small business owner 
who is wearing a million and fifty different hats to be an 
expert in everything. We do not have a general counsel and an 
IT department and we have to do all these things by ourselves, 
so that is a barrier right there. And if more tax regulations 
were imposed upon us, it would just be completely prohibitive 
to most small business owners doing business on the Internet to 
continue doing that.
    In addition to the fact that I just basically do not think 
it is fair. I hear brick and mortar saying, oh, well, you guys 
get so many breaks, but it is actually not true. For instance, 
I am in D.C. and if somebody has to have something shipped to 
the District, I collect the sales tax on that and then I report 
that to the District of Columbia.
    So I am not doing any different than the Gap down the 
street, so I do not feel that we should have to be double taxed 
or consumers should have to be penalized because they want to 
purchase something over the Internet when it is a huge 
convenience, saves time, allows access to things that people 
with disabilities and what not cannot access going to regular 
stores sometimes. So I do not think that that would be very 
good at all.
    Chairman Pence. Mr. Draluck, your business is very 
fascinating to me and represents one of those new uses of the 
Internet in terms of communications technology. The 
international settlement regimes that are in place now, do you 
believe that they need to be modified, set aside? I understand 
from your testimony that they are a barrier, but what do you 
see that this Congress and this committee should do to address 
that somewhat antiquated means of distributing resources in the 
telephone business?
    Mr. Draluck. It is a prime example of a system of subsidies 
that really affects innovation and development in every telecom 
sector, both locally and internationally. On the one hand, a 
pitch about taking one's small business international which 
iBasis has done, and that is that the kind of forward thinking 
discussion that is taking place here today does not occur in 
many of the countries that iBasis serves and, as a result, we 
are faced with all sorts of obstacles.
    The settlements in particular, many countries that have 
signed the WTO have simply dropped settlement charges. Many 
lesser developed countries that might have one monopoly carrier 
see settlement charges as an enormous source of revenue because 
when calls are terminated into the country they collect.
    Now, one way that iBasis has worked to get around this 
actually to work with monopolist carriers. That allows 
regulators in the distant countries to get a taste of what 
technological innovation can bring to consumers in that country 
and understand--or let us say begin to understand how the 
competitive force operates.
    So our strong position is that this committee and Congress 
overall recognize that these kinds of issues over which you are 
grappling are issues in their infancy overseas and the FCC has 
taken a big stand to disallow carriers in this country from 
paying settlement charges over a certain amount and that rate 
is constantly coming down and it is almost a fiction that they 
are strangled, but being disallowed to pay those fees because 
there is a balance of payments, it forces other countries to 
reduce the collection.
    So if we can get the message internationally that that kind 
of subsidy that is not market driven will not lead to 
development, then that would be quite an important message and 
we are grateful for that.
    Chairman Pence. I am going to come back to Mr. McCord 
before I close, but I do want to acknowledge and recognize for 
any questions he might have the gentleman from Pennsylvania, my 
colleague, Mr. Toomey.
    Mr. Toomey. Thank you, Chairman. I would like to start by 
saluting you for having this hearing. I for one think that the 
development and, probably more precisely, the deployment of new 
technologies, to put it very broadly, has been the great 
driving force behind the growth in productivity and the boom in 
our economy over recent years. And I think it is not a 
coincidence that as a general matter the technology sectors, if 
you will, of our economy have tended to be the least regulated 
and the most successful and innovative at the same time. I 
think there is a good reason for that.
    I have just really one area that I would like to discuss a 
little bit in particular with Mr. Clark, if I could. In your 
testimony, you pointed out a couple of things. One is the well 
known fact that the capital gains tax has a tendency to lock 
investments in in ways that are not necessarily rational for 
the investor otherwise, not as productive for the economy as 
they could be if investors were not locked in, and you point 
out that that kind of mentality that is a creation of the tax 
code could in fact contribute to things like excessive share 
prices when there is a run up and perhaps contributed to the 
speculative bubble that we saw recently.
