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76–470 2012

THE TAX OUTLOOK FOR SMALL BUSINESSES: 

WHAT’S ON THE HORIZON? 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

HEARING HELD 

APRIL 18, 2012 

Small Business Committee Document Number 112–063 

Available via the GPO Website: www.fdsys.gov 


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(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

ROSCOE BARTLETT, Maryland 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

MICK MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

JEFF LANDRY, Louisiana 

JAIME HERRERA BEUTLER, Washington 

ALLEN WEST, Florida 

RENEE ELLMERS, North Carolina 

JOE WALSH, Illinois 

LOU BARLETTA, Pennsylvania 

RICHARD HANNA, New York 

ROBERT SCHILLING, Illinois 

NYDIA VELA ́ ZQUEZ, New York Ranking Member 

KURT SCHRADER, Oregon 

MARK CRITZ, Pennsylvania 

YVETTE CLARK, New York 

JUDY CHU, California 

DAVID CICILLINE, Rhode Island 

CEDRIC RICHMOND, Louisiana 

JANICE HAHN, California 

GARY PETERS, Michigan 

BILL OWENS, New York 

BILL KEATING, Massachusetts 

LORI SALLEY, Staff Director 

PAUL SASS, Deputy Staff Director 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 


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C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Sam Graves ..................................................................................................... 1 

Hon. Nydia Vela ́zquez ............................................................................................. 1 

WITNESSES 

Aparna Mathur, Ph.D., Resident Scholar, American Enterprise Institute, 

Washington, DC ................................................................................................... 3 

Leonard Steinberg, Principal, Steinberg Enterprises, LLC, West Windsor, 

NJ .......................................................................................................................... 4 

Margot Dorfman, CEO, U.S. Women’s Chamber of Commerce, Washington, 

DC .......................................................................................................................... 6 

Martin J. Mitchell, Vice CEO, Mitchell & Best Homebuilders LLC, Rockville, 

MD ......................................................................................................................... 8 

APPENDIX 

Prepared Statements: 

Aparna Mathur, Ph.D., Resident Scholar, American Enterprise Institute, 

Washington, DC ............................................................................................ 18 

Leonard Steinberg, Principal, Steinberg Enterprises, LLC, West Windsor, 

NJ ................................................................................................................... 31 

Margot Dorfman, CEO, U.S. Women’s Chamber of Commerce, Washington, DC ..................................................................................................... 39 

Martin J. Mitchell, Vice CEO, Mitchell & Best Homebuilders LLC, Rockville, MD ........................................................................................................ 41 

Additional Materials for the Record: 

Associated Builders and Contractors, Inc. Letter for the Record ................. 48 

Statement of the National Grocers Association ............................................. 49 

Comments from the Small Business Committee ‘‘Open Mic’’ Website ......... 53 


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THE TAX OUTLOOK FOR SMALL BUSINESSES: 

WHAT’S ON THE HORIZON? 

WEDNESDAY, APRIL 18, 2012 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

WASHINGTON, DC. 

The Committee met, pursuant to call, at 1 p.m., in room 2360, 

Rayburn House Office Building. Hon. Sam Graves (chairman of the 

Committee) presiding. 

Present: Representatives Graves, Mulvaney, West, Landry, Schilling, Vela ́zquez, Schrader, Cicilline. 

Chairman GRAVES. Good afternoon, everybody. And we will call 

this hearing to order. I want to thank our witnesses for being here 

today and I will look forward to everybody’s testimony. 

This week, as small business owners across the country are filing 

their taxes, we consider the tax burden on them. According to the 

National Federation of Independent Business, federal taxes consistently rank among the top five problems that small business owners 

face. And a Small Business Administration study found costs small 

and medium-sized businesses 36 percent more per employee to 

comply with the regulations than larger businesses. 

Small business owners face other obstacles, too. Many will be hit 

with new taxes and tax increases in the health care law, such as 

the increase in the Medicare payroll tax and an unprecedented 

Medicare tax on nonpayroll income. And if the 2001 and 2003 tax 

policies are not extended, many small business owners may see 

their tax bills increase. Already facing rising energy costs and 

scarce capital, they do not need tax increases in this struggling 

economy, too. 

We should be fostering an environment where people are rewarded for investment, and that is why we encourage investment 

in entrepreneurship. But if we are going to penalize those investments by raising taxes on them, then our small businesses will find 

it even more difficult to access capital. I agree with the Ways and 

Means Committee chairman, Dave Camp, that we need comprehensive tax reform. In the meantime, we must do all we can to create 

an environment in which small businesses can thrive. 

And again I want to thank all of our witnesses for being here and 

for your participation. Some of you have come a long way. And I 

now yield to Ranking Member Vela ́zquez. 

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

everyone. 

In recent months, our economy has shown steady signs of recovery. In the last quarter of 2011, gross domestic product grew at an 


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annual rate of 3 percent. Consumer spending is on the rebound, increasing by the most in seven months in February despite stagnant 

wages and rising gas prices. Most importantly, the U.S. economy 

is adding jobs—245,000 a month between December and February. 

While this news is promising, the recovery remains fragile, making it vital that our tax policy promote small business job growth 

and does not hinder it. Now more than ever, small firms need stability and incentives to grow. But after filing taxes yesterday, the 

challenge is created by the current tax code and the uncertainties 

that lie ahead are on the minds of every small business owner. Tax 

law has been used to encourage business investment through the 

use of deductions, credits, and favorable tax rates. Yet, as this 

Committee is well aware, it has become riddled with unnecessary 

complexities which have created additional burden on small firms. 

With many expiration dates looming and ACA tax provisions going 

into effect in the coming years, these complications are compounded for millions of firms. 

In that vein, it is my hope that today’s hearing will offer insight 

on both current and future tax obstacles while also generating potential solutions. In doing so, we will seek ways to ensure effective 

tax efforts are maintained and ineffective ones are either allowed 

to expire or modified to encourage growth and competition. Failure 

to take any action, however, could create greater uncertainty in the 

marketplace and dampen the recovery for small businesses. 

