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94–464 2015

S. HRG. 114–51 

SMALL BUSINESS, BIG TAXES: ARE TAXES 

HOLDING BACK SMALL BUSINESS GROWTH? 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

APRIL 15, 2015 

Printed for the use of the Joint Economic Committee 

( 
(II) 

JOINT ECONOMIC COMMITTEE 

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress] 

SENATE 

DANIEL COATS, Indiana, Chairman 

MIKE LEE, Utah 

TOM COTTON, Arkansas 

BEN SASSE, Nebraska 

TED CRUZ, Texas 

BILL CASSIDY, M.D., Louisiana 

AMY KLOBUCHAR, Minnesota 

ROBERT P. CASEY, JR., Pennsylvania 

MARTIN HEINRICH, New Mexico 

GARY C. PETERS, Michigan 

HOUSE OF REPRESENTATIVES 

KEVIN BRADY, Texas, Vice Chairman 

JUSTIN AMASH, Michigan 

ERIK PAULSEN, Minnesota 

RICHARD L. HANNA, New York 

DAVID SCHWEIKERT, Arizona 

GLENN GROTHMAN, Wisconsin 

CAROLYN B. MALONEY, New York, Ranking 

JOHN K. DELANEY, Maryland 

ALMA S. ADAMS, PH.D., North Carolina 

DONALD S. BEYER, JR., Virginia 

VIRAJ M. MIRANI, Executive Director 

HARRY GURAL, Democratic Staff Director 
(III) 

C O N T E N T S 

OPENING STATEMENTS OF MEMBERS

Hon. Daniel Coats, Chairman, a U.S. Senator from Indiana .............................. 1 

Hon. Carolyn B. Maloney, Ranking Member, a U.S. Representative from 

New York .............................................................................................................. 2 

WITNESSES

Mr. Brian Reardon, President, S Corporation Association, and Principal, Venn 

Strategies, LLC, Washington, DC ....................................................................... 5 

Mr. Jody Fledderman, President and CEO, Batesville Tool and Die, Inc., 

Batesville, IN ........................................................................................................ 7 

Ms. Holly S. Wade, Director of Research and Policy Analysis, National Federation of Independent Business, Washington, DC ........................................... 9 

Mr. Thomas A. Hoghaug, CEO, Signus Medical, LLLC, and CEO, Lockdown 

Surgical, Inc, Chanhassen, MN .......................................................................... 11 

Dr. Martin A. Sullivan, Chief Economist, Tax Analysts, Falls Church, VA ....... 12 

SUBMISSIONS FOR THE RECORD

Prepared statement of Hon. Daniel Coats ............................................................. 34 

Prepared statement of Hon. Kevin Brady ............................................................. 34 

Prepared statement of Hon. Carolyn B. Maloney ................................................. 35 

Chart titled ‘‘Small Businesses Have Added Jobs for 17 Straight Quarters’’ ................................................................................................................ 38 

Chart titled ‘‘Share of Small Businesses Planning to Increase Employment Is Near Pre-Recession Average’’ ......................................................... 39 

Chart titled ‘‘Share of Small Businesses Listing Taxes as Top Business 

Concern Effectively Unchanged Over Time’’ .............................................. 40 

Chart titled ‘‘Only 2/1,000 Estates are Subject to the Estate Tax’’ .............. 41 

Prepared statement of Mr. Brian Reardon ............................................................ 42 

Prepared statement of Mr. Jody Fledderman ....................................................... 51 

Prepared statement of Ms. Holly S. Wade ............................................................. 53 

Prepared statement of Mr. Thomas A. Hoghaug .................................................. 55 

Prepared statement of Dr. Martin A. Sullivan ...................................................... 59 

Questions for the Record submitted by Senator Mike Lee and responses 

from Holly S. Wade .............................................................................................. 67 

(1) 

SMALL BUSINESS, BIG TAXES: ARE TAXES 

HOLDING BACK SMALL BUSINESS GROWTH? 

WEDNESDAY, APRIL 15, 2015 

CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Washington, DC. 

The Committee met, pursuant to call, at 2:31 p.m. in room G– 

50 of the Dirksen Senate Office Building, the Honorable Daniel 

Coats, Chairman, presiding. 

Representatives present: Paulsen, Hanna, Delaney, Maloney, 

Brady, Schweikert, Grothman, and Beyer. 

Senators Present: Coats, Klobuchar, Lee, Sasse, and Cassidy. 

Staff present: Barry Dexter, Cary Elliott, Connie Foster, Harry 

Gural, Colleen Healy, Karin Hope, Jason Kanter, Christina King, 

Kristine Michalson, Viraj Mirani, Andrew Nielsen, Barry Nolan, 

Robert O’Quinn, Brian Phillips, Leslie Phillips, and Aaron Smith. 

OPENING STATEMENT OF HON. DANIEL COATS, CHAIRMAN, A 

U.S. SENATOR FROM INDIANA 

Chairman Coats. We want to welcome our witnesses today. It’s 

no serendipity that this particular hearing has been scheduled on 

tax day, April 15th, and we are talking about taxes. We have some 

witnesses here who are experts in the field and have experienced 

a real-life experience in terms of dealing with our tax code from the 

small business owner’s standpoint and so we are looking forward 

to that testimony. 

There are vexing challenges facing us with our tax code that is 

burdensome on business, individuals and others and complex beyond their ability to fully understand it. The small business owners 

that I have met throughout Indiana have been patient, persistent 

and overcomers. Despite the obstacles that small businesses face, 

they are responsible for two-thirds of the net new private sector 

jobs created in the United States so it is important that we listen 

to you and understand the challenges that you have. 

Our role as legislators should be to ensure that the tax code is 

no longer a major obstacle to growth and jobs for these businesses. 

Against the headwinds of the slowest recovery since 1960, small 

business owners have to deal with a tax system that is hopelessly 

complex, full of provisions that expire every one or two years, riddled with special exemptions, deductions and preferences and filled 

with new penalties. 

The Small Business Administration lists the tax paperwork as 

the most costly paperwork burden the Federal Government imposes on small businesses, adding up to about $1,500.00 per em-
2 

ployee. It is not surprising that 9 out of 10 small business owners 

have turned to an outside paid professional to figure out their taxes 

as I have to do. Even though I took three tax courses in law school 

I can’t begin to plow my way through the complexity of our tax 

code. 

Today we will hear from witnesses who can discuss how tax policy is affecting the broad landscape of small businesses. We will 

also hear two stories of real businesses that will bring home how 

taxes affect companies on the ground. 

Tax day is a perfect time to commit to not let another April 15th 

pass before we finally tackle comprehensive pro-growth tax reform. 

And while it is urgent and essential to lower our corporate rate tax, 

which is the highest in the developed world, we must not forget the 

millions of small businesses that pay taxes at the individual level 

and have just experienced rate increases. 

I look forward to hearing from our witnesses about how we can 

tear down barriers to growth in our broken tax code and now I 

want to recognize Ranking Member Maloney for her statement. 

[The prepared statement of Chairman Coats appears in the Submissions for the Record on page 34.] 

[The prepared statement of Vice Chairman Brady appears in the 

Submissions for the Record on page 34.] 

OPENING STATEMENT OF HON. CAROLYN B. MALONEY, 

RANKING MEMBER, A U.S. REPRESENTATIVE FROM NEW YORK 

Representative Maloney. I want to thank very much Chairman Coats and all of our witnesses for being here today. There is 

broad agreement that small businesses are the backbone of our 

economy, the anchors of our communities and that they have 

played an important role in our current recovery. 

When President Obama took over from former President Bush 

the economy was in a free fall and small businesses were bearing 

the brunt of the pain. Over the fourth quarter of 2008 and the first 

quarter of 2009 small businesses shed more than three million jobs. 

President Obama and Democrats in Congress along with the 

Federal Reserve took bold actions to turn things around in the 

darkest days of the Great Recession. These actions included a number of efforts designed specifically to support small businesses. For 

example, the Recovery Act cut taxes for small businesses allowing 

them to immediately deduct up to $250,000 of investment, carry 

back losses for 5 years and exclude from taxation 75% of capital 

gains from small business investment. 

Several small businesses in my district told me that this initiative alone helped them save their business. Today small businesses 

are leading the economic recovery. Small businesses have added 

more than 6 million jobs, over 17 straight quarters of small business job growth which we can see in this Chart Number 1. You can 

see where we have been growing with a solid blue rise of jobs for 

small businesses. 

We have come a long way in the past 6 years. The share of small 

businesses planning to add jobs is back near the pre-recession average as we can see here in this Chart 2. While this reflects major 

progress I believe that we need to do much more to support small 

business growth. 
3 

The Administration’s tax reform plan, for example, would simplify and cut taxes for America’s small businesses. President 

Obama’s revenue proposal includes expanding and permanently extending increased Section 179 expensing for small businesses. The 

proposal would also increase the number of small businesses that 

take advantage of simpler cash accounting rules. 

The Administration’s approach provides tax cuts for small businesses in a fiscally responsible way and in the context of broader 

business tax reform. By contrast, the Republicans in the House 

have passed bills without offsets which would blow holes in the 

budget. Some of my Republican colleagues would have us believe 

that small businesses are up in arms about President Obama’s proposals. But this chart, based on a survey and data provided by the 

NFIB, a very respected organization and one of our witnesses 

today, shows that the share of small businesses listing taxes as 

their top concern is no greater today than it was when former 

President Ronald Reagan left office, as we see in Chart Number 3. 

One of our principal goals today should be to decide what a small 

business is for tax purposes. Most of the 95% of businesses that are 

organized as pass-throughs are small, but many are extremely 

large. Numerous large law firms, accounting firms, hedge funds 

and other businesses are pass-throughs. The tax code treats these 

large businesses the same as ‘‘mom and pop’’ stores down the street 

and one of my questions today will be should we treat them the 

same? 

When designing tax policy, fairness should be a principal concern. Some large multinationals pay less than small businesses and 

some extremely large companies don’t pay any federal income taxes 

at all. In other words the corner store likely pays more in federal 

income taxes than some of our country’s largest corporations. Those 

who are critical of our tax system should save some of their outrage 

for this. 

Before taking on tax reform, Republicans have proposed repealing the estate tax and they plan to vote on it in the House later 

today or possibly tomorrow. Let’s be clear: repealing the estate tax 

would be a major windfall for some of our most privileged and 

wealthiest citizens. With the current exemption of over 5 million 

per person and 10 million per couple, the estate tax affects only 2 

out of 1,000 estates. In other words, 99.8% of Americans do not pay 

any estate tax at all as we see in Chart 4. 

Republicans say they are motivated by a desire to protect small 

businesses but that is something of a Trojan horse I believe. Only 

about 20 small businesses and small farm estates owed any estate 

tax in 2013 according to the Tax Policy Center. Only 20. Repealing 

the estate tax is also very expensive. The Joint Committee on Taxation found that repealing the estate tax would increase the deficit 

by $269 billion over 10 years. 

1986 was a massive overall and simplification of our tax code. 

The minute the ink was dry we began to undo it and trust me, it 

wasn’t small businesses that were at that tax table. We must make 

sure that any tax reform benefits the small firms, not just the big 

multinationals gaming the system to further limit their tax obligations. 
4 

Tax reform is hard. That is why there hasn’t been a major rewrite of the code in about 30 years. For it to work it must be comprehensive and it must be bipartisan. I have always said the best 

legislation is always bipartisan and I look forward to hearing the 

perspective of our witnesses today on this important subject. Small 

businesses create massive amounts of jobs in our great country. 

Thank you for coming here today, thank you for appearing before 

our Committee. 

[The prepared statement of Representative Maloney appears in 

the Submissions for the Record on page 35.] 

Chairman Coats. Well, thank you Ranking Member Maloney, 

and I will now introduce our witnesses. I think we could put on a 

pretty good show here if I turned it right over to my colleague Congressman Brady to talk about estate taxes which the House will be 

voting on I think at 4 o’clock or so. So we are going to try to move 

through this fairly quickly so our House members in particular 

have an opportunity to speak and ask questions. 

But with the joint chambers and two parties we have somewhat 

of a byzantine balancing act here in terms of making sure that everybody gets an opportunity in a fair way. Let me quickly introduce 

our witnesses. 

Brian Reardon is President of the S Corporation Association and 

a Principal at Venn Strategies. From 2003 to 2005, Mr. Reardon 

was special assistant to the President for economic policy, working 

within the President’s National Economic Council. He has also 

worked on Capitol Hill and for the National Federation of Independent Business. 

Jody Fledderman is President and CEO of Batesville Tool and 

Die in Batesville, Indiana, a company that supplies precision metal 

stamping components for the automotive and appliance industries, 

among others. He is also past Chairman of the Precision 

Metalforming Association and serves on the boards of New Horizons Rehabilitation, the Indiana Manufacturers Association and 

the State of Indiana’s Chamber of Commerce. 

Ms. Holly Wade is the Director of Research and Policy Analysis 

for the National Federation of Independent Businesses. In addition 

to providing analysis to small businesses on public policy, she helps 

produce NFIB’s monthly small business economic trends survey. 

She also serves on the Department of Commerce Industry Trade 

Advisory Committee on Small and Minority Business. 

Martin Sullivan. Dr. Sullivan is Chief Economist for Tax Analysts, writing frequently in tax publications. Previously he taught 

economics at Rutgers University and served as a staff economist at 

the U.S. Department of Treasury and later at the Joint Committee 

on Taxation. He graduated from Harvard and has a PhD from 

Northwestern University. 

And finally, our witness from Minnesota who I am going to let 

Congressman Paulsen introduce, Senator Klobuchar sent her regrets she will be arriving late. So Congressman Paulsen I would 

love to have you introduce our witness from Minnesota. 

Representative Paulsen. Well thank you Mr. Chairman, and it 

is my pleasure to welcome Mr. Thomas Hoghaug. He has a long 

and accomplished career in the medical device industry and is cur-
5 

rently CEO of both Signus Medical as well as LockDown Surgical 

in Chanhassen, Minnesota, which is my home town. 

I would like to thank Mr. Hoghaug for his participation in today’s hearing and his willingness to discuss some of the challenges, 

the very real challenges medical device tax presents to his companies and so many others like them in Minnesota and around the 

country. I expect, Mr. Chairman, his testimony will prove very valuable to members of the Committee, seek ways to ease the tax burden faced by America’s small businesses today. 

Chairman Coats. Thank you Congressman. We will go in order 

that I just read, starting with you Mr. Reardon and then followed 

by Mr. Fledderman and Holly Wade, Mr. Hoghaug and Dr. Sullivan. 

STATEMENT OF MR. BRIAN REARDON, PRESIDENT, S CORPORATION ASSOCIATION, AND PRINCIPAL, VENN STRATEGIES, LLC, WASHINGTON, DC 

Mr. Reardon. Chairman Coats, Vice-Chairman Mr. Brady and 

Ranking Member Maloney I appreciate the opportunity to testify 

before the Committee today. The S Corp Association and its’ allies 

have been active on business tax reform efforts for about 5 years 

now and in that time we developed a number of themes that I 

would like to emphasize today. They are explained more fully in 

my written testimony. 

First, if Congress were starting from scratch it would use S Corp 

as the model for taxing business income. The basic principles are 

that income is taxed once and only once. It is taxed when the income is earned and regardless of whether the income is distributed 

to the shareholders and its taxes at progressive rights. High income shareholders pay high rates low income shareholders pay 

lower rates. That’s the correct way to tax business income. 

Second, S Corp’s are doing exactly what Congress intended them 

to do when they were created 50 years ago. The S Corp was created 

to incent private and family-owned businesses and it has worked. 

Today there are 4.6 million S Corps and they are in every community and every industry. 

