`[Joint House and Senate Hearing, 115 Congress]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 115-124
 
    THE STARTUP SLUMP: CAN TAX REFORM HELP REVIVE ENTREPRENEURSHIP?

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

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 3, 2017

                               __________

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                        JOINT ECONOMIC COMMITTEE

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

HOUSE OF REPRESENTATIVES             SENATE
Patrick J. Tiberi, Ohio, Chairman    Mike Lee, Utah, Vice Chairman
Erik Paulsen, Minnesota              Tom Cotton, Arkansas
David Schweikert, Arizona            Ben Sasse, Nebraska
Barbara Comstock, Virginia           Rob Portman, Ohio
Darin LaHood, Illinois               Ted Cruz, Texas
Francis Rooney, Florida              Bill Cassidy, M.D., Louisiana
Carolyn B. Maloney, New York         Martin Heinrich, New Mexico, 
John Delaney, Maryland                   Ranking
Alma S. Adams, Ph.D., North          Amy Klobuchar, Minnesota
    Carolina                         Gary C. Peters, Michigan
Donald S. Beyer, Jr., Virginia       Margaret Wood Hassan, New 
                                         Hampshire

                 Whitney K. Daffner, Executive Director
             Kimberly S. Corbin, Democratic Staff Director
             
             
             
                            C O N T E N T S

                              ----------                              

                     Opening Statements of Members

Hon. Patrick J. Tiberi, Chairman, a U.S. Representative from Ohio     1
Hon. Martin Heinrich, Ranking Member, a U.S. Senator from New 
  Mexico.........................................................     2

                               Witnesses

Statement of John R. Dearie, Founder and President, Center for 
  American Entrepreneurship......................................     5
Statement of Scott A. Hodge, President, Tax Foundation...........     6
Statement of Falon Donohue, Chief Executive Officer, VentureOhio.     8
Statement of John Arensmeyer, CEO and Founder, Small Business 
  Majority.......................................................     9

                       Submissions for the Record

Prepared statement of Hon. Patrick J. Tiberi, Chairman, a U.S. 
  Representative from Ohio.......................................    32
Prepared statement of Hon. Martin Heinrich, Ranking Member, a 
  U.S. Senator from New Mexico...................................    33
Prepared statement of John R. Dearie.............................    35
Prepared statement of Scott A. Hodge.............................    51
Prepared statement of Falon Donohue..............................    60
Prepared statement of John Arensmeyer............................    66
Questions for the Record Submitted by Senator Mike Lee and 
  Responses from Mr. John R. Dearie..............................    73
Questions for the Record Submitted by Senator Amy Klobuchar and 
  Responses from Mr. John R. Dearie..............................    73
Questions for the Record Submitted by Senator Mike Lee and 
  Responses from Mr. Scott A. Hodge..............................    75
Questions for the Record Submitted by Representative Barbara 
  Comstock and Responses from Mr. Scott A. Hodge.................    77
Questions for the Record Submitted by Senator Amy Klobuchar and 
  Responses from Ms. Falon Donohue...............................    77
Questions for the Record Submitted by Senator Amy Klobuchar and 
  Answers from Mr. John Arensmeyer...............................    78
Questions for the Record Submitted by Senator Margaret Wood 
  Hassan and Responses from Mr. John Arensmeyer..................    81


    THE STARTUP SLUMP: CAN TAX REFORM HELP REVIVE ENTREPRENEURSHIP?

                              ----------                              


                        TUESDAY, OCTOBER 3, 2017

                    United States Congress,
                          Joint Economic Committee,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in Room 
1100, Longworth House Office Building, Honorable Pat Tiberi, 
Chairman, presiding.
    Representatives present: Tiberi, Paulsen, Rooney, Maloney, 
and Beyer.
    Senators present: Lee and Heinrich.
    Staff present: Breann Almos, Ted Boll, Whitney Daffner, 
Barry Dexter, Connie Foster, Colleen Healy, Karin Hope, Matt 
Kaido, AJ McKeown, Kim Corbin, Allie Neill, and Kwabena Nsiah.