At a time when the economy is starting to exhibit sustained job 

creation, small firms cannot have new obstacles to expansion. Tax 

policies can disadvantage small businesses as they seek to compete 

both domestically and abroad. Small firms now spend up to 67 percent more on tax compliance than their corporate competitors and 

face constant changes to the tax code creating further confusion 

and hindering job creation. A fitter and simpler tax code can encourage entrepreneurship, promote investment, and yield hiring. 

After all, as we look at policies to promote growth, tax reform 

should be a top priority. 

Given that the last major reform of the code took place in 1986, 

it is clear changes are long overdue and that we cannot go forward 

without input from small business owners and entrepreneurs. Yet, 

comprehensive tax reform poses its own challenges. However, many 

discussions have focused on a corporate-only approach which disregards the importance of individual tax rates. Devoting reform efforts on a complete overhaul of the code supports our nation’s job 

creators by allowing them to continue hiring and expanding without worrying about tax increases. Comprehensive reform will have 

immediate benefits for small businesses while also serving our nation’s economic objectives of promoting job growth policies. 

With that I look forward to today’s testimony and thank the witnesses for your participation. Thank you, Mr. Chairman. 

Chairman GRAVES. Thank you. Unfortunately, it looks like we 

are going to have a series of votes that are coming up within the 

half hour. So what we will do is at that point in time we will recess 

and go vote and then we will come back. I apologize for that. Ms. 

Vela ́zquez and I do not get to make the schedule. If we did, we 

would do it a little bit different unfortunately. 


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But we are going to start out with our first witness and you each 

have five minutes. And please try to adhere to that if you possibly 

can. 

STATEMENTS OF APARNA MATHUR, RESIDENT SCHOLAR, 

AMERICAN ENTERPRISE INSTITUTE; LEONARD STEINBERG, 

PRINCIPAL, STEINBERG ENTERPRISES, LLC, ON BEHALF OF 

THE SMALL BUSINESS AND ENTREPRENEURSHIP COUNCIL; 

MARGOT DORFMAN, CEO, U.S. WOMEN’S CHAMBER OF COMMERCE; MARTIN J. MITCHELL, VICE CEO, MITCHELL AND 

BEST HOMEBUILDERS, TESTIFYING ON BEHALF OF THE NATIONAL ASSOCIATION OF HOMEBUILDERS 

Chairman GRAVES. Our first witness is Aparna Mathur, a resident scholar with the Economic Policy Study Team at the American 

Enterprise Institute here in Washington, D.C. 

Dr. Mathur specializes in microeconomics, international finance, 

and econometrics. Her work has been cited in The Wall Street Journal, the Financial Times, and the Economist. She received her 

Ph.D. in Economics from the University of Maryland. And welcome, 

Dr. Mathur. I appreciate you being here. 

STATEMENT OF APARNA MATHUR 

Ms. MATHUR. Thank you for having me. Chairman Graves, Ranking Member Vela ́zquez, and members of the Committee, I am honored to be invited to testify on the topic of small businesses and 

tax policy. This testimony documents the impact of new and higher 

tax rates and policy uncertainty on entrepreneurs and small businesses. 

Research suggests that young small businesses are the biggest 

job creators. According to the Census Bureau, small firms account 

for about half of all private sector employment and represent more 

than 99 percent of all employer firms. Moreover, they pay approximately 43 percent of all private wages and salaries. However, in 

the current recession, small business hiring, investment, and employment is down. The start-up rate has fallen to levels below that 

in the 1990s and the start-ups being created are smaller than they 

were at that time. In other words, they are creating fewer jobs. 

Hence, this recession has been particularly bad for small employer 

firms. 

Future tax increases and new taxes are likely to make the business environment even tougher for small businesses. In his budget 

proposal for 2013, President Obama has proposed raising the top 

margin income tax rates on individuals earning more than 200,000 

and couples earning more than 250,000. A 2011 report from the 

Department of the Treasury shows that approximately 4 percent of 

all small businesses face the two top rates of 33 and 35 percent, 

but this accounts for nearly 32 percent of small business income. 

For employer businesses in particular within small businesses, 10 

percent of business owners and 38 percent of business income was 

subject to the high margin rates of 33 and 35 percent. Hence, the 

tax increases are likely to affect a large share of small business income, particularly for employer firms. 

In addition, the Affordable Care Act will impose new taxes on 

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ment earnings in excess of 250,000 will rise from 2.9 to 3.8 percent. 

The Affordable Care Act also imposes a 3.8 percentage point hospital insurance tax on investment income over 250,000 starting in 

2013. 

In addition, there are excise tax increases on businesses that fail 

to provide qualifying health insurance and another tax of 2.5 percent of gross income on self-employed people failing to buy qualifying health insurance. 

How will these tax increases affect small businesses? Economic 

research suggests that raising taxes on small firms has a significant negative impact on business activity. Higher taxes lower the 

ability of small firms to hire workers. It also lowers their ability 

to make wage payments to these workers. Further, an increase in 

marginal tax rates reduces the gross receipts of these businesses, 

reduces the proportion of entrepreneurs who make new capital investments, and decreases the average level of these capital investments. These effects are more pronounced for high income small 

businesses which are the job creators. A paper co-authored by 

Glenn Hubbard of Columbia University also found that increasing 

the progressivity of the tax code by raising the top marginal rates 

discourages entrepreneurs from starting new businesses. 

Finally, all the talk about future tax hikes and new regulations 

has created a climate of uncertainty for small businesses which 

makes it hard for them to make long-term decisions about hiring 

and investment. New research shows that an increase in policy uncertainty, such as about taxes or government spending or other policy matters leads to large and persistent declines in aggregate outcomes such as declines in real GDP, private investment, and aggregate employment. A recent Gallup poll and also a Chamber of Commerce survey found that more than 48 percent of small businesses 

are not hiring because of the potential costs of health care, and 

more than 46 percent are not hiring because of concerns over government regulations. 