    But you make an interesting point also, and I think you are 
talking about a capital gains tax, although perhaps you would 
broaden that to include other multiple layers of taxation on 
savings like the double taxation of dividend income, for 
instance, but you make the point that the capital gains tax in 
particular hinders the capital formation for new companies and 
I think that is an important observation. And while for new 
companies and for some others there might be a strong case to 
be made for allowing people to roll into other investments, I 
prefer abolition of the capital gains tax all together.
    Mr. Clark. Amen.
    Mr. Toomey. It is just simply an irrational tax. But could 
you explain a little bit more how you would foresee a greater 
opportunity to build capital in new companies, in start-up, in 
inherently more risky ventures in the absence of a capital 
gains tax, if you believe that would be the case?
    Mr. Clark. Sure. I think there are two things that we have 
to understand and one is that we have left an economy, what we 
call the extension of maturity phase, where there is no 
question that the companies that have strong loyalty, the GMs, 
the Fords, the Chryslers, they are not going out of business 
and so you can tax at will and it is not a matter of somebody 
pulling their money out of GM to go to another company or not.
    When you go back to the entrepreneurial phase or the shake-
out, you have people literally trapped. I mean, literally. 
Psychologically, they are trapped when they look at seeing how 
much of their wealth is going to leave if they go into another 
company.
    I think it would be very, very simple to develop a method, 
if you will, to say, okay, this is the amount of money that we 
have that we have put in, whether it be on a monthly basis or 
whether it be in lump sums, over a period of time, this is the 
amount of money that we have invested in the United States 
stock market in these particular type of companies.
    And I do not believe even though we are here for the 
Internet today, I do not think it is just Internet. I think it 
is about companies that are really trying to use new 
technologies and new innovations that are really trying to 
drive our country to the next level, that are trying to take 
our economy where it has to be. And you figure out how to 
define what those companies are andlabel them as such and they 
can go freely from one company's investment to another without having 
to have any regard to a capital gains tax until they take the money out 
to go spend, to buy a Harley-Davidson or do something else that fuels 
the economy.
    Mr. Toomey. Mr. McCord, I would be happy to hear your 
thoughts on this, but I wanted to just respond briefly.
    My reservation about creating a category of investments is 
that we then bias investors in favor of those at the exclusion 
of others and I question--well, I do not question, I doubt 
strongly whether the government has the wisdom to know which 
ones the economy----
    Mr. Clark. I agree. I have the same problem with the 
government investing the Social Security money that way because 
we are picking out some companies versus others.
    Mr. Toomey. Right.
    Mr. Clark. And so I agree. I am with you. Abolish the 
capital gains tax all together. I am telling you, the next 
level of my company, to get to the next step, I need $1.4 
million and if you change the capital gains rules, I can have 
it in two days. And if you do not, I get to go back home and go 
through the same struggle that I did to raise the first million 
and a half.
    Mr. Toomey. Thanks.
    Mr. McCord? Did you have something?
    Mr. McCord. Yes. First of all, it is a great honor finally 
to meet you in person. Even though you served your share of 
time at the Evil Empire of Harvard Business school, if I 
remember correctly.
    Mr. Toomey. Undergrad.
    Mr. McCord. Oh, okay. Well, then we have that in common. I 
am a Wharton partisan.
    I did want to be responsive on this and also echo the 
401(k) idea which I think is a brilliant one and I had not 
heard before. Having staff members of Congress, you know, you 
always do kind of mine for the gold of actual new ideas.
    Just trying to be responsive a little bit here, I think a 
blended average of what the two of you are talking about, 
without pretending that I am an expert in the Byzantine ways of 
the tax code, might be the most productive. Otherwise, you run 
into a watch out what you wish for, you may get it.
    If you eliminate the inheritance tax and then you have a 
bunch of--you know, you are self-made, you made a lot of money, 
now you are a public servant. Your kids did not make a lot of 
money, they inherit it tax-free because you paid taxes on it. 