While Congress has acted over the last 50 years on numerous occasions to improve the rules and to enhance the ability of families 

and entrepreneurs to use the S Corp model to structure their businesses. 

Third, you hear lots of talk about the erosion of the corporate tax 

base. What you don’t hear is that the business tax base, that is 

pass-through businesses plus C corporations, has actually grown 

over the last 30 years since the 1986 Tax Reform Act. Prior to 1986 

the business tax base was about 9% almost wholly made up of C 

corporations, 9% of the GDP. Today it’s 11% of GDP, 6% passthrough, 5% C Corp, so it’s grown and it’s grown wholly because 

of the growth and progress of the pass-through community. 

Fourth, pass-through businesses employ mostly private sector 

workers out there. Every day 55% of private sector workers get up 

and they go to work at a pass-through business. In some states, 

nearly 7 out of 10 workers work at pass-through businesses. 

Fifth, pass-through businesses pay taxes and they pay lots of 

them. There is this theme out there that if you are not paying the 
6 

corporate tax you are not paying taxes at a reasonable rate. That’s 

been something that we have been concerned about for a long time. 

Back in 2013 we asked an economic firm to study how much do 

businesses pay, and what is their effective rate by business structure. I think that’s the only time anybody’s ever done that kind of 

study. 

And what we found was that S Corps have the highest effective 

tax rate, about 32%. Big S Corps, the large ones that people want 

to make pay taxes like C Corps they pay an effective rate of 35% 

so they are paying lots of taxes right as they are right now as S 

Corps. 

If you look on this thing you can see the C Corp number is 27%. 

An important point is that of that 27% dividends makes up 2 percentage points so there is a second layer of tax on C Corps. Here 

dividends are represented, capital gains are not, so you have to add 

that in. We were unable to calculate the capital gains rate. But the 

bottom line is that pass-through businesses are paying a lot of tax. 

Sixth, the tax rates on pass-through businesses just went up and 

they went up a lot. This is a result of the fiscal cliff and the Affordable Care Act taxes. The top rates on pass-through businesses increased from a marginal rate of 35% to almost 44%, you can see 

the components up here. The main rate went up to 39.6. There’s 

the new Affordable Care Act tax of 3.8% and then the reinstatement of the Pease limitation on itemized deductions, that’s about 

1.2%. 

When you combine that with state and local taxes, some passthrough businesses are paying more than 50% marginal rates on 

their income. 

I mention all of these points to set the table to talk about tax 

reform. Back in 2011 the Treasury Department floated a proposal 

to broaden the tax base by limiting business deductions to credits 

and to use the revenue to lower the corporate rate. 

The challenge for S Corps and other pass-throughs of this plan 

is obvious. They use the same deductions and credits but they pay 

individual rates not corporate rates. What might this look like? I 

think we have a new slide here. Yeah, here it is—so here’s some 

companies they both have $20 million in revenues they both use 

the same deductions and credits. You can see right now the S Corp 

or the pass-through is paying the higher top rate than the C Corporation. 

Now if you try to a tax reform and I am not advocating this but 

if you go to the next slide and you eliminated those credits and deductions you can see that under the Administration’s plan the C 

Corp would get a 25% rate. While the S Corp is still paying 44.6. 

That’s simply unsustainable. 

So pass-through businesses oppose corporate only tax reform. 

What do we support? Since 2011 we have advocated the following 

three principles for tax reform. One it should be comprehensive. 

Two it should lower rates for pass-throughs and C Corporations 

alike. And, three, it should reduce or eliminate the double corporate tax. The double tax on corporations is the reason U.S. businesses are uncompetitive. We are one of only a few countries to actually impose a double tax on our corporate businesses. We should 

simply get rid of it. 
7 

So what are the takeaways? One, S Corporations are the correct 

way to tax business income. Two, pass-through businesses are a 

significant part of the economy. Three, the top rates on these employers just went up significantly and 4, tax reform done right 

should be comprehensive, it should lower rates on pass-throughs 

and C Corps alike and it should reduce or eliminate the double tax 

on corporations. 

I appreciate the opportunity to testify and I look forward to answering any questions. 

[The prepared statement of Mr. Brian Reardon appears in the 

Submissions for the Record on page 42.] 

Chairman Coats. Mr. Reardon, thank you very much. I appreciate you staying close to the five-minute rule that helps give us 

time to have a good interaction with the witnesses. Thank you. Mr. 

Fledderman, you’re on. 

STATEMENT OF MR. JODY FLEDDERMAN, PRESIDENT AND 

CEO, BATESVILLE TOOL AND DIE, INC., BATESVILLE, IN 

Mr. Fledderman. First of all thank you for the opportunity to 

testify here today before you. My name is Jody Fledderman, I’m 

the President and CEO of Batesville Tool and Die in Batesville, Indiana. I have been the president of that company since 1989. We 

provide metal stamping assemblies mostly for the automotive industry. I am here to talk to you guys today a little bit about our 

business and what the taxes do to us. 

We have 395 employees at this facility and we would actually 

hire more if we could find enough qualified workers. I am not a tax 

expert but I am here to tell my story from a business owner perspective and how these tax laws are affecting us. We have a lot of 

obstacles that we have to deal with as manufacturers. The single 

biggest obstacle for us to deal with right now is the uncertainty in 

our tax code. 

It’s very difficult for us to plan the future when we don’t know 

the rules for today. It feels as if people in Washington are so insulated from what’s going on in these small businesses that they 

don’t realize not doing something can affect us as much as doing 

something. That’s why I believe we also need comprehensive tax reform. Not just to lower our rates to globally competitive levels, but 

also to provide stability and predictability for us. 

Washington should develop tax policy that encourages investment and manufacturing in America, not penalize companies and 

their owners for doing business in the U.S. But we need tax reform 

for all businesses not just C Corporations. A January 2015 industry 

survey showed 61% of metalworking companies are pass-through 

businesses. Sector-wide 81% of all manufacturing companies are 

pass-throughs and pay much higher taxes as you saw from the previous slides. This means C Corporation only reform leaves behind 

8 out of every 10 manufacturers, mostly small and medium sized 

family-owned businesses. 

We are one of those millions of manufacturers that corporate 

only reform would leave behind. Our company is structured as an 

S Corporation. We are a multi-generational manufacturing business with very strong ties in the community and we have awarded 

shares and opportunity for ownership to a lot of our key employees 
8 

that are key to our success. Because of that we are now at 72 

shareholders so we are a little unusual for an S Corporation. We 

are not a 1 or 2 owner company. 

A main reason most family-owned or tightly held manufacturers 

structure themselves as pass-throughs is to make it easier to transition the business to your family when you retire. Some of our 

shareholders are high school students, some of them are retirees in 

their 80s, there is no way they could cover the tax penalties of a 

sale or buy-back if we were a C Corp so that is one of the main 

reasons that the structure of the S Corporation is so important for 

us. 

The main drawback to being a pass-through structure is the 

most obvious. As you saw on the slides before publically most people believe the top rate is 39.6. In reality we are paying it at 43.4% 

for our federal income taxes, when you calculate in the surcharges 

and some of the other additions. Now keep in mind that we have 

got 72 shareholders and we also have one that is a fully passive 

income shareholder which is why we pay the extra 3.8% tax. 

We have to pay that extra tax for everybody so we pay it at the 

43.4% for all of our shareholders and even if that’s not what their 

tax liability is and then it is up to them to try to get those refunds 

on their own. Now because we are not a one or two owner company 

that money doesn’t come back to the company, it ends up with our 

shareholders if they can claim it or if they had tax attorneys that 

can do that for them. 

We have looked at several different scenarios. Our tax rates— 

had our tax rates not increased to 44% we would have had an additional $500,000 for our manufacturing operations. If Congress were 

to lower the effective tax rate to even 28% it would reduce our tax 

liability by $700,000 obviously more if lowered to 25%. 

The public perception plays a big role in this. The average person 

assumes that the owner takes that $700,000 and puts it in their 

pocket when obviously they don’t, that’s re-invested back in the 

business. Profit margins in our industry are usually less than 3% 

so all the investment back in the business comes from any profitability that we are able to generate. 

While tax rates receive the most attention, nothing frustrates us 

more in manufacturing than the constantly expiring tax credits and 

deductions, that’s really the biggest problem for us. We feel like 

Congress takes too casual of an approach to the tax extenders, you 

know that we will get to them eventually. What Washington 

doesn’t understand I believe is that we rely on those provisions to 

plan our investments and expansion years in advance. 

Right now we are mulling the purchase of a $3 million machine 

that would probably add 15 to 18 jobs to our business but it would 

take 16 months to get that machine in service and we have no idea 

if we will be able to use Section 179 or Bonus Depreciation to apply 

to that investment. 

I’ll wrap up here of what happened to us in 2014. I told the story 

in Senator Coats’ office and I think it is one of the reasons why I 

was asked to come here and talk today. We pay the taxes on behalf 

of our shareholders every quarter, we make quarterly estimate payments and by the end of the third quarter we were paying at our 
9 

43 or our nearly 44% and so the week before Christmas we find 

out what credits will be extended. 

Well we found out that the taxes that we had paid in the third quarter was already $600,000 more than what our tax was supposed to be, so that’s tax that now we have paid into the Federal 

Government that we shouldn’t have and that we will end up coming back to our shareholders in some form or another, some of it 

will if our shareholders’ tax accountants are savvy enough to get 

it back but that’s $600,000 that we will never see back in our business as cash flow. 

So in summary the real—my real feeling is that you know people 

are never really going to be happy with the tax code no matter 

what it is. They’re always going to think it is too much but the real 

problem is that we can’t plan our future. We are being asked to 

compete globally and compete with people all around the world. We 

already have one of the highest tax codes of all the countries in the 

world and then not knowing what the rules are makes it almost 

impossible for us to plan a future, thank you again for your time. 

[The prepared statement of Mr. Jody Fledderman appears in the 

Submissions for the Record on page 51.] 

Chairman Coats. Mr. Fledderman, thank you very much for 

your testimony. 

Ms. Wade. 

STATEMENT OF MS. HOLLY S. WADE, DIRECTOR OF RESEARCH 

AND POLICY ANALYSIS, NATIONAL FEDERATION OF INDEPENDENT BUSINESS, WASHINGTON, DC 

Ms. Wade. Good afternoon Chairman Coats, Ranking Member, 

Maloney, Members of the Joint Economic Committee. Thank you 

for the opportunity to testify today. I am pleased to be here on behalf of the National Federation of Independent Business as the 

Committee discusses small business tax policy and the economic 

growth in the small business sector. 

The small business economy is slowly emerging from one of the 

worst recessions in U.S. history and if I base small business economic trend survey data it shows the dramatic change in consumer 

spending employment, employer’s confidence and business investments throughout the recession and subsequent recovery. 

While some business activities have made significant improvements over the past 4 years, capital expenditures and outlook on 

business conditions and expansion remain at historically low levels 

due to economic conditions and the political climate. The threat of 

higher taxes whether in the form of income taxes, the healthcare 

law, the estate tax, Section 179 expensing limits or others, create 

enormous uncertainty among small business owners worried about 

the impact of policy changes on future business costs. 

The survey also tracks which problems most affect owners in operating their small business. From mid-2008 through mid-2012 

poor sales was their number one problem as consumer spending declined sharply, but now taxes is often the number one concern for 

small business owners, a problem that moderates the economic recovery in the small business sector. 

The identified small business problems and priorities survey 

highlights three main areas of tax policy that are of great concern 
10 

to small business owners. With the cost of health insurance leading 

as the most severe problem for small business owners, 5 of the top 

10 problems are all tax related. These tax problems fall into 3 categories, cost, complexity and frequent changes. 

The cost of tax obligations is three-fold. The amount paid to federal, state and local tax agencies, the cost of hiring a CPA or a tax 

advisor to navigate complex tax codes and the owner’s time in providing the required paperwork and/or filing themselves. Eightyeight percent of small employers use the tax preparer and most use 

one to either insure compliance or because the requirements are 

too complex. 

Tax related regulations cause the greatest difficulties for 40% of 

small employers, more than environmental, health and safety or 

employee regulated regulations. And compliance costs are especially problematic because they are 76% higher for small businesses than for their larger counterparts, costing them $18 to $19 

billion a year or about $74 per hour. 

Tax related costs compete with the owner’s ability to use limited 

profits for primary business activities. Profits are the main funding 

mechanism for owners purchasing new equipment, expanding facilities, hiring and stocking inventory. Tax related costs pressures 

are especially problematic for newer firms that almost solely rely 

on profits for operation and expansions costs as they are generally 

not able to access traditional vending sources. 

But regardless of the firm’s age, the tax burdens take a heavy 

toll on the owner’s ability to operate their business. One example 

that encapsulates all three categories of tax related problems for 

small business owners is the Affordable Care Act. The employer 

mandate, small business tax credit and the termination of employer reimbursement plans are just a few of the many tax related 

costs and complications small business owners face in complying 

with the new law. 

The ACA though is just one example of how excessive tax burdens affect small business owners. And the federal tax code is only 

one layer of tax obligations owner’s face in operating their business. They must also comply with state and local taxes adding to 

the overall compliance burden. Unfortunately only the owner experiences the cumulative effect of all the required taxes and regulations placed on their business. 

Federal, state and local lawmakers and government agencies 

only see them in isolation giving a false perception of their true impact. 

In conclusion small business owners continue to be accessibly 

burdened by direct indirect complicated and ever-changing taxes 

related to operating their business. Alleviating the excessive tax 

burden on small businesses is an essential component to creating 

a strong and healthy environment for owner’s to operate and grow 

their business. 

I appreciate the opportunity to present NFIB’s views and data on 

the effects of tax policy on small business and I look forward to answering any questions you may have. 

[The prepared statement of Ms. Holly S. Wade appears in the 

Submissions for the Record on page 53.] 

Chairman Coats. Thank you, thank you very much. 
11 

Mr. Hoghaug. 

STATEMENT OF MR. THOMAS A. HOGHAUG, CEO, SIGNUS MEDICAL, LLC, AND CEO, LOCKDOWN SURGICAL, INC, 

CHANHASSEN, MN 

Mr. Hoghaug. Chairman Coats, Vice Chairman Brady, Ranking 

Member Maloney, Representative Paulsen I thank you for the opportunity to testify. My name is Thomas Hoghaug I currently hold 

the position of CEO for Signus Medical LLC and LockDown Surgical, Inc. It is an honor for me to be able to address this Committee today and personally shed some light on an extremely negative impact the medical device tax has had on both of my companies and on similar small medical device firms. 

The issues and examples I will share are personal examples that 

are in no way unique to Signus Medical and LockDown Surgical, 

they are common experiences shared by a multitude of device firms 

and have been conveyed, confirmed to major meetings, committees 

and gatherings of medical device executives. 

Small device firms are primarily responsible for the majority of 

innovation and development of better and more cost effective treatment modalities for patients in the United States. I have worked 

in the orthopedic medical device arena for over 27 years, including 

as a founder of over 10 companies. 

Signus Medical is a master importer developer and distributor of 

spinal implants, while LockDown Surgical is an extremity company 

focused on joint ligament repair. Both teams are focused on improving the quality of life and reducing human suffering. 

LockDown Surgical was founded in February of 2012 with a single 

FDA cleared product for shoulder repair. It has been operating at 

an annual financial loss and expects to reach breakeven finally and 

begin to turn a small, modest profit in the fourth quarter of this 

year. It would have been sooner if it was not for the medical device 

tax. 

With the introduction and the implementation of the Affordable 

Care Act’s medical device tax, companies have experienced a multitude of unforeseen and crippling consequences of the tax including layoffs, non-replacement of lost employees, disrupted and negative cash flow, curtailing or elimination of R&D projects, reduced 

inventory expansion and effective tax rates which can exceed 100% 

of profits. 