The above evidence clearly suggests that the proposal to raise 

taxes and hire entrepreneurs is exactly the wrong policy prescription for this time. To encourage job creation we need a future with 

lower taxes, not higher. Thank you. 

Chairman GRAVES. Thank you, Dr. Mathur. 

Our next witness is Leonard Steinberg, principal of Steinberg 

Enterprises, LLC in West Windsor, New Jersey. He is a federally 

licensed enrolled agent and certified management consultant. His 

tax practice specializes in comprehensive tax services for small 

businesses, including tax preparation planning and problem solving. So welcome, Mr. Steinberg. We appreciate you being here. 

STATEMENT OF LEONARD STEINBERG 

Mr. STEINBERG. Thank you very much. Chairman Graves, Ranking Member Vela ́zquez, and members of the House Committee on 

Small Business. 

Thank you for the invitation to participate in today’s hearing to 

examine the significant impact our tax system is having and will 

have on small businesses and individuals with regard to the Affordable Care Act, the expiration of the Bush administration tax cuts, 


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the complexity in the tax system, and the issues affecting compliance. 

As a practitioner, I am responsible for the consequences of all the 

laws that Congress passes and helping my clients fulfill their obligations in filing their taxes. I am a member of the New Jersey IRS 

Practitioner Liaison Committee representing over 200 enrolled 

agents in the state and all of our respective clients. Since 2005, I 

have also represented the Small Business and Entrepreneurship 

Council as a member of the Small Business Advisory Committee 

through the Financial Accounting and Standards Board, also 

known as FASB. And from 2001 through 2004, I was a member of 

the Taxpayer Advocacy Panel and chair of the Small Business Selfemployed Payroll Tax Committee. 

The issues of complexity have been outlined in my written testimony and due to the time factor a lot of this will now be part of 

the written record. But the tax complexity deals with many, many 

issues, some of which I outlined, regarding depreciation, Section 

179, which allows a write-off of approximately $500,000 in expenses and again, if it is due to be repealed and go back to a much 

lower rate which in effect becomes an automatic tax increase. I am 

also a member of the FASB Small Business Advisory Committee 

and we have the issue of the International Financial Reporting 

System that is currently being considered. Under the IFRS structure, small businesses would not be allowed to use the last in, first 

out method of inventory evaluation. The only method that is available under IFRS is FIFO, first in, first out. That, too, would be an 

automatic huge tax increase because of the reserves that would be 

automatically taxable during the first year. 

The complexity of the tax law also affects employers at the state 

level. While this Committee is involved with federal issues only, 

many, if not most states follow the federal rules and regulations 

which all add to the cost of doing business. Many business clients 

have stated that the tax code is so complex and cumbersome and 

filled with so-called loopholes or special circumstances which make 

it inherently unfair. Business people sign the returns stating they 

are correct but they really do not know what they are signing. 

Many have no idea what the accountants are actually doing but 

pay them and the lawyers plenty of money to properly comply and 

find ways to reduce the tax burden. It seems that those with more 

money or more political influence can get more tax breaks. As an 

example, in 2010, Congress made 579 changes to the tax code 

which now numbers 3.8 million words and it has been written up 

in the press that it is now four times the length of William Shakespeare’s works. 

Nina Olson, the national taxpayer advocate, has testified before 

Congress and written in her annual report that the tax code has 

gotten too complex for reasonable people and even trained professionals to understand, including members of the IRS. The tax 

courts have ruled that IRS publications are not authoritative 

sources. In our representation work we must use IRS revenue rulings, prestigious tax law, and other cases to boost our representation for our clients. This uncertainty and all of the other complexity 

takes money out of the workers’ pockets, reduces job creation, and 

will lead to a decline in the overall economy since there will be 


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fewer dollars available for disposable income and less risk-taking 

overall. 

I would like to conclude by saying that every large businesses 

started as a small business. It is the dream of every small business 

owner to become the next large business. When money is taken out 

of the economy it also affects charitable giving. Many small businesses support local causes which are adversely affected by any decrease in the financial support that they would receive. And let the 

example of the Reagan era tax overhaul be a guide for future discussions, when the tax code was simplified in 1986—I apologize. 

The result was the longest continuous period of economic boom in 

this country’s history and more jobs were created than at any other 

time. 

The members of this important Committee have the influence in 

their respective congressional districts, their state delegations, and 

with fellow congressional members to significantly impact and reignite the most successful economic engine in the free world. That 

is the U.S. small business community. I respectfully request that 

you make the necessary changes for the future economic growth of 

our great nation and as part of your public service legacy. Thank 

you. 

Chairman GRAVES. Thank you, Mr. Steinberg. 

We are going to recess for three votes. It will not be too long and 

then we will come back and we will start with you, Ms. Dorfman. 

But with that we will stand in recess until right after the last vote. 

[Recess.] 

Chairman GRAVES. Thanks everybody for bearing with us on the 

vote series. I will now turn to Ranking Member Vela ́zquez for an 

introduction. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. It is my pleasure to 

introduce Ms. Margot Dorfman. Ms. Dorfman is the founder and 

CEO of the U.S. Women’s Chamber of Commerce. The Women’s 

Chamber of Commerce represents 500,000 members, three-quarters 

of whom are small business owners and federal contractors. 

Through her leadership, this organization has championed opportunities to increase women business and career and leadership advancement. Additionally, Ms. Dorfman has an extensive background in business, including over 10 years in executive positions 

with General Mills and other Fortune 500 firms. Welcome. 

STATEMENT OF MARGOT DORFMAN 

Ms. DORFMAN. Ranking Member Vela ́zquez, Chairman Graves, 

and Small Business Committee members, thank you very much for 

the opportunity to speak today on behalf of the U.S. Women’s 

Chamber of Commerce’s 500,000 members, three-quarters of whom 

are American small business owners, regarding the tax outlook for 

small business. 

In preparation for today’s hearing, I listened to the views of our 

many small business members, and I can tell you there is a great 

deal of frustration amongst small business owners surrounding 

small and individual tax policies, revenues lost, and compliance. 

