U.S. GOVERNMENT PRINTING OFFICE

72–118 WASHINGTON : 2001

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

(

(II)

COMMITTEE ON SMALL BUSINESS

DONALD MANZULLO, Illinois, Chairman

LARRY COMBEST, Texas

JOEL HEFLEY, Colorado

ROSCOE G. BARTLETT, Maryland

FRANK A. LOBIONDO, New Jersey

SUE W. KELLY, New York

STEVEN J. CHABOT, Ohio

PHIL ENGLISH, Pennsylvania

PATRICK J. TOOMEY, Pennsylvania

JIM DEMINT, South Carolina

JOHN THUNE, South Dakota

MIKE PENCE, Indiana

MIKE FERGUSON, New Jersey

DARRELL E. ISSA, California

SAM GRAVES, Missouri

EDWARD L. SCHROCK, Virginia

FELIX J. GRUCCI, JR., New York

TODD W. AKIN, Missouri

SHELLY MORRE CAPITO, West Virginia

NYDIA M. VELAZQUEZ, New York

JUANITA MILLENDER-MCDONALD,

California

DANNY K. DAVIS, Illinois

WILLIAM PASCRELL, New Jersey

DONNA M. CHRISTIAN-CHRISTENSEN,

Virgin Islands

ROBERT A. BRADY, Pennsylvania

TOM UDALL, New Mexico

STEPHANIE TUBBS JONES, Ohio

CHARLES A. GONZALEZ, Texas

DAVID D. PHELPS, Illinois

GRACE F. NAPOLITANO, California

BRIAN BAIRD, Washington

MARK UDALL, Colorado

JAMES P. LANGEVIN, Rhode Island

MIKE ROSS, Arizona

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

SUE KELLY, New York

SAM GRAVES, Missouri

ROSCOE BARTLETT, Maryland

TODD AKIN, Missouri

PAT TOOMEY, Pennsylvania

ROBERT BRADY, Pennsylvania

BILL PASCRELL, JR., New Jersey

CHARLES GONZALEZ, Texas

DAVID D. PHELPS, Illinois

JAMES P. LANGEVIN, Rhode Island

ANIBAL ACEVEDO-VILA, Puerto Rico

MEREDITH MATTY, Professional Staff Member

(III)

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

(1)

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

2

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

3

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, nonprofit 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.

4

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.

5

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 rather than 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

6

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.

7

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 ecommerce 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.

8

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.

9

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.

10

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 comVerDate 11-MAY-2000 10:13 Jun 06, 2001 Jkt 010199 PO 00000 Frm 00014 Fmt 6633 Sfmt 6602 E:\HEARINGS\72118 pfrm09 PsN: 72118
11

pared 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.

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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

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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.

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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 moms and

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.

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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.

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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 twothirds 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

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to be imposed on Internet access because we are not actually selling anything on the Internet; it is just an informational site where

people can 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

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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

19

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 and label 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,

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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

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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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