Money that was once used to grow and re-invest in the expansion 

of the companies is now sent to the IRS every two weeks. Another 

perhaps unforeseen but very significant impact of the medical device tax is disruption of both of my company’s cash flow. As mentioned earlier payments are made within two weeks of posting 

sales, but the collections are running upwards of 70 days. 

These payments strip both firms of ready cash which was previously used for day-to-day operations, payroll, payments to vendors. Since 2012 our monthly cash flow has been negative due to 

the device tax. As of last year I shelved two major R&D projects 

because of the device tax. 

Instead of investing in innovation we are looking at how we will 

simply manage due to the cost of introducing several new products 

in 2015 which would under pre-tax condition expectations return 
12 

Signus Medical to nominal profitability and expand LockDown’s 

surgical products into other areas of the body where there is a very 

real and significant patient need. 

Most difficult for me I had to personally lay-off a number of team 

members, specifically to pay this medical device tax. I am very 

proud to be actively involved in the medical device arena. It has 

historically been a shining star in the U.S. economy and has boasted some of the highest paying jobs when compared to all other 

business sectors and average wages. The advancements in treatments and improved patient outcomes is commonly a direct result 

of the smaller and more nimble device companies such as Signus 

Medical and LockDown Surgical who reinvest profits and resources 

into the development of new and lower cost-effective surgical and 

non-surgical solutions. 

Simply put the device tax is destroying our ability to deliver on 

the promise to improve patient care. This is something I will not 

compromise on. With the inclusion of the medical device tax in the 

2014 operational budgets, both Signus Medical and LockDown Surgical posted effective tax rates in excess of 110%. This is not sustainable for any business, large or small. I feel once again I will 

be facing employee down-sizing and further elimination of development projects and thus new clinical therapies to patients in the 

United States in order just to remain in business to pay the device 

tax. 

Money required for re-investing to expand infrastructure including employees, of inventory and product and R&D project is no 

longer available. Again these problems are not unique to my two 

companies and are clearly felt across the entire medical device industry. I do believe however that smaller and start-up companies 

are more severely impacted by the device tags given their inherent 

size and the inability to spread or defer the cost over non-device 

products being sold by larger, more vertically integrated companies. 

In conclusion I would like to thank the Committee members for 

this opportunity to testify. I sincerely hope that the information 

and personal experiences I shared helped to enlighten you as to the 

true negative impact the medical device taxes have had on the 

medical device industry as a whole and smaller and start-up companies in general. 

Growth, innovation and new job creation come from small medical device firms. The medical device tax threatens to kill off or at 

the very least curtail this segment of our industry, thank you. 

Chairman Coats. Mr. Hoghaug, thank you very much for your 

testimony. And now Dr. Sullivan. 

[The prepared statement of Mr. Thomas A. Hoghaug appears in 

the Submissions for the Record on page 55.] 

STATEMENT OF DR. MARTIN A. SULLIVAN, CHIEF ECONOMIST, 

TAX ANALYSTS, FALLS CHURCH, VA 

Dr. Sullivan. Chairman Coats, Vice Chairman Brady, Ranking 

Member Maloney, Members of the Committee thank you for this 

opportunity to testify. Two recent developments have heightened 

interest in tax relief for small business. First, in 2012 Congress allowed the top individual rate to rise from 35 to 39.6%. Second, 
13 

there is concern that Congress will pursue corporate only tax reform that would cut the corporate rate and to pay for that lower 

rate cut, reduce tax deductions and credits for all businesses. 

This would hurt small business that would lose tax breaks but 

get no relief from the rate cut. In my remarks today I will briefly 

comment on five options for small business tax relief. 

Option 1—Congress could reduce the top individual rate to 35% 

or lower. We should always strive to keep tax rates as low as possible but the case for lowering the top tax rate should not pivot on 

the effect that it would have on small business but on larger issues 

such as the need for deficit reduction, the effective rate cuts on tax 

fairness and the effect of a rate cut on the overall economy. 

The figure on the screen shows a box. The box represents all the 

income affected by a change in the top individual rate. Only 30% 

of pass-through income is in this box, only 21% of it is related to 

pass-through employers and only 8% is related to small business 

employers. The bottom line—most of the benefit of cutting the top 

rate would not go to small business. 

Option number 2—Congress could cut the top individual rate but 

limit that rate cut only to pass-through businesses and several 

states have adopted this approach most notably in 2013 Kansas 

completely exempted all pass-through income. One problem with 

this approach is that it opens the door to aggressive tax avoidance. 

Secondly, much of the benefit would not go to small business, but 

go to large businesses, some of them very large. 

Here are the facts. In 2011 there were 15,000 S Corporations 

with more than 15 million in sales. They accounted for 27% of all 

S Corporation profits. And there were 22,000 partnerships with 

more than 100 million in assets, they accounted for 64% of partnership profits. Clearly we should not equate pass-through business 

with small business. 

Option 3—Congress could limit any rate cuts for pass-through 

business to certain industries. Dave Camp’s tax reform provided a 

25% rate for manufacturing and construction pass-through business. This target approach is a lot less expensive, only about a 

quarter of the cost of an across-the-board pass-through tax relief 

like they had in Kansas. But why should we pay for some industries over others and why if we want to create jobs should we exclude labor intensive service and retail businesses. 

Another problem is the complexity. It is hard to figure out exactly which business lines qualify for these benefits as demonstrated by our current difficulties with the Section 199 deduction 

for domestic manufacturing. 

Option number 4—Instead of providing back-end tax relief for 

small business income, Congress could provide front-end relief for 

business costs such as capital spending, wages and research. This 

approach has several advantages. It is far easier to measure qualified costs than it is to isolate income that is qualified for these benefits. 

Second, there is far less opportunity for tax planning and third, 

this approach can target activities that promote economic growth. 

So for example, if Congress wants to create jobs it can do this more 

effectively with a wage credit than with a cut—a rate cut of equal 

revenue cost. 
14 

Deducting the full cost of capital equipment when purchased is 

called expensing. As tax breaks go expensing for small business is 

one of the most meritorious. It is an incentive for capital spending, 

it’s better than a rate cut, it increases cash flow and it simplifies 

record-keeping. 

Besides a wage credit or expensing, Congress could make the research credit more attractive to small business by making it refundable as several states have done. 

And Option number 5—Simplification. Of course everybody 

wants simpler taxes but simplification is especially important to 

small business. Compliance costs per employee are much higher for 

small firms than for large firms, yet it is the economic equivalent 

of a tax surcharge just for being small. 

One particularly promising approach for small business tax simplification would be the expansion of the cash method of accounting. 

So in conclusion to help small business we should avoid rate cuts 

that are poorly targeted, complex and spur costly and unproductive 

tax planning. Instead we should provide tax relief tied directly to 

investment and employment and most of all we should simplify. 

Simplifications are a sure-fire way to reduce costs for business, 

to promote growth with minimal impact on the deficit, thank you. 

[The prepared statement of Dr. Martin A. Sullivan appears in 

the Submissions for the Record on page 59.] 

Chairman Coats. I want to thank our witnesses for their testimony and I look forward now to the interaction between the Members. I want to turn this over now; I’m going to defer my time. My 

House colleagues I know have an important vote on taxes, interestingly enough, coming up at 4 o’clock. So let’s see if we can get as 

many of them some time here as we can. I do want to turn to our 

Ranking Member Mrs. Maloney and then we will hear from Mr. 

Brady. 

Representative Maloney. I want to thank you all for your testimony and thank you for being sensitive to our time. One of the 

biggest challenges in crafting tax policy for small businesses is deciding what counts as a small business. Many Americans when 

they think of a small business think of a corner grocery store but 

clearly small businesses are much more than that and there are 

dozens of possible definitions based on revenues, number of employees, average revenue per employee, industry classifications or 

other characteristics. 

And defining what a small business is is critical to the success 

of our hearing today and I would like to ask Ms. Wade from the 

NFIB can you tell me in two or three sentences for the purpose of 

tax policy what is a small business, how would you define it? 

Ms. Wade. For NFIB members, most of our members are under 

40 employees however they span all industries and all size groups 

so for tax policy the policy that would benefit most of them would 

be lower rates and simplification and reducing the changes in the 

tax code. There isn’t a strict definition because there are many 

firms that are labor intensive versus capital intensive so it is a 

broad spectrum that we represent. 

Representative Maloney. Okay, is a global law firm with dozens of offices around the world a small business Ms. Wade? 
15 

Ms. Wade. It depends. It depends what the composition of the 

firm here. We have you know, we have manufacturers who export, 

we have members who span every industry so tax policy that can 

cover most of them would be our choice for pro-growth, supporting 

most small businesses. 

Representative Maloney. Is a hedge fund with billions in assets a small business Dr. Sullivan would you say? 

Dr. Sullivan. I think it is just common sense that that is not 

a small business. 

Representative Maloney. What about a global law firm? 

Dr. Sullivan. Well as we know they can have thousands and 

thousands of partners. They are considered a pass-through business, they are taxed as a partnership, but they are certainly not 

a small firm. 

Representative Maloney. Mr. Fledderman you run a successful 

tool and die company and you have an I would say a personal stake 

in this issue. Do you think, for example, that a global law firm or 

a hedge fund should be classified as small business? 

Mr. Fledderman. I don’t really know if it should be classified 

as a small business. 

Representative Maloney. For purposes of the tax code? 

Mr. Fledderman. No I don’t. I think that manufacturers and 

people that make things obviously more on that side since that is 

what we do, but that is what really generates the jobs in this country we all know that and I believe that that’s what we should be 

concentrating on. 

Representative Maloney. Dr. Sullivan could you please tell me 

very briefly what is a pass-through? Is a pass-through the same 

thing as a small business? 

Dr. Sullivan. A pass-through business is one of three classifications under the tax code, either a sole proprietorship, a partnership 

or an S Corporation, they are called pass-throughs because as all 

of these folks here know the income is not taxed at the entity level 

it is taxed on the individual level. 

However it is not the same thing as a small business. Most small 

businesses are pass-throughs but most pass-through not all passthroughs are small businesses. There are many very large passthrough businesses. 

Representative Maloney. Should these large entities with hundreds of millions and even billions of revenue be treated the same 

and face the same tax structure as the local laundromat and the 

neighborhood deli, Dr. Sullivan? 

Dr. Sullivan. It depends. I can use a real live one in Kansas 

where the Governor Brownback put in legislation to exempt all 

pass-through business from all income tax in Kansas. It was discussed as a small business tax relief which it was but it also provided tax relief for the largest businesses in the state. 

Representative Maloney. And are there steps that we could 

take to better differentiate in the tax code between traditional 

small business employers and huge companies organized as passthroughs? What steps would you recommend Dr. Sullivan since you 

have written about and studied this? 
16 

Dr. Sullivan. Well I think ultimately we are talking about job 

creation so I would suggest targeting the tax benefits to those businesses that have lots of employees rather than just lots of assets. 

Representative Maloney. Thank you my time has expired. 

Chairman Coats. Thank you. 

Congressman Brady. 

Vice Chairman Brady. Thank you Chairman for calling this 

important meeting I do have a statement I would like to submit for 

the record. 

Chairman Coats. We will accept that. 

Vice Chairman Brady. The gist of the statement is to lay out 

the economic benefits of repealing the estate tax and the harm it 

does to our economy and family-owned farms and businesses, especially a growing group for women and minority-owned businesses, 

building wealth for the first time in America. We think that’s a 

good thing and it also lays out the need for tax reform, corresponding to the fact that in a recent poll 80% of Americans believe Congress ought to act now to fix this broken tax code. 

A quick question for you Mrs. Wade and then a tax question for 

the others. On the estate tax, we are told that this is just tax cuts 

for the wealthy, that your members are the Paris Hilton’s of the 

world, the robber barons of the Teddy Roosevelt day, that this 

doesn’t benefit average Americans. But my understanding from 

NFIB and other groups is that this death tax is the number 1 reason family-owned farms and businesses aren’t passed down to the 

next generation. 

It is hurtful to the economy. It harms jobs, it is the wrong tax, 

the wrong time or it is the wrong people and studies show that repealing the estate tax would actually create more revenue for the 

Federal Government than keeping the tax in place. And part of the 

damage is that the businesses use so much time, devote so much 

time and money to planning to survive the death tax rather than 

investing in their companies. 

So for your member’s small businesses, would repealing the 

death tax help them spend more money and time on growing their 

business and jobs and less time on just doing the tax planning that 

they have to do today? 

Ms. Wade. Certainly, we’ve produced a number of studies looking into succession planning for small business owners and small 

employers and how they are trying to work through the estate 

planning phase of about 30% are their business. So looking to pass 

their business on to family members and while the estate tax you 

know affects a number of them, more of them are spending resources in trying to plan for this, it is that uncertainty of where 

their business is headed in the future, it is the uncertainty of what 

thresholds the estate tax will be in the future. 

So in our latest survey, tax survey 34% in the last five years of 

small business owners have paid for trying to plan for an estate tax 

so 35% probably many or fewer will pay this estate tax but it is 

a misallocation of resources. 

Vice Chairman Brady. That’s a good point, the claim is just a 

very small number paid the tax. You are saying 1 out of 3 of your 

members have to engage in tax planning and to divert resources 

from productive investments to avoid or minimize estate taxes. 
17 

There is often in tax reform a trade-off between lowering rates and 

reducing depreciation or increasing depreciation so my view is that 

corporate rates are extremely important, but so is cost recovery. 

The ability to fully cover the cost of those investments is a big driver of main street jobs. So I wanted to ask the other witnesses 

today, do you have any advice to us as we look at this issue of capital cost recover, and whether it is equally important to rates when 

it comes to business growth Mr. Reardon? 

Mr. Reardon. I think it’s incredibly important. You know there 

are a couple of plans out there, including one put forward by Senator Lee, to allow full expensing and it effectively shifts the taxation of business income from an income base to a consumption 

base approach which I think most economists agree is the correct 

way to go. It also has the benefit of being incredibly simple. 

I mean you go out and you buy a piece of equipment and you 

write it off. You don’t have to keep track of depreciation schedules, 

you don’t have recapture, you don’t have all that so it benefits on 

both sides, it reduces the cost of capital and it increases simplicity. 

Vice Chairman Brady. Thank you Mr. Reardon. 

Mr. Fledderman. 

Mr. Fledderman. Oh yeah I agree 100%. It would be very beneficial but again I will stress that it’s really important for two 

things. Number one that we know what the rules will be and then 

if this is an expense, it is some type of expense it is made permanent so many of the pieces of equipment that we have take months 

to put into service and when we are informed that the third week 

of December what is going to be allowable we have got a week left 

to purchase something over Christmas, again it makes sense. 

Vice Chairman Brady. No, thanks for that point, Mr. Hoghaug 

and then Dr. Sullivan? 

Mr. Hoghaug. No I would agree that estate planning is something that I used to actually consider and look at for succession to 

my children and all. Right now given the medical device tax it’s 

negative impact and this I am just worried about being in business 

in a few years. 

Vice Chairman Brady. Having an estate. 

Mr. Hoghaug. So you know right now that planning has been 

set aside in lieu of planning on the day-to-day business. 

Vice Chairman Brady. Thanks, Dr. Sullivan briefly I’m out of 

time. 

Dr. Sullivan. Sure. Capital expensing and bonus depreciation 

are very important and effective incentives for capital investment, 

especially for small business because they give the additional benefit of cash flow. The problem is it is such a good incentive that 

it might be better than a rate cut and so when you are looking at 

trade-offs when you have limited budget it makes it very difficult 

to talk about lowering the rate and doing a capital recovery at the 

same time. 

Vice Chairman Brady. Thank you sir, thank you again Chairman. 

Chairman Coats. Senator Klobuchar. 