This frustration centers around a few broad issues—complexity, 

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ness and resulting anti-competitive outcomes, and the challenge of 

simply being a good employer and provider for one’s family and 

community. 

Already in today’s hearing we have heard a bountiful number of 

references to the growing complexity of the U.S. tax code and how 

these changes have a great impact not only on business tax policies 

but also on individual taxes due to the high number of small businesses that are structured as pass-through entities. 

The outcome of these challenges has been magnified by the recession. While large businesses employ armies of accountants, attorneys, and complex tax evasion strategies to avoid paying their fair 

share of taxes, Congress continues to pass press release ready legislation instead of taking the action needed to truly level the playing field to invigorate America’s Main Street businesses. 

Our small business members tell me the endless and unrelenting 

lack of fairness and changing landscape of business and individual 

taxation takes away from their focus on the things that matter to 

them—securing and keeping good employees, increasing business 

competitiveness and profitability, and investing in future business 

growth. 

Our small business members who are active as federal contractors tell us they are doubly burdened as they must also deal with 

the complexities of the FAR, the EPA regulations, and state and 

local issues. It is not feasible or affordable for small business to 

employ someone to deal with the spiraling complexity Congress has 

created. 

When our small business members see how the tax system is 

skewed against them and how big business gets away with 

schemes to avoid taxes when as a small business they cannot even 

access nor use many of the supposedly targeted tax break for small 

businesses, they become outraged. And worse, the unfair tax advantage big businesses have over small businesses decreases small 

business competitiveness as well as their ability to hire and retain 

employees and to provide good benefits. 

We hear endless stories of how tax breaks cannot be used by our 

small businesses because of some feature or restriction that renders it impossible for many small businesses to comply with. Yet 

congressional leaders still manage to find a nice headline proclaiming their love and concern for small business. 

For example, tax breaks for investments and equipment are nice 

as long as your firm needs equipment and has the cash flow up 

front to invest. As most of the smaller, financially challenged firms 

do not have cash flows available, they find this approach simply 

emboldens their larger competitors while discriminating against 

them. 

Additionally, an overwhelming majority of small business members told us they very much want to provide health insurance for 

their employees and take advantage of incentive tax credits. Small 

business owners are close to their employees who are their neighbors and often their family members. 

Many of our members told us they believe as the provisions of 

the Affordable Care Act continue to be implemented, that they will 

be better able to provide health care for their employees and to be 

better competitors when seeking to secure and retain employees. 


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I call upon Congress to end the piecemeal approach you have 

taken to tax policy and the grossly unfair tax provisions and loopholes that can only be employed by larger firms. Small business 

owners want to pay their fair share of taxes and they understand 

the need of the U.S. government to raise revenues to provide a 

quality and secure environment for businesses and families. 

But today we do not have a level playing field. More legislation 

aimed at grabbing headlines will not help. What will help is real 

leadership in Congress, leaders who come together to truly work on 

behalf of small businesses. We know that small businesses are the 

job creators. It is imperative that we simplify tax policy and the 

complex codes and skew policies that benefit big business and allow 

business owners to focus on the important work they have as revenue generators, job creators, and community leaders. Thank you. 

Chairman GRAVES. Thank you, Ms. Dorfman. 

Our final witness is Martin J. Mitchell. He is the vice CEO of 

Mitchell and Best Homebuilders in Rockville, Maryland, where he 

works with his father and three siblings. In 2011, Mr. Mitchell was 

president of the Maryland National Capital Building Industry Association. He received his MBA from the University of Maryland 

and is testifying on behalf of the National Association of Homebuilders. Thanks for being here, Mr. Mitchell. 

STATEMENT OF MARTIN J. MITCHELL 

Mr. MITCHELL. Thank you for having me. Chairman Graves, 

Ranking Member Velazquez, members of the Committee. Thank 

you for the opportunity to testify today. 

My homebuilding company, Mitchell and Best, is a family owned 

company and has been in operation for 37 years. After a very tough 

five years of the worst housing market downturn in our lifetimes, 

in 2012 we expect to build 25 homes, thereby creating at least 75 

full-time jobs. We used to build close to 100 homes per year. 

Small businesses are the heart of the residential construction 

sector. In 2012, nearly 80 percent of the NAHB builder members 

had less than 10 employees. About half had less than $1 million 

in gross revenues. Three-quarters built 10 or fewer homes. And 80 

percent of homebuilders are organized as pass-throughs, S corporations, and LLCs. As pass-through entities, homebuilders and all 

other small businesses report and pay taxes at the individual rate. 

For this reason, NAHB strongly supports extending the 2001, 2003 

income tax cuts now scheduled to expire at the end of this year. 

In addition to the marginal rate cuts, it is important that the 15 

percent rate on capital gains and dividends also be extended. As 

many homebuilding companies are family-owned like mine, the 

present law on the estate tax rate rules must also be extended or 

ideally the tax itself eliminated. 

Another issue for small businesses organized as pass-through entities is the Alternative Minimum Tax. The AMT complicates business planning and has grown from a tax that affected a few tax 

payers to one that could hit more than 30 million taxpayers this 

year absent a congressional fix. 

Also, next year, several new taxes will come into force that will 

negatively affect small businesses. One standing from the 2010 

health care reform legislation is a 3.8 percent tax on certain capital 


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gains that will have a harmful effect on multi-family apartment developers. Further, there is a pervasive rumor that this new 3.8 percent tax will take the form of a sales tax on homes. This incorrect 

information, which NAHB is fighting via educational efforts, is 

having a chilling effect in some housing markets. 

Ultimately, a complicated federal tax system is a burden and a 

hindrance on small businesses. Traditionally, the job creators. For 

this reason, NAHB supports simplifying the tax code as part of a 

deliberative and thoughtful comprehensive reform effort. Such an 

effort should include a public process that examines necessary 

changes, studies transition rules, and considers economic impacts. 