 OPENING STATEMENT OF HON. PATRICK J. TIBERI, CHAIRMAN, A U.S. 
                    REPRESENTATIVE FROM OHIO

    Chairman Tiberi. I call the hearing to order.
    The Joint Economic Committee is holding this hearing 
because entrepreneurship matters. It matters because startup 
businesses drive the innovation that fuels economic growth and 
opportunity, and very importantly, entrepreneurs matter because 
nearly all the gains in job creation come from businesses less 
than a year old, true startups. The bad news is that the rate 
of startups has been declining over the past few decades. That 
decline became an outright collapse during this recovery when, 
for 3 straight years, as the chart shows, companies closed 
their doors more rapidly than they were opened.
    During similar periods in recent recoveries, the greatest 
gains in the number of American companies occurred during the 
Reagan administration, perhaps not coincidentally, when tax 
rates were falling. In contrast, this recovery saw only about a 
fifth of the business growth. That has real consequences for 
middle-class families.
    According to analysis by the Economic Innovation Group, 
each startup creates an average of six jobs. Plentiful startups 
and jobs create a cycle in which potential entrepreneurs are 
more willing to take a risk on a new venture. By the same 
token, weak levels of entrepreneurship and job creation create 
a downward spiral for both.
    Another alarming trend is that the number of places where 
startup growth is actually happening is shrinking, a topic we 
investigated in a hearing earlier this year. From 2010 to 2014, 
half of all businesses' growth occurred in just five 
metropolitan areas. Blighted areas across the country are 
desperate for new businesses and the jobs and opportunities 
that come with them. That is why I introduced the bipartisan 
Investing in Opportunity Act to attract capital and investment 
in distressed communities, and I hope that it becomes part of 
tax reform.
    Tax reform is a key tool in our policy arsenal that could 
remove artificial barriers to starting a business and foster an 
environment where entrepreneurship can thrive. Truth be told, 
entrepreneurs probably don't think much about taxes when they 
launch a startup, and they shouldn't have to. But before long, 
they are hit with mind-numbing complexity that drains precious 
resources from their businesses. They may spend every dime of 
profit buying expensive equipment to scale up production, but 
the tax code may not allow them to immediately deduct the cost. 
That means they will owe taxes on profits they no longer have.
    If they do manage to become profitable, startups that are 
corporate taxpayers will face the highest tax rate in the 
developed world. And successful startups that pay individual 
taxes because they are set up as pass-through businesses will 
face even higher individual rates that have increased 
dramatically over the years. The tax code also punishes success 
by forcing family business owners to do costly estate planning 
so the death tax doesn't steal their ability to pass the 
business to the next generation of entrepreneurs.
    In this increasingly global economy, entrepreneurs can 
start or move a business anywhere in the world they choose. 
Yet, our tax system is out of step with our competitors. Tax 
reform done right will grow jobs and grow paychecks, helping 
restore the virtuous circle that gives entrepreneurs the 
confidence to take a risk and reach high for the American 
dream.
    Tax reform done right will provide them more capital, the 
lifeblood of entrepreneurs, and it will make America the best 
place in the world to invest and to start a business. Our 
future prosperity depends on it.
    I look forward to hearing the thoughts of our excellent 
panel of witnesses today, and I will introduce them in a 
moment. But I would first like to recognize our ranking member, 
Senator Heinrich, for his opening statement. Welcome.
    [The prepared statement of Chairman Tiberi appears in the 
Submissions for the Record on page 32.]