Senator Klobuchar. Did you want to let some House members 

go first, I understand they have a vote I can wait 20 minutes. 
18 

Chairman Coats. I do have some concerns, I have just been told 

it has been pushed back a little bit, but if you are willing to—— 

Senator Klobuchar. Yes, I just have to leave in 20 minutes, I’m 

fine. 

Chairman Coats. Well, let’s see who would be the next House 

member up. 

Mr. Hanna. 

Representative Hanna. Thank you Chairman. Mr. Hoghaug 

people would believe that the medical device tax 2.3% shouldn’t be 

relevant it doesn’t sound like a big number to anybody. Listening 

to your statement and incidentally I agree with you but I would 

like you to do a little bit deeper dive in explaining to this community why it is that—and we know it is on your gross receipts, why 

it is that that percentage could have such a tremendously negative 

impact through ObamaCare on your bottom line and on your company? 

Mr. Hoghaug. Thank you for the question. First of all it’s an excise tax which even though theoretically people say will be passed 

on to the consumer. In reality we cannot pass it on, capitated pricing and hospitals, 70% decrease in actual pricing since 2008 has 

completely eliminated the ability to raise prices. 

Secondly it comes out of our weekly or bi-weekly cash flow and 

is paid ahead of collections or profitability. Irrespective of how a 

company is doing, including being a start-up as one of my firms is, 

in the end the Device Tax is not tax deductible. There are a few 

opinions out there but there are no IRS mandates that say where 

it can or cannot be deducted. Perhaps at the state and local level 

but certainly not on the federal, so if you were to take an 8 million 

dollar company with roughly a 6 million dollar profit, $480,000 it 

is about $248,000 in tax. 

If you were losing money that $248,000 is still owed to the government irrespective of when you collect it or how you collect it and 

it just restricts the day-to-day basic cash flow for reinvestment in 

the firm. 

Representative Hanna. Thank you very much. Miss Wade you 

know government sets all kinds of problems up for small business. 

It almost feels—and I’m from New York, one of the highest taxed 

states—as if it is a war of attrition. People think that businesses 

will stay in business, people and individuals don’t get frustrated, 

don’t quit, don’t make enough money in their lives so that it just 

becomes marginally not worth it. 

I think you and I know that people do quit, people do give up 

and the energy that it takes to create and grow and stick with a 

small business through your lifetime regardless of awful things like 

inheritance taxes as it may suck the life blood out of your business 

just when the next generation needs it the most. The raw costs, the 

psychological cost in addition to just the specific costs, you talked 

about the 179 deduction and the fact that Congress—and Mr. 

Fledderman did also so in a couple of minutes can you explain to 

me and I am sure I already agree with you. 

But you notice there is nobody here in defense of this tax code 

today. The true meaning of not knowing the direction of your life, 

your business, your—this sustenance for your family in the way 
19 

Congress handled this this last time, literally in the last moment 

and how important and why the 179 deduction is important. 

Ms. Wade. Sure so small businesses one of their major complaints is uncertainty over government policies and frequent 

changes in the tax code and 179 expensing covers both of those unfortunately so in our survey of small business economic trends 

monthly survey we asked a few questions on capital expenditures. 

While capital expenditures are historically low since the recession the December 2013 when the expensing when it was going to 

be lowered from 500,000 to 25,000 we saw a huge spike in the 

number of small business owners purchasing capital expenditures, 

planning that it would be lowered to 25 and not retroactive. So 

these fluctuations in tax policies certainly affect small business 

owners and how they conduct their business and we think it should 

be better served that they conduct their business on what’s best for 

their business and not driven by uncertainties. 

Representative Hanna. Do you think all of this causes a 

misallocation of resources in many different ways for everyone? 

Ms. Wade. Absolutely uncertainty is one of the huge problems 

they face. 

Representative Hanna. My time is expired, yield back. Thank 

you Chairman. 

Chairman Coats. Well, thank you for this explanation. To my 

colleagues and the witnesses and those watching here, we have 

summed it up. As I said, a byzantine system is in place in terms 

of who goes when. The rule is that those who are here at the start 

of the Committee hearing are listed and then they are ranked in 

terms of House, Senate, Republican, Democrat. We try to be fair 

to both chambers and to both parties. 

Then those who come and go fit in so we almost need to hire a 

staffer just to provide me a note which gets revised about every 3 

minutes and then we have the question of votes over in the House 

so we are trying. If I overlooked somebody or missed somebody or 

they are out of order, I apologize. We are trying to do the best that 

we can. The way I have it on the list is Senator Klobuchar has 

yielded her time, not yielded, but deferred her time, to the point 

where she looks over and tugs at my sleeve and says I need it now. 

So you are welcome to do that, but if we stay with our agreed on 

procedures it will be Congressman Paulsen, followed by Senator 

Lee, followed by Congressman Delaney, and then we’ll go from 

there if that is all right with everybody. So Congressman Paulsen, 

you are on. 

Representative Paulsen. Well first of all thank you Mr. Chairman, and the testimony was very good today. You know we spent 

a lot of time in this Committee gathering data over the last few 

years about how we are experiencing a growth gap. The economy 

is under-performing. It is the slowest economic recovery ever and 

wages are flat, small businesses have really struggled. For the first 

time in 35 years, more businesses have failed than have started. 

On top of that, we have got the medical device tax and very powerful testimony that we have heard today. 

It is hurting one of our best American success stories. I think one 

thing to reflect on is that 80% of medical device companies are 

small businesses, 50 employees or less. Sadly some of the stories 
20 

that I have heard match the story, Mr. Hoghaug, that you mentioned of the impact on these device manufacturers I talked to a 

company in Texas. They had never laid off an employee in 22 

years, but they laid off 25 people and then they deferred hiring another 15 people simply because of the device tax. 

I hear other stories all the time in my home State of Minnesota, 

and Senator Klobuchar knows and Mr. Hoghaug you mentioned 

that in your written testimony and you have kind of got this a little 

bit of cash flow issues. In your written testimony it mentions your 

effective tax rate as a company at Signus Medical is nearly 79%. 

You face one of the highest tax rates of any industry now in the 

world. 

I mean it is surprising to me that you are still in business and 

how can any of us sitting in front of you expect that you can continue running your business like that. Now the Congressional Research Service and other supporters of the tax claim there’s no impact on jobs, it’s not real. It’s not really happening. As someone 

who is actually running a small business, Mr. Hoghaug, and understands what is happening on the ground how do you respond to 

those critics? 

Mr. Hoghaug. What a great question. In theory most of the 

studies that I have seen or read it is all based on the fact that you 

can pass on this 2.3% to the actual end user that is not my experience. We have not been able to—I haven’t seen anything but a decrease in the actual pricing since 2008, prices are down about 70% 

thus profits are down. You tack on the 2.3% on top of that and the 

cash has to come from somewhere and as I mentioned in my testimony one of the hardest things that I ever had to do is walk up 

and lay off two people for the sole reason that I had to make my 

tax payment, not because they were doing anything wrong, they 

were exemplary employees but I had to lay them off otherwise I 

would be in default and that’s very real and I haven’t been able to 

hire them back because we are paying 50, 60 days in advance of 

collecting the actual money on the sale so you are always playing 

catch up with the cash, but the bills always come in on time. 

Representative Paulsen. You mentioned also that you deferred 

or had to shelve some research and development products. The surveys we have gotten back from the device industry says the exact 

same thing. This is the life blood of the industry right, I mean, it 

feeds into the supply chain of where we have seen all the success. 

Can you tell us a little bit about some of the patients that your 

devices have helped, and what is the impact of the device tax now 

on them? 

Mr. Hoghaug. Well I have hundreds of stories of benefiting. One 

that actually has stuck with me for many years is a father bringing 

in a 16 month old small child who was quadriplegic due to Down’s 

Syndrome and a congenital defect at the base of the skull and carrying his small daughter into the neurosurgeon I worked with in 

Children’s Minneapolis saying please, please bring my daughter 

back to me. 

And through the course of the surgery an implantation of our device I was witness to the fact that she could move her fingers and 

her legs again and while still has many challenges ahead she was 

functional and you know there wasn’t a dry eye in the house. But 
21 

those are the types of implants and the next generation implant 

that could be out there to help more people, a greater number of 

patients. 

The research and development dollars just aren’t there to take 

it to the next generation to supply it. 

Representative Paulsen. Well, I think that illustrates how this 

is really a tax on innovation and as the Chairman knows coming 

from a state with a high number of medical device companies, and 

Senator Klobuchar knows we need to keep this industry alive. 

Thankfully, this is one of those issues that has gathered bipartisan 

support for repeal, and I hope that we will continue to be able to 

move this issue forward. I yield back. 

Chairman Coats. Thank you. 

Senator Lee. 

Senator Lee. Thank you Mr. Chairman and thanks to all of you 

for your testimony it has been very informative today. Mr. Reardon 

in your testimony you mentioned that back in 2003 full integration 

of the corporate taxation system came within just a few votes of becoming law, finally becoming reality and you made a convincing argument that businesses should choose their form, their corporate 

form based on the type of business they have, the type of business 

strategy they have rather than having to game out the tax code. 

Can you discuss with us just a few potential ways in which full 

integration of business taxation might occur today or ways in 

which the tax burden of C Corporations and pass-through entities 

might be kept in balance so that the decision of how to organize 

a business is driven by business considerations rather than by the 

tax code? 

Mr. Reardon. Sure, I would be happy to. Thank you. I think the 

Committee has discussed a little bit, sort of this dilemma of that 

you have big S Corps and you have similar sized C Corps and they 

are taxed differently and you know how do you reconcile that and 

my argument is that the S Corp is taxed correctly so you should 

move the tax code towards that single layer of tax. 

One of the ways to do that is to integrate the corporate code with 

the individual code so that if you are paying taxes at the corporate 

level then there is no shareholder level tax or vice versa. If you 

don’t pay tax at the corporate level then you have a shareholder 

level tax of an appropriate amount and then that’s the tax that the 

company pays. 

I guess one of the other concerns is that well we can’t quite get 

there, there’s no way to do that. Well we came really close in 2003. 

The President’s original proposal was full integration of the corporate code where if a corporation paid a tax on the dollar that it 

made then there would be no subsequent tax, either as a dividend 

or when the shareholder sold the stock as a capital gain. That plan 

passed the Senate, it came very close to passing the House. The 

compromise was that we ended up with a 15% raid on cap gains 

and dividends which got us pretty close to the idea of you know a 

single layer of tax, certainly much closer than we have been since 

World War II. 

I think that there is two ways to do it. My understanding with 

your plan is that you have if the corporation pays a tax there is 

no subsequent shareholder level tax. The challenge with that is the 
22 

optics, that it looks like that shareholders aren’t paying taxes when 

in fact they are carrying the burden of the tax paid by the business. I think you get around that by having a notice sent out to 

the shareholder that this much tax was paid by the business on 

their behalf. 

The other way to do it would be to allow the corporate to have 

a dividend’s paid deduction so that the corporation when they kick 

out a dividend to the shareholders they don’t pay a tax at the corporate level, but that the shareholder pays that tax. 

I like that because it makes the tax explicit at the shareholder 

level. The challenge with that is you know there’s I think 40% of 

C Corp equity right now is owned by tax exempt taxpayers, IRA’s, 

trust funds, college funds et cetera so how you deal with those 

shareholders is difficult. 

Senator Lee. There’s probably not an easy fix to that. 

Mr. Reardon. There’s not an easy fix to that so I think your solution is probably the most elegant but the bottom line is that if 

you want to make U.S. businesses more competitive, the double tax 

is the big challenge. Our competitors don’t have double taxes. Most 

of our countries that we compete with have integrated their corporate code with their individual codes so we are an outlier there 

and we should fix that. 

Senator Lee. And once you have double taxation in place that 

therefore makes it a lot more difficult to design a fair tax code, a 

fair business tax code. 

Mr. Reardon. Well I think you have two challenges one it drives 

up the cost of capital because you have got the two layers of tax 

and that means that you are driving investment out of the U.S. 

and into foreign markets and two you have a huge behavioral issue 

which is you know one of our members testified before the House 

Small Business Committee earlier today and in his testimony he 

talked about when they were a C Corp they didn’t want to pay dividends because they didn’t want to face that second layer of tax. But 

if they have shareholders who rely on those dividends then what 

is the point of being the shareholder of a company where you are 

not benefiting from the success of the company? 

That endangers the future of the company because the shareholders say no let’s sell the business, let’s sell it to that big C Corp 

down the street. And so the challenge is that you know if you are 

going to you know move the tax code in the correct way you want 

to move away from the double tax, you want to make sure that 

business income, a single layer is taxes at a reasonable rate and 

then that’s it and then you get away from both the cost of capital 

and the behavior challenges. 

Senator Lee. Was this by the way the single biggest argument 

that sunk the 2003 plan that would have fixed it, was it the argument that you are somehow helping—— 

Mr. Reardon. I think there was opposition by some important 

people on the House side but you will have to talk to them I don’t 

know exactly why they didn’t like the idea. 

Senator Lee. Okay well said. I see my time has expired, thank 

you very much, thank you, Mr. Chairman. 

Chairman Coats. Senator Lee, thank you. 

Senator Klobuchar. 
23 

Senator Klobuchar. Well thank you very much. We are left to 

wonder who these important people are but thank you very much. 

Mr. Reardon. It might have been the Chairman of the Ways 

and Means. 

Senator Klobuchar. Oh okay well I wanted to first acknowledge Mr. Hoghaug thank you so much for being here and the jobs 

you create in our State and Representative Paulsen has already 

mentioned how difficult this situation is with the medical device 

tax. He and I both have been working together to try to get this 

repealed along with Senator Hatch and others and we are hopeful 

that this may be the year we can get this done just because of the 

changing of politics and people understanding and also a GAO report that came out showing how difficult it is to assess this tax. 

Just one other follow-up I had was just the R&D tax credit if 

that’s helpful that’s something else that expires at the end of every 

year and it has been a big frustration and if you find that helpful 

Mr. Hoghaug? 

Mr. Hoghaug. Well, on the surface it seems to be helpful. It 

hasn’t due to the length and kind of the uncertainty of the R&D 

projects with medical devices not one outstanding being the FDA— 

as it changes every year you can’t get the entire project in under 

the deduction and I don’t know if it is going to be there next year. 

So we are planning as if it is not going to be there and then we 

just have to look at cash flow and how much you can afford. 

Senator Klobuchar. Exactly and then it doesn’t serve its purpose of creating incentive which is one of the reasons we would love 

to see longer term comprehensive reform as well as international 

tax reform and I know in this part of this but we know a little bit 

about that from having Medtronic and all the trillions of dollars 

that are overseas. 

I was just talking to Senator Schumer about that if we are not 

going to get comprehensive done this year it would be nice to get 

that done. Another thing that I have found to be really helpful to 

our company’s manufacturing companies is something you mentioned is the section 179 depreciation tax credit expensing provision and Mr. Fledderman as part of the comprehensive tax reform 

do you think we should be looking at the depreciation tables or 

some updates? 

It is the number one thing that is mentioned to me and I think 

it was the head of the Federal Reserve Yellen who also mentioned 

that it was a very helpful way if we could make that longer and 

clearer and make any improvements to it it’s one of our better tax 

incentives. 

Mr. Fledderman. Yes and thanks for the question. It definitely 

would help tremendously especially if we can count on it. You know 

I listened to all of this and one of the things that I think I would 

like to say is we are talking about the tax incentives that there are 

and it seems to me like we really don’t have tax incentives. We 

have tax rewards for something you did because we don’t know 

whether we are going to have it. 

Senator Klobuchar. Especially when they are retroactive. 