For homebuilders, homeowners, and prospective homebuyers, a 

critical element of the tax code is the mortgage interest deduction, 

the MID. 

The MID has been part of the tax system since 1913 and helps 

facilitate homeownership. Its beneficiaries are primarily the middle 

class, and in particular younger homebuyers who in the early years 

of mortgage are primarily paying interest. Weakening or eliminating the MID today would be economically disastrous. 

It is also worth noting that any tax reform effort that would 

lower corporate but leave individual rates the same or even higher 

would have a negative impact on small businesses. Homebuilders 

also face a number of other tax issues, including business debt 

mitigation and the phantom income tax. What is hopefully clear 

from my testimony is how uncertain the current tax environment 

is for businesses. The current uncertainty and tax policy makes it 

difficult for businesses to plan for years ahead which may further 

stall economic growth. In my industry, we cannot afford further 

stalled growth. Homebuilding has led the economy out of almost 

every recession. Housing provides the momentum behind an economic recovery because the homebuilding industry employs such a 

wide range of workers. Housing is a key engine of job growth. It 

is also a key component of consumer confidence. 

In terms of jobs, if we were at normal production levels for the 

housing industry, 3 million more people would be employed at this 

point in time. As Congress moves forward on the consideration of 

tax issues, Homebuilders want it to be a constructive partner with 

you in creating a better tax code. I thank you for the opportunity 

to testify today and look forward to your questions. 

Chairman GRAVES. Thank you, Mr. Mitchell. 

Mr. Mitchell’s testimony expressing concern about the pending 

tax increases is echoed by many small business owners across the 

country and they are making their views very well known on the 

Small Business Committee’s website portal. It is called Small Business Open Mic and I would ask unanimous consent that these comments be admitted as part of today’s hearing record. Without objection, that is so ordered. 

We are going to start questions with Mr. West. 

Mr. WEST. Thank you, Mr. Chairman. Also, Ranking Member. 

And thanks to each and every one of the members of the panel for 

being here. You know, we just came off of two weeks being back 

in our districts, and again, the recurring theme when you go out 

and you talk to everyone, the three top issues—access to capital, 

regulatory environment, and tax policy. And as you know, we just 


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passed a budget out of House here that said we would look at personal income tax rate, condensing those six tax brackets down to 

two—25 percent and 10 percent. And of course, the Ways and 

Means Committee will look at that cut line. 

But my question to you, because as you know, if we are talking 

about lowering tax rates that means we have to get rid of deductions and eliminate loopholes and things of that nature and for 

subchapter S LLCs using the personal income tax rate. My question to you then, if we take it down to 25 percent or maybe 22, 23 

percent, what are the three deductions that you see that still need 

to be retained for small business owners and for that personal income tax rate? Do you want me to play the Jeopardy music? 

Mr. STEINBERG. Number one, charitable donations. That is probably one of the best tax deductions. But I would also like to say 

as a practitioner, a lot of people think that when they get a deduction it is a dollar for dollar deduction on their tax. It is not. It is 

a reduction based upon your marginal rate. So as an example, if 

you give $100 in charity but you are in the 25 percent tax bracket, 

you only get a $25 deduction off your taxes. While it is important, 

a lot of people are under the misconception that that deduction is 

a dollar for dollar. 

The other aspect which I personally take umbrage with is the 

term ‘‘loophole.’’ Congress passes the laws. There are no loopholes. 

Everything is in law. What a loophole is is the unintended consequences of the law that gets passed. So if you want loopholes, 

there are plenty of unintended consequences that are built into the 

tax code that I and my fellow practitioners really have to deal with 

on a year-to-year basis every time Congress passes new tax codes 

or updates the tax code. And as people say when they say to me, 

well, if you go to a flat tax you are going to put the accountants 

out of business. And my answer to that is every time Congress 

passes a tax act it should be subtitled ‘‘The Accountants Full Employment Act’’ for that particular reason, because we then have to 

implement and make sure all of these aspects are enforced. 

So as far as the three, I would leave the charitable donations. I 

understand the issue of mortgage interest. I also understand the 

issue of real estate taxes, which is really a state issue as well as 

a federal issue. And, of course, that is where the states and the federal government go back and forth. And those are the three that 

I would definitely keep. 

Mr. WEST. Does anyone else want to—— 

Mr. MITCHELL. I would have to echo the keeping of the mortgage 

interest deduction. Right now that is keeping the homebuilding industry going. We would see a devastating effect as I indicated in 

my testimony in that there has been a lot of misperceptions about 

the mortgage interest deduction and who gets the advantages to 

that deduction. But housing production would fall off significantly. 

But what you would also find is that not only do we create three 

jobs for every house that is built, there is tens of thousands of dollars that go back into the local community, the state, and the federal government from the taxes and impact fees that are created 

for every home that is built. So the more we can incentivize home 

ownership to a reasonable level and a sustainable level, we think 

that is appropriate. 


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Mr. WEST. Anyone else? I only got two. 

Ms. DORFMAN. I will have to defer to my accountant. 

Mr. WEST. Last question then. Do we really need to have the 

death tax? Especially when we consider the fact that we are about 

to take from 35 percent up to 55 percent and we are about to bring 

that minimum qualifying amount from 5 million down to 1 million. 

Is this something that will absolutely crush the small businesses? 

And if we look into the future—three, five, further down the road— 

do we really need to have the death tax when it comes to small 

businesses? 

Mr. STEINBERG. As a practitioner, and I do not mean to monopolize the conversation, but this is what I do for a living. As a practitioner, the inheritance tax, that money has already been taxed 

twice. It has been taxed once as income and it has been taxed also 

on the dividends and interest that result from the investment of 

that. Now you are going to pass that burden onto the next generation and there are tax avoidance schemes that are looked at all the 

time to try and avoid paying the estate tax. 

It is interesting that you bring that up at this point in time because I am working on an estate right now where the estate, the 

owner had passed away and his wife now may have to sell the 

house in order to pay the state taxes. Where is she going to live? 

