```

[Joint House and Senate Hearing, 114 Congress]
[From the U.S. Government Publishing Office]

                                                         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

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                        JOINT ECONOMIC COMMITTEE

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

SENATE                               HOUSE OF REPRESENTATIVES
Daniel Coats, Indiana, Chairman      Kevin Brady, Texas, Vice Chairman
Mike Lee, Utah                       Justin Amash, Michigan
Tom Cotton, Arkansas                 Erik Paulsen, Minnesota
Ben Sasse, Nebraska                  Richard L. Hanna, New York
Ted Cruz, Texas                      David Schweikert, Arizona
Bill Cassidy, M.D., Louisiana        Glenn Grothman, Wisconsin
Amy Klobuchar, Minnesota             Carolyn B. Maloney, New York, 
Robert P. Casey, Jr., Pennsylvania       Ranking
Martin Heinrich, New Mexico          John K. Delaney, Maryland
Gary C. Peters, Michigan             Alma S. Adams, Ph.D., North 
                                         Carolina
                                     Donald S. Beyer, Jr., Virginia

                  Viraj M. Mirani, Executive Director
                 Harry Gural, Democratic Staff Director
                            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

   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 
employee. 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.
    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.
    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 
currently 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% pass-through, 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 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 
pass-through 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.
    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 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 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 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. Eighty-eight 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.
    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 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, 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.
    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?
    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 pass-throughs are small businesses. There are many very 
large pass-through 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 pass-throughs? What steps would you recommend Dr. 
Sullivan since you have written about and studied this?
    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. 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.
    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 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 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 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 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.
    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 different 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.
    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 pass-through income it shows up in the shareholder's 
income taxes and 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 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.
    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.
    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 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.
    (Whereupon the meeting adjourned at 4:06 p.m.)
                       SUBMISSIONS FOR THE RECORD

            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.
      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.
    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).
    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.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 

        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 
multi-generational 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 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 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.
---------------------------------------------------------------------------
    \1\ Dunkelberg, William C., and Holly Wade, NFIB Small Business 
Economic Trends, NFIB Research Foundation, series.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \2\ Wade, Holly, Small Business Problems and Priorities, NFIB 
Research Foundation, 2012.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \3\ Dennis, William J., Tax Complexity and the IRS, NFIB Research 
Foundation, Volume 6, Issue 6, 2006.
    \4\ https://www.sba.gov/sites/default/files/advocacy/rs343.pdf
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \5\ Dennis, William J., Small Business's Introduction to the 
Affordable Care Act Part II, NFIB Research Foundation, December 2014.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \6\ http://www.irs.gov/pub/irs-pdf/i109495c.pdf
---------------------------------------------------------------------------
    Small-business owners have also encountered repeated delays and 
confusion over the ACA's small-business health insurance tax credit and 
financial reimbursement 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.
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    \7\ http://www.irs.gov/pub/irs-pdf/i8941.pdf
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    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 
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 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 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 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.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 

 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\
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    \1\ Small Business Administration, Office of Advocacy, Frequently 
Asked Questions, March 2014.
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    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 roughlypercent of all jobs, these 
start-ups 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.
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    \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.
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    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.
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    \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.
    \4\ Dennis, William J., Tax Complexity and the IRS, Volume 6, Issue 
6, NFIB Research Foundation, 2006.
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