Mr. Fledderman. That’s right if you know at the beginning that 

you are going to have it then it really is an incentive to do something versus you might get a reward for doing it. It’s a whole dif-
24 

ferent thought process when you are a business owner when you 

have to make a decision on an investment or something like that. 

You know I am as patriotic as the next guy but I have got to admit 

you know when we were getting ready to invest another 4, 5, 10 

million dollars in our business I’m questioning is this the best place 

to do it. 

Does it really make sense to put that kind of money here and you 

don’t really know what the return is going to be and I don’t like 

thinking like that and I don’t think that’s the way we want business owners in this country to think. 

Senator Klobuchar. Great thank you. Mr. Reardon, many 

small businesses in Minnesota actually are ESOPS and I think you 

know they provide several tax benefits under the law. Can you talk 

about the benefits of ESOPS for small businesses. We sometimes 

have tax changes that we are very concerned could affect them and 

there are some other issues, we got a ruling today out of the Department of Labor that we are concerned about on fiduciary duty 

but ESOPS actually are exempt from it. 

Could you talk about the value of ESOPS? 

Mr. Reardon. Yeah that was a real helpful ruling. 

Senator Klobuchar. Yes. 

Mr. Reardon. The you know, several of our board members are 

actually S Corp ESOPS and I think one of the primary values aside 

from the fact that when you have an ESOP structure it changes 

the whole culture of the business that people take a much higher 

level of ownership over both their jobs and sort of accomplishing 

the tasks that are within their responsibilities. 

But it also eases the transition of business ownership. One of the 

biggest challenges for businesses like Mr. Fledderman’s and Mr. 

McGregor’s is how do you transition from one generation to the 

next or if there is no other generation what do you do with that 

business? 

Usually for closely owned businesses, the people who have the 

best chance of succeeding with it after the first generation goes 

away are the people who are working there and so that’s where an 

ESOP really comes in handy because it eases that transition it 

shifts the ownership to the people who are best able to keep that 

business successful and then it creates a great return and retirement opportunity for them. 

Senator Klobuchar. Okay thank you very much. 

Chairman Coats. Thank you. Let’s see, my list has Congressman Delaney. 

Representative Delaney. Thank you Mr. Chairman and I want 

to thank all of our witnesses for being here today. Prior to coming 

to Congress I ran a commercial finance company that I started that 

across 11 years we financed 5,000 small to mid-size businesses and 

made about $30 billion of loans and I can say every single one of 

the businesses that I ever financed always thought that they were 

paying too much tax. 

And they are right about that to some extent because let’s face 

it you know earnings would be more productively invested in the 

business than they are paid to the government but we do need tax 

revenues for the government to pay our obligations and that’s our 

principal responsibility as fiduciaries. 
25 

And so when we think about these changes we have to be smart 

about them and we have to do things that you know unlike the 

medical device tax which I don’t like because it’s an excise tax and 

the reason I think the witness had the problem with his business 

is because it was income tax, you would only pay it if you are actually making money so you wouldn’t have the cash flow problems. 

But I think there are two things, the first is that I think we have 

to stop with the false choices between small and big businesses because A it is hard to find those lines and Mr. Fledderman it sounds 

like your business does a lot of work for the auto industry, those 

are big companies they are your clients. And so the fact that we 

have a bad tax system for them affects you too and I think it’s true 

for most small to mid-size businesses in this country a lot of their 

clients at least of the 5,000 companies I financed a lot of their clients were big businesses so the fact that we keep their cash overseas because we have a bad international tax system hurts small 

businesses. 

The fact that they have all the same problems that you do hurts 

small businesses so these false choices because small businesses 

employ a lot of people but there is a lot of data that suggests that 

it is actually fast growing mid-size businesses that create all the 

jobs so I just think it is important for us not to have this false narrative. We have a bad tax code and it is hurting all American businesses full stop and they are all interrelated. 

But my question is to you Mr. Reardon, let’s assume for a second 

because there is a fair amount of momentum at least I feel to do 

business only tax reform and I think the reason for that is that the 

ideological divide on the individual tax reform is very wide at this 

point. 

So there is momentum to do business only so let’s assume we are 

doing that for a second and let’s assume that we don’t do what you 

would like which is to eliminate the double tax and I understand 

all the reasons for it but let’s assume for a second we don’t do that, 

how do you—how would you propose that we deal with all of the 

unincorporated businesses of which probably 90% of businesses I 

don’t know what the stats are all probably incorporated being one 

of our witnesses here Mr. Hoghaug you run a C Corp and you run 

an LLC right so there’s you know these things are somewhat interchangeable. 

How do you think we can if we were to eliminate deductions and 

lower the rates for C Corps and we were not to do individual tax 

reform at the same time, how could we actually do something to 

address an incorporated business at the same time? 

Mr. Reardon. Just for the record we have always argued for 

comprehensive reform that addresses individual—— 

Representative Delaney. My hypothetical assumes that. 

Mr. Reardon. Plan B is out there which I think it is sort of encompassed on what Senator Lee has in his plan. There’s a Grant 

Thornton business equivalency plan out there which would effectively cap the tax on pass-throughs at whatever the top C Corporate is so that you would divorce a little bit the individual rate 

from the pass-through rate. 

Basically treat it like capital gains so when you have active passthrough income it shows up in the shareholder’s income taxes and 
26 

then it is treated to a different rate schedule than their other wage 

and salary income. I think that’s probably the most fair way to 

treat the difference between C Corps and pass-throughs. 

Martin has mentioned a number of other options out there, all 

of them would benefit certain pass-throughs but the challenge is 

that none of them, unlike rates, affect all pass-throughs the same 

way and so if you do broader expensing you are helping companies 

that have more capital expenditures but there is lots of S Corps 

and pass-throughs out there, retail and others that don’t have a lot 

of capital expenditures so they won’t benefit at all. 

So they will still be stuck with that higher rate. We have explored this as I said for 5 years and we keep coming back to the 

rates. 

Representative Delaney. What do you think the apples to apples differential is right now between a C Corp counting its double 

tax and a pass-through? 

Mr. Reardon. It depends on—— 

Representative Delaney. Who is paying more and by how 

much? I know it’s hard but generalize it. 

Mr. Reardon. Well the effective rate study that we did looking 

at domestic only because once you get into international it gets 

really complicated with all the credits in there. S Corps are at 32%, 

C Corps were at 27% that does include dividends but it doesn’t include the capital gains rate so you should probably adjust the C 

Corp up a little bit. But I think you know they are sort of in that 

range where they are at right now. 

Representative Delaney. So if you did the proposal that you 

are talking about the spread would probably be similar because if 

you lowered the rate? 

Mr. Reardon. Yes, I think it would be fairly comparable. 

Representative Delaney. Thank you sir. 

Chairman Coats. Congressman Beyer. 

Representative Beyer. Thank you Mr. Chairman and thanks 

all of you for coming and this fascinating—I’ve been running a 

small business for 41 years and very much identify with so much 

of what you say the incredible difficulty of accumulating capital 

just because of the tax. 

So Dr. Sullivan is a Harvard trained economist. We heard early 

on and I think Mr. Reardon’s presentation about that when you 

add up the medical device tax, rather the Affordable Care Act Tax 

and the like you get to 44%, 43.4% when you add Virginia’s 5.75% 

personal state tax you are over 50 and then if you look at the part 

that we take out for ourselves for social security that’s another 

15.4% so it’s you know 65% or something on the first $107,000 and 

then drops down. 

Is there any theoretical economic research that shows where that 

ideal theoretical tax break should be where you start to get the disincentive of not to work which just doesn’t make any sense to try 

as hard as it does when you are a small business? 

At what point do we say if 53% is perfect or 40% or 60% or 29? 

Dr. Sullivan. Well I think there’s no magic number out there. 

It certainly is subject to a lot of controversy. You should keep the 

rates certainly as low as possible. I think the question that we are 

talking about is there are a lot of individuals who are not involved 
27 

in small business who are subject to these high tax rates and so 

when we talk about lowering the rates it is not just affecting the 

small business. If we want to help small business it doesn’t make 

a lot of sense just to focus on the rates because then you are helping all individuals who have very high incomes. So if we want to 

promote job creation we should give tax breaks to the individuals 

who are actually creating jobs. And so I wouldn’t focus so much on 

the rates as to focus on the job creation part of the equation. 

Representative Beyer. I was impressed with options 4 and 5, 

option 4 being the upfront tax benefits like the costing, expensing 

and option 5 being you know the tax simplification, the huge tax 

burden years ago when Bill Clinton was first elected President I 

talked to one of his chief economists about one of my great frustrations which is I don’t mind paying 39.6% tax on the income I take 

out of the business, you know to buy my big house, to pay the country club bills, it drives me crazy to pay it on the money that I want 

to leave in the business to grow more jobs, to expand it. 

Is there not an option 7 here or an option 6 that says you can 

do the same tax rates on the money that is taken out but a much, 

much lower rate on the money that is left to grow the business and 

to grow jobs? 

Dr. Sullivan. I was just at Harvard last week talking to the law 

school professors there and Professor Halperin was suggesting that 

there should be tax relief for money that is kept inside the corporation and so I think there are options like that that people are interested in. 

Representative Beyer. Maybe we can ask our Chair and Ranking Member if we can pursue that together which would be excellent, thank you and I’m hoping Mr. Reardon can help us think 

about that also. 

Mr. Hoghaug, you know one of the arguments made about the 

medical device tax was that you were going to sell somebody more 

artificial hips and pacemakers and the like that would offset it. Do 

you see any uptick in demand from ACA? 

Mr. Hoghaug. Great question, no. We have seen zero uptick. 

Most of the devices, spine in particular, but I am also involved with 

the shoulder and other joints, are diseases of the aging and elderly. 

Those people either have insurance or covered by Medicare so we 

have seen no appreciable rise at all. You know a trauma patient 

that goes in with a broken neck is going to get treated whether or 

not they had insurance so those numbers really haven’t changed at 

all. 

Representative Beyer. Would deductibility and alignment of 

the cash flow make a meaningful difference for you in the medical 

device tax? 

Mr. Hoghaug. I just think it’s an entirely bad idea to be taxing 

in any way this—the innovation. I’m not sure how one could reconcile that. I mean it seems that the majority of the House and 

Senate are in favor of repealing this tax as it really is a tax on innovation and you know by not being able to reinvest within the 

company and on the next new generation product the patients are 

suffering. 

Representative Beyer. Thank you Mr. Chair. 
28 

Chairman Coats. Terrific questions. I mean you got our attention on those couple of items there. Thank you, Congressman 

Schweikert? 

Representative Schweikert. Thank you Mr. Chairman. Is it 

Congressman Beyer? If you are paying your country club fees, you 

belong on this side right? So if I turned to this panel and said, all 

right, optimal tax system? And from a personal perspective, and it 

would be a good time for the doctor, in a moment, to share his philosophical vision. What is a tax code that maximizes economic 

growth, economic stability but minimizes decision making directed 

from the tax code itself; because I believe as a regulatory policy 

when it is outside certain realms but also tax policy we distort 

price effects, we distort allocations. 

Mr. Reardon, describe to me what the optimal tax code is? 

Mr. Reardon. If I were writing the tax code in the current environment I would shoot for a rate that is sustainable, 28–30% range 

and then I would tax all income at that rate. As I said earlier incorporate or integrate the corporate code so you can have the 30% 

rate on C Corps, 30% rate on pass-throughs and 30%—— 

Representative Schweikert. And you would create equalization or deal with the differential on the C Corp and its dividends? 

Mr. Reardon. And on the individual rates as well, you know I 

disagree sort of a little bit with what Marty is saying about what 

rate should be applied to wage and salary income simply because 

capital has to come from somewhere and the only way that you are 

going to get capital for people to borrow or invest is for people to 

be able to earn money and then save it and then invest it in those 

enterprises. 

Representative Schweikert. Mr. Fledderman does that accomplish what you need? 

Mr. Fledderman. Absolutely I agree 100% I think the simplification of tax code helps both the business as we can plan and 

I think it helps the Federal Government because they can plan. 

Right now the government doesn’t know what kind of credits I am 

going to submit for at the end of the year so they really don’t know 

what kind of returns are to be necessary. It would be a lot easier 

for us to calculate what our tax burden is going to be and for the 

government to calculate what the tax take is going to be. 

I’m all for paying my fair share of taxes and a flat tax would be 

simplified would make it the same for everybody. 

Representative Schweikert. Miss Wade what would be the optimum tax code? 

Ms. Wade. For NFIB members they have told us time and time 

again that lowering the rates that’s for all demographics of small 

businesses, regardless of industry or their growth potential. Lowering the tax rate but then also permanency of the Estate tax repeal and 179 expensing so that the frequent changes in the tax 

code isn’t driving their business decisions. 

Representative Schweikert. What is you lowered rates to the 

point that you remove things like 179? 

Ms. Wade. We’ve surveyed our members and there is a little bit 

of negotiation but it all comes down to what their paying and bottom line on tax costs. 
29 

Representative Schweikert. That’s what it is always about 

right? 

Ms. Wade. Yes. 

Mr. Sullivan. It’s always about trade-offs. I mean NFIB members want lower rates and they want expensing but you are asking 

the question. If we have to raise a certain amount of revenue 

what’s the best way to do it. 

Representative Schweikert. In the most—my proposition is 

based on the concept what maximizes economic growth and minimizes economic distortion by tax policy. 

Mr. Sullivan. And the answer is that under tax reform in the 

classic sense we want a single layer of tax on all businesses and 

we want rates as low as possible and there is going to be some very 

painful loophole closing that is going to have to take place for that 

to happen. When I was on staff I was always lobbied, I’m sure you 

are lobbied and you are told that if you take away this tax break 

it is going to hurt jobs but ultimately all of those tax breaks are 

really hurting jobs and you need to lower the rates and sort of ignore that pattern about ‘‘oh you are going to kill jobs by taking 

away my tax break.’’ 

Representative Schweikert. In a world like you have where 

you are putting money into R&D for medical devices what is optimal for you? 

Mr. Hoghaug. Well two-fold once I agree—but I would agree 

that a lower flatter tax, corporate tax would certainly induce re-investment within the company and with R&D. The elimination of 

the medical device tax which is punitive on my start-up company, 

which has yet to turn a profit and yet it still pays medical device 

taxes, so I am actually borrowing money and financing the tax. 

But I would agree just some extension of the R&D tax credit or 

something, just something that we could plan for the future. 

Representative Schweikert. All right thank you Mr. Chairman. There is one comment I wanted to make we need to be a little 

careful earlier we threw out what if you were an investment company or a hedge fund or this and that and the title or the structure 

we should probably be concerned about what is the profitability, 

what’s the actual income from it because there was a time when 

I ran a fairly large investment fund and make no money from it 

but I had a really big title so we have got to be very careful about 

stereotyping because it sort of distorts, you know when we get 

down to the sort of what’s the actual—that’s for the economy and 

best for the country that I yield back Mr. Chairman. 

Chairman Coats. Well, thank you, Congressman. The Senate 

has called a vote so I am going to have to leave shortly, I would 

be happy to turn this over to the Ranking Member, Congresswoman Maloney if you want to continue with some additional questions or if you have any additional questions. 

It seems to me, and I am not trying to categorize everything into 

a conclusion here, but what I have heard today is that tax reform 

is a necessity if we are going to promote economic growth for the 

future. 

Comprehensive tax reform seems to be the best way to go. Piecemeal continues the complexity and some unfairness. Making it fair 

is simplifying our tax code, lowering rates to the extent that we 
30 

can. Particularly dealing with the question relative to business income, where is that sweet spot where you can lower the rate and 

eliminate the exemptions or the trade-offs? Because if you want to 

achieve fairness you want to achieve simplicity. 