What is she going to do? She is 65 years old. She cannot work. She 

does not have any means of employment. She was going to use the 

assets from her inheritance to be able to live comfortably for the 

remainder of her life. You tax that, where is she going to go? 

Where is she going to live? So as far as the estate tax is concerned, 

I think it is confiscatory and I think it serves a negative purpose 

regarding the amount of money that is generated to the government. 

Mr. WEST. So that is a no. Yes or no? 

Ms. MATHUR. I think it should be, you know, done away with. I 

think there is a lot of—a lot of businesses will be affected negatively by the tax. 

Mr. WEST. Ms. Dorfman. 

Ms. DORFMAN. In even looking I believe there was the challenge 

originally with the farmers and the land that they inherited. It was 

passed down to the generations and the family farm having to be 

sold. You know, it is a small business. So. 

Mr. WEST. Yes or no? 

Ms. DORFMAN. I forget how you crafted the question. 

Mr. WEST. Should the death tax be, you know, maintained or 

should we do away with it? 

Ms. DORFMAN. No tax. No death tax. That is the way to say it. 

Mr. STEINBERG. We agree. It should be eliminated. 

Mr. WEST. Thank you, Mr. Chairman. I yield back. 

Ms. VELA ́ ZQUEZ. How do you balance that with deficit reduction 

and balancing the budget? Mr. Steinberg. 

Mr. STEINBERG. Okay, thank you. I appreciate the opportunity. 

Well, one of the ways to do it is Congress does not have an income problem; Congress has got a spending problem. 

Ms. VELA ́ ZQUEZ. A revenue problem. 

Mr. STEINBERG. No, it is not a revenue problem. There is enough 

revenue coming in. What I suggest is that if Congress really wants 


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to get their act in order, why do you not make a recommendation 

that every federal agency cut their budget by 1 percent? You will 

have more than enough money to offset all of these taxes. 

Ms. VELA ́ ZQUEZ. Dr. Mathur, the Ryan budget includes extending 

the Bush era tax rate cuts, reducing corporate tax rates, and moving to only two tax brackets. Yet, in order to ensure the estimated 

$10 trillion in cuts are paid for, many popular tax expenditures 

must be completely eliminated, possibly having a disproportionate 

impact on small firms. The Ryan budget did not include any details 

on what expenditures should be caught. Since we are talking about 

ways to stimulate the economy and control deficits without burdening small firms and the middle class, can you please give us 

specific credits or deductions that will make up the trillions in tax 

cuts without imposing such burdens on small businesses? 

Ms. MATHUR. I think the assumption that just reducing corporate 

income taxes or reducing personal income taxes will actually lead 

to long-term deficits is wrong. I think there is a lot of, you know, 

the research suggests that if you actually cut corporate income 

taxes or you cut personal income taxes you could actually see higher taxable incomes being reported. You could actually see more corporate tax revenues coming into the system. 

Ms. VELA ́ ZQUEZ. Let us say that it does not happen the way that 

you are describing it. Can you give me specific tax credits that 

could be—or deductions that will make up for the trillions of dollars in tax cuts without burdening small businesses? 

Ms. MATHUR. I think we will have to go through the list. I am 

not sure, you know, which ones are actually working. 

Ms. VELA ́ ZQUEZ. Thank you. Mr. Mitchell, in your recent testimony you spoke about a Recovery Act tax change that not only 

helped your business but made the system a little fairer to small 

firms with debt. Can you please elaborate a little more on the debt 

exclusion from the stimulus bill and where your business would be 

today if that exclusion had not been enacted into law? 

Mr. MITCHELL. Yes, I would be happy to. 

Under the Stimulus Act there was a deferral policy where if you 

had forgiveness of debt, cancelation of debt that created phantom 

income, you could defer that out to a period of up to 10 years. Unfortunately, in an industry such as we are in, we turn our product 

over. We are not like an apartment builder where we hold an asset 

for a long period of time. So even though that was beneficial and 

it allowed us to defer, it really only created a deferral for maybe 

a year or two because once you sell the underlying asset that was 

a part of that debt you then have to take that phantom income tax. 

It has helped us to move things forward for another year or two 

but we had situations where Weyerhaeuser Realty Investors was 

our largest mezzanine debt holder. They closed down that operation. The value of land dropped significantly. And we have tens 

of millions of dollars of COD which is phantom income. It could be 

devastating to us if there is not an adjustment made to that. And 

we ask Congress to take a serious look at that. 

Ms. VELA ́ ZQUEZ. So you are telling me that what you are describing is how one targeted provision in the tax code could be beneficial 

to small business. 


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Mr. MITCHELL. I believe it can be for those businesses that saw, 

you know, reductions in the value of their assets over the last five 

or six years during this downturn. 

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

Chairman GRAVES. Mr. Schilling. 

Mr. SCHILLING. Thank you, Chairman. I would like to thank the 

panel for being here today. 

I am a small business owner. I have a pizzeria in Moline, Illinois. 

And you know, the one thing that I understand is that our business 

is down. We are off about 35 percent and the gas prices continue 

to just crush our business. And a lot of the business folks that I 

have spoken with recently are very concerned about the BushObama tax cuts expiring because as this downturn economy is here 

and then now they take on another hit with a 35 percent or, you 

know, most of the folks I talk to are anywhere from 20 to 40 percent off, once those expire, basically what is going to happen is it 

is going to put a lot of these companies out of business. 

And I think it is really, really imperative to understand, I believe, is that we have to stop spending money that we do not have. 

And that is the thing. Because as we continue to spend it, you 

know, we are $16 billion in debt, it is a huge burden on our kids 

and our grandkids. And, you know, once we stop the ridiculous 

spending—the Tunnels for Turtles and all of the other things that 

we have been doing for years—then we can look at revenue increases. But until then we have got to really stay focused in on 

that type of stuff. 