 OPENING STATEMENT OF HON. MARTIN HEINRICH, RANKING MEMBER, A 
                  U.S. SENATOR FROM NEW MEXICO

    Senator Heinrich. Thank you, Chairman Tiberi. And thank you 
to all of our witnesses for being here today.
    The tax reform debate is underway, and I am happy that our 
committee is taking this opportunity to examine the Nation's 
tax policy. I agree that our tax code needs to be simpler for 
families and for small businesses.
    Where we can promote policies to make sure that the Tax 
Code is working for working Americans, growing the economy, 
creating good-paying jobs, and supporting families and 
communities across the country, I will be among the first to 
support it. Unfortunately, the Republican's starting point 
seems heavily focused on giving more tax giveaways to large 
multi-national corporations and the wealthiest among us rather 
than on small businesses, rural entrepreneurs, and those 
communities still struggling to recover following the 
recession. There is time to shift that focus, and hearings like 
this one can help.
    In New Mexico, small businesses make up more than 95 
percent of all businesses and employ more than 55 percent of 
private-sector workers. They are the heart and soul of our 
State's economy. They are companies like Risk Sense in 
Albuquerque that help firms assess and manage their 
cybersecurity risk.
    Founded as a small business technology transfer from the 
New Mexico Institute of Mining and Technology, the company now 
has 100 employees, and earnings growing 50 percent annually. It 
is a great success story, and we certainly need more of them.
    At the national level, startup activity has picked up in 
the past 3 years, but the share of startups has declined by 
almost half since the 1970s. New firms are increasingly 
concentrated in a few big cities and states. One report found 
that just 20 counties were responsible for half of the net 
increase in new businesses from 2010 to 2014. And the share of 
startups created by veterans and in rural areas are both down 
in the past two decades.
    There are a number of actions that we should take to boost 
startup activity, few of which have anything to do with the tax 
code. It is vital that we strengthen the basic economic 
foundation, more jobs, higher wages, and improved access to 
education and healthcare. And we must lay the groundwork for 
startup activities in rural areas. That means increasing access 
to capital, speeding the deployment of broadband in rural 
communities, and other steps, to ensure that rural and tribal 
areas are able to compete when it comes to startup activity.
    We also should be clear about what will not help small 
firms. Big tax cuts for large, established companies do nothing 
for startups, which have little to no taxable income in those 
critical early years while working to get their businesses off 
the ground. And it does little for small businesses in need of 
capital to grow, capital that has been shrinking and drying up 
since the recession. As we have seen time and again, tax 
giveaways for large corporations and our highest earners do 
nothing to help small businesses, rural communities, and 
working people, get ahead, and it leaves fewer and fewer 
dollars to invest in roads, schools, entrepreneurs, and working 
families, compounding the challenges facing small cities and 
towns across our country.
    The primary goal of reform should be to use the levers we 
have to level the playing field. One, because it is the right 
thing to do. And, two, because every American should have the 
opportunity to turn their dream into a reality. A zip code 
should not determine a child's success or her chances of 
starting a business.
    The entrepreneurial spirit is alive and well from Las 
Cruces, New Mexico, to Boston, Massachusetts. It is our job to 
make sure we give every American the same chance to succeed, no 
matter their background. Two things we could do right now to 
boost our economy and put more money into the pockets of 
working families are expanding the earned-income tax credit and 
strengthening the child tax credit. Our focus needs to be on 
creating better opportunities for the folks on Main Street, not 
delivering more tax breaks for investment bankers on Wall 
Street.
    We have an opportunity this Congress to work together to 
craft a bipartisan tax reform package that promotes 
entrepreneurship, simplifies our tax code, and puts more money 
in the pockets of working people. If we do that, we will give 
Main Street the boost it desperately needs. I am certainly 
ready to get to work, and I look forward very much to this 
panel's testimony.
    [The prepared statement of Senator Heinrich appears in the 
Submissions for the Record on page 33.]
    Chairman Tiberi. Thank you. Now on to our panel of 
witnesses.
    John Dearie is founder and president of the Center for 
American Entrepreneurship, a nonpartisan research policy 
advocacy organization focused on the importance of 
entrepreneurs and startups, innovation, and the growth of job 
creation. He is the former acting CEO of the Financial Services 
Forum, spent 9 years at the Federal Reserve Bank in New York, 
and is the coauthor of ``Where the Jobs Are: Entrepreneurship 
and the Soul of the American Economy.''
    Welcome.
    Scott Hodge is the president of the Tax Foundation in 
Washington, D.C., and is recognized as one of Washington's 
leading experts on tax policy. During his tenure, the Tax 
Foundation has become one of the most influential organizations 
on tax policy in Washington and in State capitals. Among other 
things, he has authored over 100 studies on tax policy and 
government spending. Scott began his career in Chicago where he 
helped found the Heartland Institute. Before joining the Tax 
Foundation, Scott was Director of Policy and Budget Policy at 
Citizens for a Sound Economy. He also spent 10 years at the 
Heritage Foundation analyzing budget and tax policy.
    Welcome back, Mr. Hodge.
    Ms. Falon Donohue is the CEO of VentureOhio, a for-impact 
organization created to promote a collaborative statewide 
ecosystem that supports entrepreneurs, including by increasing 
access to angel and venture capital for Ohio startups. Prior to 
her tenure at VentureOhio, and while serving her country in the 
Ohio Air National Guard, she began her career in technology 
solution sales and business development.
    Thank you for your service to our country and for your 
service to entrepreneurs. We look forward to hearing from you.
    And last but not least, John Arensmeyer is founder and CEO 
of Small Business Majority, an organization focused on 
empowering America's entrepreneurs to build and thrive in an 
inclusive economy. In the past few years, he has spearheaded 
the growth of Small Business Majority's entrepreneurship 
program, providing resources to our Nation's 28 million small 
businesses. He was also the founder and CEO of ACI Interactive, 
an award-winning international e-commerce company.
    Welcome, and we look forward to your testimony.
    Chairman Tiberi. With that, Mr. Dearie, you can begin, and 
you have 5 minutes. We look forward to your testimony.