It seems to me that to get that fairness, you have to give that 

consideration. Is there a level at which you could say give me that 

level, that provides the certainty that I need, so that I know exactly what I am going to have to pay on the income that I earn 

and the profits that we achieve and I don’t have to hire attorneys 

and CPA’s to figure out how I qualify for certain exemptions, certain deductions? I think that’s a challenge that is going to hit all 

of us here in Congress, and we are going to have to address the 

need through comprehensive tax reform that very question. 

We have talked about the right level as you have gone through 

this I don’t think we need to report that. And then locking in certainty seems to be the key component of getting a pro-growth dynamic economic tax code. We talked about what I would think are 

two confiscatory, egregious taxes and one is the medical device tax, 

which I think our witness here from Minnesota knows, and I have 

experienced the same thing in Indiana. We are a medical device 

state also. 

I have seen and heard from those who own the companies who 

have not yet, but have potentially innovated breakthroughs that 

can substantially improve health and save lives, but simply aren’t 

going to be able to get there or pursue their technology or their innovation because they are forced to pay tax on their sales, an excise tax and not on their profits. 

They are not making a profit, they have to borrow money to pay 

the tax or they lay-off people. We have had companies that have 

planned expansion, planned new hiring and canceled as a result of 

this tax. It’s egregious to take this type,—particularly this type of 

innovative industry that has so much promise for future health 

benefits to slap on an excise tax. And it was all based on the fact 

that you would have a surge of business from the Affordable Care 

Act, which you have indicated has not been the case. And that’s 

true with many of our smaller companies in particular. 

And then the estate tax. I know the House will be voting on this. 

I am not sure if the Senate has the votes to address this. But in 

many instances, not in every because there is some inherited 

money passed down, clearly, but this is money that has been 

earned, money that has been taxed. And then you get to do it all 

over again—almost half of everything that you have saved, and 

give it back to the government the second time. 

I think it’s been a very constructive hearing. I thank our witnesses for being here, with some terrific questions that have been 

asked, and some very good answers that have been given. I think 

this will play an important role in terms of how we determine how 

we move forward with achieving the goal I think we all want to 

have and that is taking a very complex, out of whack, desperately 

needed, tax code reform piece and make it sensible. Accomplishment here is relative to what is necessary for us to get our economy 

not hindered by the complexity and the unfairness of this particular code. And so thanks to all of our witnesses, thanks to my 

colleagues here. With that, this meeting is adjourned. 
31 

(Whereupon the meeting adjourned at 4:06 p.m.) 

(33) 

SUBMISSIONS FOR THE RECORD 
34 

PREPARED STATEMENT OF HON. DAN COATS, CHAIRMAN, 

JOINT ECONOMIC COMMITTEE

It is fitting that on Tax Day, April 15, we are examining one of the most vexing 

challenges for small business—our burdensome and incomprehensible tax code. 

A quote by an unknown source represents the entrepreneurial spirit I have witnessed representing Hoosiers in Washington: ‘‘Small business isn’t for the faint of 

heart. It’s for the brave, the patient and the persistent. It’s for the overcomer.’’ 

The small business owners I have met are brave, patient, and persistent. They 

are indeed overcomers. Despite the obstacles small businesses face, they are responsible for two-thirds of the net new private-sector jobs created in the United States. 

Our role as legislators should be to ensure that the tax code is no longer a major 

obstacle to growth and jobs for these businesses. 

Against the headwinds of the slowest recovery since 1960, small business owners 

have to deal with a tax system that is hopelessly complex, full of provisions that 

expire every one or two years, riddled with special exemptions, deductions, and preferences, and filled with new penalties. 

The Small Business Administration lists tax paperwork as the most costly paperwork burden the Federal Government imposes on small businesses at $74 per hour 

or $1,500 per employee. It is not surprising that nine out of 10 small business owners have to turn to an outside paid professional to figure out their taxes. 

Today we will hear from witnesses who can discuss how tax policy is affecting the 

broad landscape of small businesses. We will also hear two stories of real businesses 

that will bring home how taxes affect companies on the ground. 

We hear these stories every day: 

• Stories of complexity. I can sympathize with business owners because I took two 

tax law courses in law school and am still baffled by the tax code. 

• Stories of uncertainty, like the farm family unable to replace outdated equipment because they are unsure whether small business expensing or bonus deprecation will be in effect for the year, and at what level. 

• Stories of manufacturers hit with higher tax bills because the top individual tax 

rate rose, but without extra cash in the business to pay the tax. 

• Stories of small businesses struggling under the weight of ObamaCare’s taxes 

and mandates, wondering if they can afford to add more workers or whether 

they should move employees to part-time status. 

• Stories of medical device makers, like one in Warsaw, Indiana, that develops 

orthopedic implants for children and had to shelve two important projects because of the medical device tax. 

• And stories of family-owned businesses with land, buildings, equipment or inventory but without cash to pay the estate tax, worried the business won’t survive to the next generation. 

Tax Day is a perfect time to commit to not let another April 15 pass before we 

finally tackle comprehensive, pro-growth tax reform. And while it is urgent and essential to lower our corporate tax rate, which is the highest in the developed world, 

we must not forget the millions of small businesses that pay taxes at the individual 

level and have just experienced rate increases of their own. 

I look forward to hearing from our witnesses about how we can tear down barriers 

to growth in our broken tax code. 

PREPARED STATEMENT OF HON. KEVIN BRADY, VICE CHAIRMAN, 

JOINT ECONOMIC COMMITTEE

Chairman Coats, Ranking Member Maloney, Members, and Distinguished Witnesses: 

Even though the United States has technically been in a recovery for more than 

five-and-half years, our economy remains stuck in second gear. Last year, our economy grew by 2.4 percent—that is barely above the average annual growth .rate of 

2.3 percent for this entire disappointing recovery. 

In this recovery, the rate of new business formation has lagged. New and expanding small businesses have historically accounted for a large share of new jobs during 

expansions. Regrettably, this fountain of job creation has slowed significantly during 

this recovery compared with past recoveries. 

Our broken U.S. tax code is a major cause for this weak recovery: 

• Our tax code is too costly, complex and unfair—but mostly unfair. Especially 

to hardworking taxpayers, small businesses and America’s economy. 
35 

• A national survey by Texas-based polling firm Baselice & Associates shows 80 

percent of voters support Congress ‘‘acting now to fix the tax code by making 

it fairer, flatter and simpler.’’ Eighty-six percent of Republicans support reform, 

followed by 79 percent of Democrats and 76 percent of independent voters. 

• Americans agree: We need a simpler, fairer tax code that’s built for growth and 

makes our economy healthier. It should close loopholes and limit deductions to 

lower tax rates for everybody. Small businesses shouldn’t pay higher tax rates 

than big businesses, and real reform should stop encouraging companies to shift 

jobs overseas. 

• I believe a 21st century tax code shouldn’t raise taxes to bail out Washington’s 

spending problem. It should limit spending, rein in the IRS and strengthen 

America’s economy to begin paying down our national debt. 

Today, I want to focus on a particular challenge confronting farmers, ranchers, 

and small business owners—the death tax. All too often, families must sell their 

farms, ranches, and small businesses to pay Uncle Sam’s death tax. One fifth-generation Texas ranch I know-which started back in the 1800s—had to sell 2/3 of that 

historic land to pay the death tax. That’s just wrong. 

What is worse—if you can imagine it—is that the death tax is especially destructive for women- and minority owned small businesses. They’re the fastest growing 

sector of small businesses and start-ups in this country. 

Bob Johnson, the founder of BET television, observed the death tax ‘‘continues to 

pose a serious threat to the likelihood that present-day African American-owned 

businesses can be preserved as part of a family’s long-term legacy.’’ 

President Obama insists that the death tax is necessary to remedy income inequality. Yet, that just isn’t so. Former Vice Chairman of the Federal Reserve Board 

Alan Blinder found that only two percent of income inequality can be explained by 

inherited wealth. 

The death tax motivates the wealthy to reduce their savings and increase their 

consumption spending now rather than pass their wealth on to the next generation. 

The death tax actually increases the consumption gap between the wealthy and the 

poor in America. Moreover, the death tax leaves all Americans poorer as the productive investment in new buildings, equipment, and intellectual property—which those 

savings would have funded—does not occur and the jobs that such investment would 

have generated are not created. 

This reminds me of President Reagan’s aphorism about our friends’ knowing so 

much that isn’t so. 

Democrats claim that ‘‘special use valuation’’ is an alternative way to exempt 

farms, ranches, and small businesses from the death tax. We’ve tried these gimmicks before. They don’t work. They just throw additional burdens and complexity 

on family businesses and tie them up in red tape for years after death. 

Enough with the gimmicks and complicated workarounds. They don’t work. Right 

now, our country is facing a $1.5 trillion Growth Gap compared with an average recovery since 1960. That means we’re missing 5.5 million private-sector jobs. The average family of four is missing almost a thousand dollars a month. Our recovery is 

so bad, we’re going to need 7.4 percent growth in real GDP each and every quarter 

just to catch up to the average recovery by the time President Obama leaves the 

White House. 

We need American entrepreneurs and family businesses to close that gap. They’re 

the backbone, the engine of our economy. But the death tax has robbed them of $1.1 

trillion in capital stock. The Tax Foundation estimated that in 2005 the death tax 

cost American taxpayers $88.2 million and 2.3 million hours of effort just in compliance. Imagine if all of that could have been invested in new jobs and business opportunities. I don’t think I need to stress to anyone here how desperately we need that. 

The Treasury collected $19.5 billion in estate and gift taxes over the last 12 

months. In contrast, the Treasury spends $9.9 billion per day. The death tax generates less than two days of federal spending. 

This week, the House of Representatives will vote to repeal the death tax once 

and for all. I hope the Senate will join the House and approve this truly progressive 

legislation and send it to President Obama. 

I look forward to today’s discussion with our witnesses. 

PREPARED STATEMENT OF CAROLYN B. MALONEY, RANKING MEMBER, 

JOINT ECONOMIC COMMITTEE

Thank you Chairman Coats for holding today’s hearing. I also want to thank all 

of the witnesses for being here today. 
36 

There is broad agreement that small businesses are the backbone of the economy, 

the anchors of our communities, and that they have played an important role in the 

current recovery. 

ACTIONS BY DEMOCRATS

When President Obama took over from George W. Bush, the economy was in free 

fall and small businesses were bearing the brunt of the pain. Over the fourth quarter of 2008 and the first quarter of 2009, small businesses shed more than three 

million jobs. 

President Obama and Democrats in Congress, along with the Federal Reserve, 

took bold action to turn things around in the darkest days of the Great Recession. 

These actions included a number of efforts to support small businesses. 

For example, the Recovery Act cut taxes for small businesses, allowing them to 

immediately deduct up to $250,000 of investment, carry back losses for five years, 

and exclude from taxation 75% of capital gains from small business investment. 

SMALL BUSINESS JOB GROWTH

Today, small businesses are leading the economic recovery. Small businesses have 

added more than six million jobs over 17 straight quarters of small business job 

growth (see chart #1). 

We have come a long ways in the past six years. The share of small businesses 

planning to add jobs is back near its pre-recession average (see chart #2). 

While this reflects major progress, I believe we need to do more to support small 

business growth. 

The Administration’s tax reform plan, for example, would simplify and cut taxes 

for America’s small businesses. President Obama’s revenue proposal includes expanding and permanently extending increased section 179 expensing for small businesses. The proposal would also increase the number of small businesses that can 

take advantage of simpler cash accounting rules. 

The Administration’s approach provides tax cuts for small businesses in a fiscally 

responsible way and in the context of broader business tax reform. By contrast, the 

Republicans in the House have passed bills without offsets—which would blow massive holes in the budget. 

SMALL BUSINESS ATTITUDES

Some of my Republican colleagues would have us believe that small businesses 

are up in arms about the Obama Administration’s policies. But this chart—based 

on survey data provided by the NFIB, one of our witnesses today—shows that the 

share of small businesses listing taxes as their top concern is no greater today than 

when Ronald Reagan left office (see chart # 3). 

Ronald Reagan! 

SOME ‘‘SMALL’’ BUSINESSES ARE QUITE LARGE

One of our principal goals today should be to decide what a small business is for 

tax purposes. 

While most of the 95 percent of businesses that are organized as pass-throughs 

are small—many are extremely large. Numerous large law firms, accounting firms, 

hedge funds and other businesses are pass-throughs. 

The tax code treats these large businesses the same as ‘‘mom and pop’’ stores 

down the street. But, should it? 

When designing tax policy, fairness should be a principal concern. Some large 

multinationals pay less than small businesses and some extremely large companies 

don’t pay any federal income taxes at all. 

In other words, the corner store likely pays more in federal income taxes than 

some of our country’s largest corporations. Those who are critical of our tax system 

should save some of their outrage for this. 

ESTATE TAX

Before taking on tax reform, Republicans have proposed repealing the estate tax 

and they plan to vote on it in the House later today or tomorrow. 

Let’s be clear: repealing the estate tax would be a major windfall for the wealthiest Americans. With the current exemption amounts of over $5 million per person 

and more than $10 million per couple, the estate tax affects only two out of 1,000 

estates. In other words, 99.8 percent of Americans do not pay any estate tax (see 

chart #4). 
37 

Republicans say they are motivated by a desire to protect small businesses. But 

that’s something of a Trojan horse. Only about 20 small business and small farm 

estates owed any estate tax in 2013, according to the Tax Policy Center. Twenty! 

Repealing the estate tax is also very expensive. The Joint Committee on Taxation 

found that repealing the estate tax would increase the deficit by $269 billion over 

10 years. 

NEED FOR BIPARTISAN TAX REFORM

1986 was a massive overhaul and simplification of the tax code. The minute the 

ink was dry, work began to undo it. And trust me, it wasn’t small businesses at 

the table. 

We must make sure that any tax reform benefits the small firms, not just the big 

multinationals gaming the system to further limit their tax obligations. 

Tax reform is hard. That’s why there hasn’t been a major rewrite of the code in 

about 30 years. For it to work, it must be comprehensive and it must be bipartisan. 

There is no other path forward. 

I look forward to hearing the perspective of our witnesses this afternoon. Thank 

you for appearing before the Committee. 
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PREPARED STATEMENT OF JODY FLEDDERMAN, PRESIDENT & CEO, 

BATESVILLE TOOL & DIE

Thank you for the opportunity to testify before you today about the impact of 

taxes on small and medium- sized manufacturing businesses. My name is Jody 

Fledderman; I have been President and CEO of Batesville Tool and Die in Batesville, Indiana since 1989. For over 30 years, Batesville Tool & Die has been providing quality metal stamping and stamping assemblies for our automotive, appliance, industrial and other industry customers. We currently have 395 employees 

and would hire more if we could find qualified workers. 

In addition, I was the 2014 Chairman of the Precision Metalforming Association 

and serve on Board of Directors for both the Indiana Manufacturers Association and 

the Indiana Chamber of Commerce. I think my positions on state and national 

boards and running my own business, provide me a unique perspective of the challenges facing manufacturers in Indiana and across the country. 

The single greatest obstacle to growing my business in the long term is the uncertainty surrounding our tax code. How can Congress expect us to plan when we do 

not know what the rates will be in the future? 

How can lawmakers carelessly continue putting off their responsibilities until the 

last hour? Too often it feels as if people in Washington are so insulated from the 

real world they do not recognize their inaction has significant consequences for families and businesses throughout the country. It is very difficult to plan for the future 

when you don’t even know the rules for today. 

I truly believe our economy would have recovered more quickly if businesses felt 

comfortable that Washington would set the rules and stop meddling for a while. 

This is why we need comprehensive tax reform. Not just to lower our rates to globally competitive levels but also to provide stability and predictability in the Internal 

Revenue Code. Washington should develop tax policy that encourages investment 

and manufacturing in America—not penalize companies and their owners for doing 

business. 