What I would like to do is just, Mr. Steinberg and Mr. Mitchell, 

the new health care law creates much uncertainty for our small 

businesses through mandates, regulations, and tax increases that 

do not take effect until 2014. One specific tax, the Small Business 

Health Insurance Tax, will increase premiums by two and a half 

percent in the year 2016 alone. According to the Joint Committee 

on Taxation is what they are telling us, do you think that this tax 

increase will make it more difficult for employers to provide health 

care which is the overall goal of the president’s health care law 

after all and then predict health insurance costs in the future by 

giving us that increase? Just kind of a basic. 

Mr. MITCHELL. Well, from our aspect, despite maybe what is 

thought about in the public, we are now operating at razor thin 

margins if we are on the black side of the ledger at this point in 

time. So any type of an increase, even a 2.5 percent, which may 

not sound like a significant amount but on your overall employee 

base it will be a significant burden. So right now it will be difficult 

for us. We are an industry that has been hit with several code 

changes in the last 10 changes, significant ones that have changed 

our cost structure. But any additional cost item that is placed on 

us such as that will make it difficult for us to continue and survive. 

Mr. STEINBERG. There are consequences through having that tax 

passed and number one would be whether the IRS has the resources to be able to enforce it. Right now the IRS is operating 

razor thin as it is with their budget. They do not have the resources to enforce the current tax law. How are they going to have 

the resources to enforce additional mandates that are being passed 

through the Affordable Care Act? And the other aspect is that you 


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are really taking money out of the owners’ pockets. And I happen 

to know Ms. Vela ́zquez’s district. I grew up in Brooklyn so I 

know—and Queens. And I know the area. Sunnyside Avenue. You 

have got bodegas. You have got laundromats. You have got hair salons. You raise the amount of tax that they are going to pay, those 

small businesses are not going to be able to employ the local people. So how are they going to stay in business if you take more 

money from them? 

Ms. VELA ́ ZQUEZ. I do not think they are making over $250,000. 

Mr. STEINBERG. That is not the issue. That is not the issue, Congresswoman. The issue is you are taking money away from them 

that they cannot give to hire somebody else. Or let us say a young 

high school student wants to come in for a job after school and is 

looking for a job and they want to be able to give them a job to 

be able to do it. If they do not have the money, that high school 

kid—I worked high school jobs after high school. They want to be 

able to work. If they do not have the money, what is a high school 

kid supposed to do? Where are they going to get the experience and 

learn how to do it if the money is being taken out of the economy 

and being sent to Washington? There is a disconnect there between 

what is happening in Washington and what is happening on Sunnyside Avenue. 

Ms. VELA ́ ZQUEZ. I totally disagree with you. 

Mr. STEINBERG. I respectfully accept that. 

Mr. SCHILLING. Can I reclaim my time? You guys can do this 

later. 

Just one quickly, Mr. Steinberg and Mr. Martin (sic) because you 

guys have experience in this, how much would you say your company or members spent preparing and comply with the tax code or 

the regulations each and every year? Because I see this as money 

that we could be expanding and hiring people. But can you give me 

a ballpark of some of your clients and then maybe what your business does in complying? 

Mr. STEINBERG. The average tax return for an S corporation for 

me takes about three hours. That is just doing the tax return. That 

is not doing all the due diligence behind it. So when you factor in 

all of the work behind it you are looking at approximately 6 to 10 

hours worth of work before the tax return is completed. 

Mr. SCHILLING. So basically you are able to hire another worker 

to do all of this extra work. Right? 

Mr. STEINBERG. But then have to pass that cost on to the client. 

Mr. SCHILLING. That is right. Okay. 

Mr. STEINBERG. So the client, in effect, is paying for compliance 

one way or the other. So therefore, I am taking more money out 

of the client’s pocket rather than having the client be able to put 

that money back into the business. 

Mr. SCHILLING. Very good. Thank you. 

Mr. MITCHELL. From our standpoint we have never been a large 

enough firm to be required to do audited financial statements. We 

have always done different levels below that. The complexity of our 

tax returns in our type of business going back from the downturn 

of the early 90s is that we basically have to put every project into 

a separate LLC and then we have to compile those up and roll 

those up to one LLC. As a business that is not operating profitably 


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for the last couple of years, we are still having to put out $30,000 

to $40,000 a year to have our tax returns done. That is not our financial statements. We have our financial statements done internally. We get some input and feedback from our accountants but 

we do not have them do that. That does make it even more difficult 

to obtain equity and debt, but it is just one of those things we have 

to look at every penny that we are spending these days. It is a significant number for a firm like us. 

Mr. SCHILLING. Very good. I thank you for your time and yield 

back. 

Chairman GRAVES. Mr. Schrader. 

Mr. SCHRADER. Thank you, Mr. Chairman. 

Dr. Mathur, the data I have seen would indicate that our tax 

revenues, federal tax revenues are pretty much at an all-time low 

since World War II. Would you agree to that? 

Ms. MATHUR. Yes. 

Mr. SCHRADER. So how would you describe the state of our economy right now with our revenues, tax revenues at an all-time low, 

taxing of businesses is, you know, at the lowest point it has ever 

been. 

Ms. MATHUR. I do not agree with that the taxing of businesses 

is at its lowest point it has ever been. I think, I mean, if you look 

at the corporate tax rate, we have one of the highest corporate tax 

rates now amongst—— 

Mr. SCHRADER. With LLCs. Most of your small business folks as 

I understood, we are talking about LLC. 

Ms. MATHUR. A lot of small business folks will also face high tax 

rates of 33 and 35 percent. 

Mr. SCHRADER. But you just testified a minute ago that the federal average is at an all-time low. Our taxes—— 

Ms. MATHUR. The revenues are low because—— 

Mr. SCHRADER. Let me finish my comment, please. 

Ms. MATHUR. Sure. 

Mr. SCHRADER. I will ask you a question; you can answer. Okay? 

Ms. MATHUR. Okay. 