STATEMENT OF JOHN R. DEARIE, FOUNDER AND PRESIDENT, CENTER FOR 
                   AMERICAN ENTREPRENEURSHIP

    Mr. Dearie. Chairman Tiberi, Ranking Member Heinrich, and 
members of the committee, thank you very much for the 
invitation to testify today. Your focus on tax reform and 
entrepreneurship hits the bulls-eye of what, in my view, is the 
Nation's foremost domestic policy challenge, and that is 
accelerating economic growth. As members of the committee are 
no doubt aware, the U.S. economy has been mired in a rut of 
subpar performance for more than a decade. After expanding at 
an average annual rate of about 3.4 percent for most of the 
post World War II era, the economy has not grown at 3 percent 
or better since 2005--that is for almost 13 years now--and has 
averaged only 2.2 percent since the end of the Great Recession 
more than 8 years ago.
    Weak economic growth means less opportunity, diminished job 
creation, lower wages, increased economic anxiety, and greater 
dependence on government assistance. To meaningfully address 
these challenges and the anger, cynicism, and populism they 
inspire, we must accelerate economic growth back to the 
historical average, and on a sustained basis.
    Economic growth comes principally from gains in 
productivity driven by innovation, which comes 
disproportionately from new businesses or startups. Nearly all 
of the major innovations that have defined the economic 
landscape over the past 150 years--the railroad, the telegraph 
and telephone, the automobile, electrification, the airplane, 
air conditioning and refrigeration, the computer, countless 
applications of the internet, and wireless communications--all 
came from entrepreneurs.
    Moreover, recent research has shown that startups also 
account for virtually all net new job creation.
    And, yet, as you pointed out in your opening statement, Mr. 
Chairman, American entrepreneurship is in trouble. From 2000 to 
2006, the economy produced an average 510,000 new firms each 
year. Since 2009, however, the number of new businesses 
launched annually has dropped to about 400,000, meaning that 
the United States currently faces a startup deficit of almost 
100,000 new firms each year.
    Even more alarming, as economists Bob Litan and Ian 
Hathaway have shown, the number of new firms as a percentage of 
all firms has fallen near a 30-year low. And this decline is 
occurring in all 50 States, in all but a handful of 360 cities 
they examined, and across a broad range of industry sectors, 
including high technology.
    Given the critical role that startups play as the principal 
source of innovation, gains in productivity, economic growth, 
and job creation, such circumstances amount to nothing short of 
a national emergency.
    Addressing that emergency by reversing the three-decade 
decline in American entrepreneurship requires changes in public 
policy, which brings us to tax reform. The current Tax Code 
presents a number of challenges for startups, challenges that 
can amount to the difference between survival and failure. 
Specifically, the current code penalizes businesses with 
substantial early years' losses, discourages investors from 
backing new businesses, and impedes successful new companies 
from expanding.
    The broad objectives of the unified framework for tax 
reform released by the Administration and the tax drafting 
committees are very promising. Simplifying the Code, broadening 
the base by eliminating loopholes, lowering business tax rates, 
allowing full expensing of business investment, and moving to a 
territorial system are the keys of a modern and competitive Tax 
Code.
    But, as the unified framework itself states, it is only a 
template for the tax drafting committees. The essence of tax 
reform is the details, and we eagerly await specifics.
    Our hope is that reform will address a number of tax-
related obstacles to entrepreneurship, including: allowing 
startups to defer their income tax liability in order to 
conserve critical cash flow in the early years; allowing 
startups to carry forward net operating losses and R&D tax 
credits; expanding the application of R&D tax credits to 
startups' payroll taxes; and simplifying and expanding the 
favorable tax treatment of investment in new startups.
    So, Mr. Chairman, economic growth comes from gains in 
productivity, driven by innovation--which comes 
disproportionately from startups. Revitalizing American 
entrepreneurship, therefore, is the essential pathway to faster 
economic growth and the opportunity, jobs, and wage growth the 
American people need and deserve. Tax reform that includes a 
special focus on the unique tax-related vulnerabilities of 
startups is a critical part of America's pro-growth agenda.
    Thank you, again, for the invitation to participate.
    [The prepared statement of Mr. Dearie appears in the 
Submissions for the Record on page 35.]
    Chairman Tiberi. Thank you.
    Mr. Hodge, you are recognized for 5 minutes.