TAX REFORM FOR ALL BUSINESSES

A January 2015 industry survey by the Precision Metalforming Association and 

National Tooling and Machining Association showed that 61% of companies are 

structured as a pass-through business, often paying income taxes at the higher individual rates. Sector-wide, 81% of all manufacturing companies are structured as 

pass-throughs, meaning C–Corporation only reform would leave behind eight in ten 

manufacturers, most small and medium-sized family-owned businesses. We are one 

of those millions of manufacturers Corporate-only reform would leave behind. 

Batesville Tool and Die is structured as an S–Corporation. As a multigenerational manufacturing company with strong ties to the community, over the 

years our company has awarded shares to certain employees and family members. 

Maybe we’ve been overly generous in the past, but we now have 72 shareholders. 

We are not your typical manufacturing pass-through, which in our industry tends 

to average 3–5 shareholders. However, being a pass-through allows us to reward 

employees with shares in the company without the penalty of double taxation that 

a C–Corporation structure brings. 

The main reason most family-owned or tightly held manufacturers structure 

themselves as pass-throughs is so they can keep the company within the family. Underscoring this point is that many in our industry are nearing their retirement and 

planning to pass the business along to the third or fourth generation of manufacturers. If our company was a C–Corporation, when I’m set to retire, the tax penalties 

just on my portion alone would mean I’d have to plan years ahead how to cover the 

dividend tax rate – even if I knew what it was ahead of time. 

Unfortunately, I’m still a ways away from retiring, but think what would happen 

to these 72 small shareholders if we sold the company—some of them are retirees 

in their eighties while others are high school students. How would they come up 

with the resources to pay the income and dividend taxes were we structured as a 

C–Corporation? 

While there are many benefits to our pass-through structure, the main drawback 

is the most obvious—Congress raised our rates a few years ago. While publicly most 

believe the top rate is 39.6%, in reality we pay roughly 43.4% in federal income 

taxes when you calculate the surcharges and other additions. Keep in mind we have 

72 shareholders, with one drawing fully passive income. This means we are withholding 43.4% from all of their taxes and leaving it up to the individual shareholder 

to seek a refund if their overall income levels do not reach the highest brackets. 

More importantly, that is money taken out of the business to pay taxes on their behalf and even if the individual receives a refund, the company will never see any 
52 

of that money again—valuable resources we could have used to invest in the business. 

As Washington contemplates tax reform, I asked our CFO to explore how various 

scenarios affect our company. Based on current tax law and after deductions and 

credits, Batesville Tool and Die paid roughly $1.6 million in taxes. Had the individual tax rate not increased to 39.6%, we would have paid $1.1 million in taxes 

using the same figures. If the rate is reduced to 28% and the key investment provisions are kept in place, our tax liability drops to $928,000, freeing up $700,000 to 

invest in the business, more if lowered to 25%. 

This is where public perception plays a big role. The average person and politician 

would assume the owners pocket that $700,000. In reality, that is not the way small 

and medium-sized manufacturers operate. In the metalworking industry, our profit 

margins are typically 1–3%. The cost of manufacturing in America is not cheap and 

we use every resource available to make ourselves more globally competitive 

through investing in new technologies and hiring skilled workers. 

Furthermore, what many people do not know is most small business owners have 

to personally guarantee loans for the company when buying equipment that can cost 

in the millions. The fewer resources our lenders see in the business, combined with 

the higher personal tax liability for each shareholder, often leads to increased borrowing rates and stricter terms. Small and medium-sized manufacturing businesses 

rarely self-finance, and with a 1–3% profit margin we are not the most attractive 

borrower in the best of circumstances. 

TAX CREDITS AND DEDUCTIONS USED BY MANUFACTURERS

Every manufacturing business is different and each company serves a variety of 

industries which have varying needs requiring specialty equipment. Some of our 

equipment can cost $2–10 million, much of which we could not afford without Bonus 

Depreciation. For others the R&D Tax Credit is worth hundreds of thousands as opposed to general deductions. 

While traveling the country as Chairman of the PMA last year, I heard from 

countless manufacturers that they are holding back investments because they do 

not know whether Congress will extend critical tax provisions. The recent association survey of our industry showed that 91% of metalworking manufacturers 

claimed Section 179 Equipment Expensing in 2014. An equally impressive 89% used 

Bonus Depreciation while roughly half claimed the R&D Tax Credit. This January, 

Congress allowed the R&D credit to lapse for the sixteenth time, Bonus Depreciation to expire, and 179 to revert to $25,000, rendering it completely useless for manufacturers like us. 

To our company, the R&D and Bonus are by far the most important. We claimed 

$544,000 in R&D and while that was among a peak year for us, we see this provision as one of the few in our tax code that actually incentivizes manufacturing in 

America. I know many smaller companies shy away from the R&D as not being 

worth their time to defend in an audit. Some will say they cannot substantiate the 

$20,000 in expenses to claim $40,000 in R&D credits. But at Batesville, our exposure to the R&D is significant, so I guess we will just have to keep the faith in Congress that you will extend or make permanent the R&D, I just ask that you don’t 

wait until the eleventh hour this time. 

Bonus Depreciation really is a game changer for manufacturers who invest heavily in equipment and talented people to run them. Had Congress not extended 

Bonus Depreciation in December of last year, countless manufacturers in the metalworking industry would have faced an average $400,000 tax liability due in 2015. 

The typical small manufacturer does not have that kind of cash on hand and would 

eliminate 2015 purchases and hiring to pay the added tax liability. 

However, before Congress pats themselves on the back for a job well done, extending expired provisions in November and December each year clearly stunts economic 

growth. Machines in our industry take eight weeks to eighteen months to place into 

service. This makes it impossible for the average manufacturer to benefit from 

Bonus Depreciation or Section 179 Equipment Expensing extended on December 11 

with only three weeks to finance, purchase, and place into service machinery weighing several thousand tons. 

The other real world impact of Congressional inaction was witnessed firsthand at 

Batesville Tool and Die last year. Due to the uncertainty over whether Congress 

would extend the R&D, Bonus and other key tax provisions, we overpaid our quarterly estimates to account for a potential massive tax liability if the provisions remained expired for 2014. This meant we overpaid our taxes by $580,303 because 

lawmakers waited until a lame duck Congressional session before acting. While our 

employees and other shareholders benefit from this structure, it causes significant 
53 

1Dunkelberg, William C., and Holly Wade, NFIB Small Business Economic Trends, NFIB Research Foundation, series. 

challenges for the business when we have to overpay based on which tax credits and 

provisions Congress keeps in place. 

As a pass-through, we pay the taxes for our shareholders quarterly based on estimates of revenue and existing tax law. This meant that last year we withheld 

roughly 44% from each shareholder for income taxes and overpaid on their behalf 

based on not knowing which tax provisions Congress would put in place for the taxable year. The individual shareholders will receive a refund for the overpayments 

on their personal tax returns, but they will never give that money back to the business who overpaid on their behalf. This means, the company will never see that 

$580,000 again. With over half a million dollars I could hire seven or eight new employees or purchase a new machine that would have also required new workers. Instead, we sent that money to Washington, who will just turn it around and give to 

it the individuals, while the small business is left footing the bill. 

Comprehensive tax reform would immediately fix this problem. Our company 

would know the rules at the beginning of the year and withhold or pay the appropriate estimate. But the current system is like shooting a moving target, but never 

giving you a chance to lock on. Absent comprehensive tax reform, we need Congress 

to make permanent these investment provisions or at least extend them for a significant number of years. As I mentioned earlier, some of our equipment takes 

eighteen months or longer to place into service and our planning process is often 

two to ten years as we anticipate future growth. 

The Alternative Minimum Tax, or AMT, is another issue which receives attention 

from politicians when discussing tax reform. The reach of the AMT is much broader 

than just affecting the ‘‘middle class.’’ When a business is captured under the AMT, 

they cannot claim the Research and Development Tax Credit, which would be available to them and is so popular among lawmakers. In addition, an AMT captured 

business could not benefit from the politically popular $1,000 credit for hiring the 

long-term unemployed. Again, this is why we need comprehensive reform, the Internal Revenue Code is riddled with outdated and conflicting provisions stifling U.S. 

companies and deterring foreign investment. 

CONCLUSION

In towns such as Batesville, Indiana with a population of 6,500, the community 

needs employers like us but we need a partner in Washington that sets the rules 

and sticks with them. Manufacturers of all sizes need time to plan. We may not be 

a billion-dollar company but businesses in our industry routinely spend millions 

each year to remain competitive. Virtually every other industrialized nation has a 

tax code that fosters innovation and encourages investment. It is time the U.S. Government caught up to the rest of the world the way its manufacturers have. 

Thank you for the opportunity to testify before you today on this important issue. 

PREPARED STATEMENT OF MS. HOLLY WADE, DIRECTOR OF RESEARCH AND POLICY

ANALYSIS, NATIONAL FEDERATION OF INDEPENDENT BUSINESS

Good morning Chairman Coats, Vice Chairwoman Maloney and members of the 

Joint Economic Committee. Thank you for the opportunity to testify today. I am 

pleased to be here on behalf of the National Federation of Independent Business 

(NFIB) as the Committee discusses small business, tax policy and economic growth 

in the small-business sector. NFIB is the nation’s leading small business advocacy 

organization representing over 350,000 small-business owners across the country. 

NFIB represents businesses in most industries and of various sizes, with about 80 

percent under 40 employees. 

The small business economy is slowly emerging from one of the worst recessions 

in U.S. history. NFIB’s monthly Small Business Economic Trends (SBET) survey 

data shows the dramatic change in consumer spending, employment, owner’s confidence and business investments throughout the recession and subsequent recovery.1 While some business activities have made significant improvement over the 

past four years, capital expenditures and outlook on business conditions and expansion remain at historically low levels due to economic conditions and the political 

climate. The threat of higher taxes whether in the form of income taxes, the 

healthcare law, the estate tax, section 179 expensing limits, or others creates enormous uncertainty among small-business owners worried about the impact of policy 

changes on future business costs. 
54 

2Wade, Holly, Small Business Problems and Priorities, NFIB Research Foundation, 2012. 

3Dennis, William J., Tax Complexity and the IRS, NFIB Research Foundation, Volume 6, 

Issue 6, 2006. 4https://www.sba.gov/sites/default/files/advocacy/rs343.pdf 

5Dennis, William J., Small Business’s Introduction to the Affordable Care Act Part II, NFIB 

Research Foundation, December 2014. 6http://www.irs.gov/pub/irs-pdf/i109495c.pdf 

The SBET survey also tracks which problems most affect owners in operating 

their small businesses. From mid-2008 through mid-2012, ‘‘poor sales’’ was their 

number one problem as consumer spending declined sharply. But now ‘‘taxes’’ is 

often the number one concern for small-business owners, a problem that moderates 

the economic recovery in the small-business sector. 

The NFIB Small Business Problems and Priorities survey highlights three main 

areas of tax policy that are of great concern to small-business owners.2 The survey 

is of a random sample of NFIB members asking them to evaluate 75 potential 

small-business problems and assess the severity of each. The problems are then 

ranked by their mean score. With the ‘‘Cost of Health Insurance’’ leading as the 

most severe problem for small-business owners, five of the top 10 problems are all 

tax-related. These tax problems fall into three categories: cost, complexity and frequent changes. 

The cost of tax obligations is threefold; the amount paid to federal, state and local 

tax agencies, the cost of hiring a CPA or tax advisor to navigate complex tax codes, 

and the owner’s time in providing the required paperwork and/or filing themselves. 

Eighty-eight percent of small employers use a tax preparer, and most use one to either ensure compliance or because the requirements are too complex. Tax-related 

regulations cause the greatest difficulties for 40 percent of small employers, more 

than environmental, health and safety, or employee-related regulations.3 And compliance costs are especially problematic for small-business owners as they are 67 

percent higher for small businesses than for their larger counterparts, costing them 

$18–19 billion per year, or about $74 per hour.4

Tax-related costs compete with owners’ ability to use limited profits for primary 

business activities. Profits are the main funding mechanism for owners purchasing 

new equipment, expanding facilities, hiring and stocking inventory. Tax-related cost 

pressures are especially problematic for newer firms that almost solely rely on profits for operation and expansion costs as they are generally not able to access traditional lending sources. Banks almost exclusively lend to more established firms, not 

new ones due to higher failure rates. But regardless of the firm’s age, tax burdens 

take a heavy toll on owners’ ability to operate their businesses. 

One example that encapsulates all three categories of tax-related problems for 

small-business owners is the Affordable Care Act (ACA). The employer mandate, 

small-business tax credit, and the termination of employer reimbursements are just 

a few of the many tax-related costs and complications small-business owners face 

in complying with the new law. 

The cost of health insurance is the most critical issue facing small-business owners. It is the main reason owners do not offer employer-sponsored health insurance 

and the main reason owners discontinue providing the benefit.5 But the employer 

mandate does not take into consideration the cost issue as it requires all employers 

with 50 or more full time equivalents to offer health insurance or pay a tax for not 

offering. 

The employer mandate pressures offering firms to continue regardless of profitability and penalizes firms for not offering, regardless of their financial situation. 

Firms with high employee turnover, seasonal employment and lower profit margins 

are less likely to offer health insurance. But now, those with 50 or more full time 

equivalents must absorb an additional tax for not offering, offer increasingly expensive health insurance, or limit employment—all less than optimal options. 

The employer mandate also contributes to increased tax complexity due to the 

often ambiguous and complicated aggregation rules associated with calculating the 

number of full time equivalent employees. The paperwork associated in calculating 

employee hours as they relate to the mandate reduces the most valuable asset of 

the owner, his or her time. And the aggregation rules will be most difficult for owners with seasonal employees, high employee turnover or own more than one employer firm. The IRS estimates that it will take over 4 hours to fill out the required 

forms, acknowledging that these estimates will vary due to individual circumstances. For firms with more complicated employment structures, the time commitment required will likely be far greater.6

Small-business owners have also encountered repeated delays and confusion over 

the ACA’s small-business health insurance tax credit and financial reimbursement 
55 

7http://www.irs.gov/pub/irs-pdf/i8941.pdf 

options. The tax credit is a targeted approach to help curb health insurance costs 

for offering small employers and is intended to provide an incentive for those that 

do not, to start offering. However, the tax credit is largely ineffective on both fronts 

as its design is exceedingly restrictive, complicated, and only offers temporary relief 

to a larger small business cost problem. The tax credit now serves as a windfall for 

the few who qualify and take the time, or pay an accountant, to file for it. The IRS 

estimates that it will take over 15 hours to understand, complete and submit the 

appropriate forms.7 The paperwork costs involved in filing for the tax credit will 

likely yield little benefit at the end of the day. These problems are not an uncommon fate for many tax credits including those trying to increase hiring and car 

sales. Generally these types of incentives only benefit those already committed to 

the activity and are willing fill out the required paperwork or pay someone to do 

it for them. 

Another ACA tax burden that falls into the frequent changes category is the termination of employer reimbursements for individually purchased health insurance 

plans by their employees. A recent NFIB survey found that about 18 percent of 

small employers offered this benefit last year and are now in violation of the law. 

NFIB continues to receive calls from owners, generally after having talked to their 

CPA or insurance agent, confused about the new rules prohibiting the practice and 

the subsequent harsh tax penalties. It is very likely many small employers are still 

not aware of this change in policy and will be notified of its termination in the form 

of a letter from the IRS requiring payment of excessive penalties. 

The ACA is just one example of how excessive tax burdens affect small-business 

owners. And the federal tax code is only one layer of tax obligations owners face 

in operating their business. They must also comply with state and local taxes adding to the overall compliance burden. Unfortunately, only the owner experiences the 

cumulative effect of all the required taxes and regulations places on their business. 