Mr. SCHRADER. So what I am saying here is that our revenues 

are at an all-time low. Our taxes are at an all-time low overall. I 

will grant you a point, it depends on what business you are in or 

what part of the world you come from. But they are at an all-time 

low. If taxes alone determine the health of our economy, we should 

be booming right now and we are not booming. So while I share 

everyone’s concern on, you know, tax policy, I think it is completely 

inaccurate and hyperbolic to say that, you know, low taxes equal 

great economy. We are not seeing that right now in the United 

States of America. 

Second point, Mr. Steinberg, you are absolutely ill informed on 

the American—or excuse me, the Affordable Care Act. Congresswoman Vela ́zquez is absolutely correct. The revenues in that bill 

are for larger businesses. Businesses 50 employees or under are 

completely exempt. Those are truly the small, small—I am a veterinarian. I am like Representative Schilling. I have got a small, 

small business. And I am very appreciative of the fact that that is 

recognized in the Affordable Care Act. Health care right now is totally unaffordable. As we have heard testified here today, the efVerDate Mar 15 2010 09:27 Nov 15, 2012 Jkt 076470 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 E:\HR\OC\A470.XXX A470

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fects of that act do not occur until 2014 and already businesses are 

shedding, you know, their health care plans. So the system now is 

broken. We have to do something. And I respect the fact that the 

bill is imperfect. Every bill we pass is probably imperfect and we 

have got a long way to go. But I would suggest respectfully we do 

not throw the baby out with the bathwater. 

My question, Mr. Chairman, sir, to the panel, you have all testified, at least all agreed I think, that our tax code is too complex 

and comprehensive tax reform is probably a good idea. There are 

several proposals out there. Congressman Ryan has given an attempt at that and I appreciate that actually. There is another one 

out there that the president put together through his Debt Commission, sometimes commonly called the Simpson-Bowles Report. 

And there has been a recognition that certain deductions are very, 

very important. They call out the primary interest deduction 

through the Gang of Six work. They talk about the charitable deduction that Mr. Steinberg talked about. The real world is, you 

know, for every junction we save, I am a big one to say that, prime 

interest mortgage deduction, that is a big cost. That is one of the 

bigger deductions we have. And that will affect how much we can 

lower the rate going forward. 

But I guess I would just like a general from each of you, do you 

think that the Simpson-Bowles framework of comprehensive tax reform with certain critical tax deductions to make sure our economy, 

and the housing industry in particular, recovers is maybe a decent 

template at least for this Congress to work off of? There were 38 

members of Congress that agreed to that. I am curious where you 

all stand. 

Mr. MITCHELL. Well, I have to admit I do not know all the details 

of the Simpson-Bowles, but we are supportive of a reform of the tax 

code and supportive of the simplification as you talked about and 

we think that it was mentioned here earlier, if you go back to 1986 

when some of the reforms were made, there were certain protections for important items such as the mortgage interest deduction 

and other housing. But there were other housing changes that 

made severe impacts that were negative to the housing industry. 

So I think that, you know, while we support the overall goals, I 

cannot get into the details. I apologize. I can go back and talk 

about that. 

Mr. SCHRADER. Ms. Dorfman. 

Ms. DORFMAN. I would have to say I am not familiar with all the 

details either but our members definitely would like to have a simplified code. We also think that the unfair tax advantages that the 

large corporations are enjoying should be re-examined and perhaps 

removed so that there is a level playing field. Trying to compete as 

a small business when the corporations, obviously the large corporations have that advantage, it is hard to go ahead and, you 

know, grow in a market space with that competitive disadvantage. 

Mr. SCHRADER. Mr. Steinberg. 

Mr. STEINBERG. Any framework that the Congress can begin to 

look at that is going to significantly improve the tax structure is 

definitely welcome. And, of course, with the CBO and the other 

panels, the American Enterprise Institute and some of the other 

think tanks in the city, as they do the analysis of it as you begin 


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to progress, it is a start. It took us 40 to 50 years to get to this 

point. We are not going to solve it in one or two years. It has got 

to be a phased implementation. And each Congress can change it 

as they change—as the Congress changes every two years, then 

they can do away with what the previous Congress has done. What 

you need to do is you need to codify it and say this is permanent 

so that businesses have a way to plan. They have certain certainty. 

Right now there is no certainty among the small business owners. 

You know that. And Mr. Schilling knows that. There is no certainty 

in the tax code. So once you have that certainty, if you are going 

to use Simpson-Bowles, that is a good framework to start. And just 

let the statistics tell you where it goes from year to year. 

Mr. SCHRADER. Good. 

Ms. MATHUR. I agree that we need tax simplification. We need 

a process where, you know, if you are thinking of cutting down 

rates then, you know, we also care about effective rates. I think 

what matters when we think about actually getting revenues, that 

was the point I was trying to make earlier. You can have high 

rates but that does not always translate into high revenue. We 

know that with the corporate tax rate. We have one of the highest 

rates and we have one of the lowest revenue collections in all of 

the Western countries. So we should aim for simplification but I 

think we need to care about where we stand in terms of the effective rates as well. 

Mr. SCHRADER. I am actually over my time. Mr. Chairman, 

thank you very much. I just want to say I appreciate the comments 

particularly on the last question and ask you to do a little more 

homework if possible and give me a little more feedback based on 

Simpson-Bowles, Gang of Six type of changes because it is the only 

bipartisan game we have in town. It is not perfect but at least it 

is a starting point for finally a productive discussion that I think 

America is craving right now. Thank you. And I yield back, sir. 

Chairman GRAVES. Mr. Mulvaney. 

Mr. MULVANEY. I am all right. 

Chairman GRAVES. Are you sure? 

Mr. MULVANEY. Yes. I yield back. 

Chairman GRAVES. I want to thank you all for participating 

today. And I think we should all be concerned about the burden of 

taxation on our nation’s small businesses, the effect of these pending tax increases, the fact that the administration seems to be willing to let that happen, and the impact that is going to have on our 

economic recovery. 

I would ask unanimous consent that members have five legislative days to submit statements and supporting materials for the 

record. Without objection that is so ordered. This hearing is adjourned. 

[Whereupon, at 2:35 p.m., the Committee was adjourned.] 


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