Okay. Now, they put it in the stock market. Now, they have a 
smart dad, he went to Harvard, et cetera, they get 11 percent a 
year on it. They may never in their lives pay a dollar in taxes 
if there is no capital gains tax cut.
    Now, I just want you to ponder that for a second. 
Conversely, the next time we are trying to float a bond for 
Lehigh Valley to have fat pipes so that the less affluent can 
get the same level of service as Alargco, we have no tax tool 
whatsoever because tax-free is meaningless if we have no 
capital gains.
    Conversely, if you have patient treatment where you say if 
all you are doing is moving your money from one field to 
another but keeping it in the equity markets, you are not out 
there buying SUVs or, you know, third homes or whatever. That 
is a big deal. And I do think in general we have problems with 
the capital gains tax cut.
    To your point, I mean, you have probably read about 
Safeguard and some of those fiascos. A lot of that stuff, a lot 
of the margin purchasing that was done, was done specifically 
to avoid capital gains tax cuts because they figured their cost 
of capital was 7 percent instead of 40 percent.
    So I understand these are challenging problems, but in a 
hierarchy, at the same moment that you are going after the 
inheritance tax, I would say something that you might want more 
promptly to put on your to do list to allow on a voluntary 
basis the small fry who are with 401(k) plans to allow them the 
freedom to put up to 1 percent of their 401(k), because the 
vast majority of people moving towards retirement are not part 
of these SURS, PSRS, CALPERS. We are speaking in code, but 
these are the largest pension fund funders because they are 
state-run pension funds.
    If you allowed the average 401(k) for the average risk 
affectionate true entrepreneur to say, hey, heck, I will put 1 
percent into private equity funds, you would really turbo 
charge a lot of the venture money out there and I think have a 
big net benefit in a very timely fashion because there is a 
fright--I mean, all respect to angel groups aside, those tend 
to be a long run for a short throw.
    You get 20 rich guys sitting around Lehigh, they get 
together because they want to get together with other rich 
guys, they kick tires for a few weeks and then they squawk to 
put 10 grand into a company. A 401(k), now, that is a real 
turbo charger.
    So just trying to parse this out and give you a flavor for 
what you might want to put on your to do list, I wanted to be 
responsive in real time to your thought.
    Mr. Toomey. Thank you.
    I will yield the balance of my time, Mr. Chairman.
    Chairman Pence. Thank you, Mr. Toomey. Thank you again for 
participating in the hearing as a leader in the Congress on 
economic issues and as a subcommittee chairman. You have 
greatly enhanced the value of this hearing. I know we and the 
witnesses appreciate your participation.
    Let me just close, if I may, by thanking each one of you. I 
can expect that testifying before a congressional hearing is a 
harrowing experience. Many of you traveled far distances to be 
here and may well have enjoyed a sleepless night last night 
thinking about your presentation.
    Let me say that you were none worse for the wear today, 
that each of your presentations were not only eloquent and well 
executed, but, as I hope you could tell from my questions and 
Mr. Toomey's questions, quite well informative and very helpful 
to us as we begin this process of really using this 
subcommittee as a driving force for small business 
entrepreneurism and policies in Congress that will promote 
that.
    Let me close by saying as someone who built my own small 
business starting in my basement of my home and working in the 
communications area that I am a bit envious of each one of you.
    Now sitting in the stolid chambers of Congress, I some days 
pine for the rugged world of entrepreneurism and I hope each 
one of you know that this chair admires you as the new Edisons, 
the new Fords, and as genuine pioneers in an economy that our 
children and grand children will know nothing different than.
    Each one of you are the first ones into the wilderness, 
really paving a way for what I think is the real key to the 
United States of America remaining the dominant force on the 
world economic scene.
    So I congratulate you for your courage. I congratulate you 
for your testimony and I thank you for being here today.
    With that, this hearing is adjourned.
    [Whereupon, at 3:17 p.m., the Subcommittee was adjourned.]
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