Federal, state and local lawmakers and government agencies only see them in isolation, giving a false perception of their true impact. But it’s the responsibility of the 

business owner to manage them all while trying to operate a profitable, successful 

business. 

In conclusion, small-business owners continue to be excessively burdened by direct, indirect, complicated and ever changing taxes related to operating their business. Alleviating the excessive tax burden on small businesses is an essential component in creating a strong, healthy environment for owners to operate and grow 

their business. I appreciate the opportunity to present NFIB’s views and data on 

the effects of tax policies on small businesses. I look forward to answering any questions you might have. 

PREPARED STATEMENT OF THOMAS A. HOGHAUG, CEO, SIGNUS MEDICAL, LLC, AND

CEO, LOCKDOWN SURGICAL, INC. 

Chairman Coats, Vice-Chairman Brady, Ranking Member Maloney, Senator 

Klobuchar and Representative Paulsen, I would like to thank you for this opportunity to testify. My name is Thomas Hoghaug and I currently hold the position of 

CEO for Signus Medical, LLC, and LockDown Surgical, Inc. It is an honor for me 

to be able to address this committee today and potentially shed some light on the 

extremely negative impact the Medical Device Tax has had on both of my companies 

and on similar small medical device firms. The issues and examples I will share are 

personal examples that are in no way unique to Signus Medical and LockDown Surgical. They are common experiences shared by a multitude of smaller device firms 

and have been conveyed and confirmed to me during meetings, committees and 

gatherings of medical device executives. Small device firms are primarily responsible for the majority of innovation and development of better and more cost effective treatment modalities for patient care in the U.S. 

I have worked in the orthopedic medical device arena for over 27 years with extensive experience in both international and domestic product sales and distribution. Over the course of my career I have founded seven (7) medical device companies, the largest being California based Alphatec Inc., and assisted others in achieving critical sales mass in order to go public. The most notable being Minneapolis 

based Spine-Tech Inc. which is considered to be the most successful IPO and ultimate acquisition target in the orthopedic industry. In 2002, I acquired sole ownership of Signus Medical, LLC, a master importer, developer and distributor of spinal 

implants. In June of 2014 I accepted the concurrent position of CEO of LockDown 

Surgical Inc; an extremity company focused on joint ligament repair. LockDown Sur-
56 

gical was founded in February of 2012 with a single FDA cleared product for shoulder repair. It has been operating at an annual financial loss and expects to reach 

breakeven and finally begin to turn a modest profit in the fourth quarter of this 

year. It wound have been sooner if it were not for the device tax. 

Since the economic disaster of 2008, the spinal implant industry has been one of 

the hardest hit in terms of downward pricing pressure, FDA clearance delays and 

regulatory scrutiny. We have seen end user pricing drop in excess of 70% , while 

the burden of compliance and reporting has increased dramatically. Signus Medical 

has managed to weather these storms but not without a negative impact on its top 

line sales and net profit. 

With the introduction and implementation of the Affordable Care Act’s Medical 

Device Tax, companies have experienced a multitude of unforeseen and crippling 

consequences of the tax including: layoffs, non-replacement of lost employees, disrupted or negative cash-flow, curtailing or elimination of R & D projects, reduced 

inventory expansion and effective tax rates which can exceed 100% of profit. Money 

that was once used to grow and reinvest in the expansion of the companies is now 

sent to the IRS every two (2) weeks. The AdvaMed response to the November 3, 

2014 Congressional Research Service reports that these payments are in fact used 

in the Nation’s general revenue stream and not used for healthcare reform under 

the ACA as was promised. 

From the time of our first device tax payments the impact was felt immediately. 

We are required to pay the 2.3% tax on all invoiced sales approximately every two 

(2) weeks. This tax is assessed on all device sales billed within the previous two (2) 

weeks irrespective of profit, profitability, cash-flow or collections. At present, our collections average about 72 days from the date of surgery yet we are compelled to pay 

the IRS within 14 days or less. As a result, we are fronting the tax payment nearly 

50 days in advance of actually collecting payment for our implanted devices. Representing two small device companies as I do, I was forced to lay off several employees in order to cover the initial shortfall and when several more key support personnel were lost through the course of normal job advancement, I no longer have 

the investment capital to re-hire those positions. Both Signus Medical and 

LockDown Surgical are privately held businesses with very close-knit groups of employees. One of the hardest tasks I have ever had to perform in my 27 year career 

is to personally layoff employees who have performed their jobs admirably, have 

families and homes of their own, employer paid healthcare, financial obligations and 

commitments based upon the strong wages and benefits we were able to provide. 

Solely and for no other reason but to pay for the Medical Device Tax. To date we 

have experienced a nearly 25% reduction in our staff and I see no near or long term 

opportunity to replace them while this tax is in effect. I have had to implement a 

wage freeze since 2012 as the device tax cut into the profits and ultimately took 

more than 100% of both company’s profits in 2014. 

The payment terms and concept of what is essentially a 2.3% excise tax was, in 

my opinion, ill-conceived. The tax is on gross sales, cannot be passed on to consumers, is non-deductible and does not take into consideration the profitability or 

financial status of the company. In respect to LockDown Surgical, being a startup 

company, we have had to actually finance the device tax in addition to financing 

all of the initial costs associated with setting up and rolling out a new company and 

product. Investors look at the negative impact of the device tax; see how it pushes 

out the point of breakeven by literally years and are extremely hesitant to invest 

capital knowing much of it will be siphoned off to pay for a tax instead of used to 

grow and develop a company and new treatment therapies. No other industry is 

burdened with this government imposed barrier to market. Make no mistake it is 

a very real impediment to investment as was highlighted by a number of surveys 

conducted by LifeScience Alley, the Medical Device Manufacturers Association 

(MDMA) and AdvaMed. While presenting to Minnesota Governor Mark Dayton’s 

Economic Round Table Forum in 2013, I expressed real alarm that the then effective tax rate on Signus Medical due to the device tax was 82%. Governor Dayton’s 

financial advisor addressed my concerns by asking me, ‘‘Why on earth would you 

want to be in any business with such a high tax rate? I would never be in one.’’ 

My response after the incredulous shock of that comment was that I have been in 

the spinal market since 2001. Our company has made commitments to providing the 

best treatment options to surgeons and patient care, providing our employees and 

their families with well-paying jobs and benefits. This company is my investment 

in my own future as well. Prior to 2012, the corporate playing field was essentially 

even and all companies just had to deal with some of the highest corporate tax rates 

in the world. I certainly didn’t chose to self- impose this excise tax on my companies. 

To help put this in perspective, our CFO provided me with some very basic accounting examples of the impact of the tax. I am by no means a tax expert, but as 
57 

CEO I am legally liable for all financial reporting and tax submissions. As such, I 

can certainly navigate through corporate Profit and Loss Statements and can clearly 

assess the impact the Medical Device Tax has on corporate bottom lines. In former 

times, pre device tax, a small company with $8,000,000 in sales and an average 6% 

pre-tax income would show a modest $480,000 pre-tax profit. Using the National average state corporate tax rate of 8.5% or $40,800 combined with the Federal Tax 

Rate of 35% on the adjusted taxable income or $153,720 it would result in a total 

of $194,520 in taxes paid; the Net Income After Tax would be $285,480 which could 

be used to expand the business, service debt or develop new products. That represented a 40.5% effective tax rate. Now, add in the 2.3% Medical Device Tax on 

gross sales of $184,000 and the total taxes paid on the same revenue dollars jumps 

to $378,520 resulting in a Net Income After Tax of $101,480 or in other words a 

78.9% effective tax rate, which is a 94.6% increase in taxes and far less capital to 

reinvest. 

Next, extend this same scenario to a startup or loss company and the effects are 

even more dramatic. A pre-device tax company with the same $8.000,000 in sales 

and a modest ¥2% loss of ¥$160,000 would only be subject to the average 1.5% 

of various State minimum taxes of $2,400. Total Net Loss After Tax would be a 

¥$162,400. With the addition of the Medical Device Tax, this startup or loss company is liable for the same $184,000 as the profitable company; its total tax liability 

is now $186,400 thus resulting in a Net ¥$346,400 loss. This loss, including the 

device tax, has to be financed somehow and pushes out breakeven and profitability. 

There is no return on investment when one is financing a government tax and fewer 

investors are willing to take on this financial burden. Furthermore, the Device Tax 

loss is not deductible and is therefore lost to any kind of recovery forever. The following page contains a simplistic visual example of the deleterious effect of this tax. 

Another perhaps unforeseen but very significant impact of the Medical Device Tax 

is disruption of both of my companies’ cash-flow. As mentioned earlier, payments 

are made within 2 weeks of posting sales but collections are running upwards of 

70 days. These payments strip both firms of ready cash which was previously used 

for day to day operations, payroll and payments to vendors. Since 2012, our monthly 

cash-flow has been negative due to the tax and we have slowly used up all cash 

reserves and creative reductions of inventory to now find ourselves in arrears with 

suppliers. Banks and investors are clearly aware of the effects of this tax and are 

reluctant to extend lines of credit or further loans citing no desire to finance government taxes. As of last year, I shelved two major R&D projects because I could not 

guarantee that cash, which at one time was budgeted and deemed available, would 

in truth actually be available. Instead, we are looking at how we will simply manage 

through the cost of introducing several new products in 2015 which would, under 

pre-device tax conditions and expectations, return Signus Medical to nominal profitability and expand LockDown Surgical products into other areas of the body where 

there is a very real and significant patient need. 

I am very proud to be actively involved in the medical device arena. It has historically been a shining star in the US economy and has supported some of the highest 

paying jobs when compared to all other business sectors and average wages. The 

advancements in treatment and improved patient outcomes is commonly a direct result of smaller and more nimble device companies, such as Signus Medical and 

LockDown Surgical, reinvesting profits and resources into the development of new 

and more cost effective surgical and non-surgical solutions. What many are unaware 

of, however, is the very high physical cost of supporting each and every case performed on a daily basis across this huge nation of ours. Using spinal surgery as an 

example, Signus Medical must supply the hospital and surgeon sufficient implants 

and redundant backup inventory to address every potential size and possible complication one might face in surgery. Literally dozens of implants, like shoes in a 

shoe store, must be provided in order to actually implant and sell only one device 

and the cost of this inventory is born by the company. Hospitals no longer purchase 

or stock specialty instruments and implants so they must be shipped in and tracked 

for every single case. The FDA and HIPAA compliance burden for the location of 

each and every implant, their corresponding lot numbers, all associated instrument 

sets and ultimately which implants are used is staggering for a company of any size. 

The costs associated with increasing even one surgical customer are so significant 

that it may take many months to upwards of a year just to recoup the investment 

of the supporting implants and instrumentation. We at Signus have become a model 

of ‘‘Just In Time’’ shipping and inventory control in order to work around the much 

needed expansion capital which has been used instead to pay the device tax. Efficiency alone has its limits and I have been faced with the unenviable choice of slowing or turning down business to ensure patient safety. Patients, their safety and 
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surgical outcomes are a priority shared by all medical device companies. This is 

something I will not and cannot compromise on. 

With the inclusion of the Medical Device Tax into the 2014 operational budgets, 

both Signus Medical and LockDown Surgical posted effective tax rates in excess of 

110%. This is not sustainable for any business, large or small. I fear once again I 

will be facing employee downsizing and further elimination of development projects 

and thus new clinical therapies to patients in the United States in order to just remain in business and pay the device tax. Even as the business improves, so do the 

pre-payment of device taxes and it is extremely difficult to actually ever catch up. 

Money required for reinvesting in expanded infrastructure including employees, new 

inventory and promising R&D projects is no longer available. Again, these problems 

are not unique to my two companies and are clearly felt across the entire medical 

device industry. I do believe however that smaller and startup companies are more 

severely impacted by the device tax given their inherent size and inability to spread 

or defer to cost over non-device products being sold by larger and more vertically 

integrated companies. 

In conclusion I would like to thank Chairman Coats, Vice-Chairman Brady, Ranking Member Maloney, Senator Klobuchar and Representative Paulsen for this opportunity to testify before this committee. I sincerely hope that the information and 

personal experiences I have shared help to enlighten you as to the true negative 

impact the ACA’s Medical Device Tax has had on the Medical Device Industry as 

a whole and smaller and startup companies like Signus Medical LLC, and 

LockDown Surgical Inc in particular. Growth, innovation and new job creation come 

from small medical device firms. The Medical Device Tax threatens to kill off or at 

the very least considerably curtail this segment of our industry. 
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1Small Business Administration, Office of Advocacy, Frequently Asked Questions, March 

2014. 2 Haltiwanger, John, Ron S. Jarmin, and Javier Miranda, ‘‘Who Creates Jobs? Small vs. Large 

vs. Young,’’ The Review of Economics and Statistics, May 2013. 3 Crain, W. Mark & Crain, Nicole (2010). The Impact of Regulatory Costs on Small Firms. 

Washington, DC: U.S. Small Business Administration, Office of Advocacy. 4Dennis, William J., Tax Complexity and the IRS, Volume 6, Issue 6, NFIB Research Foundation, 2006. 

QUESTIONS FOR THE RECORD SUBMITTED BY SENATOR MIKE LEE AND RESPONSES

FROM HOLLY WADE, DIRECTOR OF RESEARCH AND POLICY ANALYSIS, NATIONAL

FEDERATION OF INDEPENDENT BUSINESS, WASHINGTON, DC 

What is the empirical evidence on how small, young, and growing businesses contribute to employment and to the economy generally? 

Overall, the small business economy (those firm under 500 employees) contribute 

to almost half of private,non-farm,GDP,about half of private sector employment and 

63 percent of net new private-sector jobs.1

However, a growing amount of attention on job creation has focused on the type 

of small business that most contributes to net new jobs per year. And important research has found that while small businesses are the engine of job creation, it is 

specifically new and young businesses that drive the process.2 The latest research 

shows that while new firms only account for roughly percent of all jobs, these startups generate about 20 percent of gross job creation and the vast majority of net new 

jobs. The highly dynamic nature of new, young firms is an essential component to 

the economy as a whole, as employment in mature small and large firms tends to 

be more constant. However, that is not to discount the contribution of more mature 

firms. Most workers are employed in mature firms, those older than 5 years. 

But one area of significant concern is the decline of net new firms and associated 

job creation. Census data shows that new firms accounted for about 16 percent of 

total firms in the late 1970s. However, that share had declined to 8 percent in 2011. 

And jobs created by those new firms are also on the decline. Therefore, a supportive 

pro-business environment is crucial in both attracting start-ups and maintaining a 

supportive and competitive environment for mature firm to be profitable. 

How does the tax burden and tax complexity adversely and disproportionately impact small, young, and growing businesses? 

NFIB’s Small Business Problems and Priorities survey ranks the severity of 75 

potential business issues. The survey is a random sample of NFIB members. While 

the headline result are of all respondents, we also looked at the severity of issues 

by the firm’s age. ‘‘Federal Taxes on Business Income’’ ranked 5th for those businesses open less than 3 years and was ranked 6th for the overall population. Twenty-nine percent of this group found the problem a ‘‘critical’’ issue in operating their 

business. And ‘‘State Taxes on Business Income’’ while ranking lOth for the overall 

population, ranked 4th for the youngest category with 26 percent finding it a critical 

issue. 

Other studies have found that regulatory cost burdens also disproportionately 

harm small firms and tax compliance certainly falls into this category.3 Tax compliance costs are three times higher per employee for small firms than their larger 

counterparts, or about $1,600 per employee compared to just over $500, respectively. 

While most small employers hire an accountant for tax purposes,4 the associated 

costs and paperwork burden are a challenge for small business owners. 

Æ