     STATEMENT OF SCOTT A. HODGE, PRESIDENT, TAX FOUNDATION

    Mr. Hodge. Well, thank you, Mr. Chairman, and Senator 
Heinrich, members of the committee. I appreciate the 
opportunity to talk to you today about how to make our tax 
system more friendly to entrepreneurship. The Tax Foundation's 
mission is to work toward a Tax Code that does not stand in the 
way of success. So we applaud this effort to try to remove the 
tax barriers to entrepreneurship. And despite our byzantine Tax 
Code, America is a land of entrepreneurs. The dynamism of our 
entrepreneurs, the willingness to try and possibly fail, is 
what separates the United States from every other nation on 
Earth. And, yet, through all the success stories that we hear, 
there are dozens of other firms that never got past the 
numerous speed bumps that the Tax Code places in front of their 
ambition and eventual success.
    Let's put ourselves in the shoes of Maria, a young 
entrepreneur who has invented a smart scooter, and look at the 
tax issues that she faces along the way. The first thing that 
she has to consider is what business form to make her business. 
She has a choice between a traditional C corporation and a 
pass-through firm. Both have advantages. Both have 
disadvantages.
    If Maria chooses a C corporation form, her company faces 
two layers of tax, one at the entity level, and a second at the 
shareholder level. If her company becomes successful enough, it 
will face one of the highest corporate tax rates in the 
industrialized world at 35 percent. If we include the 
shareholder taxes, the rate is over 50 percent. On the other 
hand, Maria could choose one of the four different pass-through 
business forms that face only one layer of tax.
    But a successful pass-through business owner can face 
income tax rates as high as 43\1/2\ percent, which includes a 
top individual rate of 39.6 percent. If her company becomes 
really successful, her family business could end up facing the 
estate tax, which could take as much as 40 percent of 
everything that she built over a lifetime.
    The treatment of capital investments puts another speed 
bump in her way. When Maria's company is young and growing, she 
can expense her capital investments under Section 179. After 
her company is no longer small, it must comply with complex 
depreciation schedules that not only raise the tax costs of 
every capital investment she makes, it adds about $23 billion 
to the compliance costs of businesses large and small.
    There are other all kinds of arcane aspects of the Code 
that inhibit entrepreneurship. But let's take a minute to see 
what the unified framework proposes that could help 
entrepreneurs, starting with tax rates. Of course, the most 
dramatic of these changes is to lower corporate tax rates and 
pass-through rates that are proposed in the framework. It 
proposes a 20-percent corporate tax rate for C corporations and 
a top rate of 25 percent for pass-through business income.
    The 20 percent Federal corporate tax rate would instantly 
lower the U.S. rate to one of the lowest in the industrialized 
world, making the U.S. one of the most attractive places to do 
business on Earth.
    And the lower proposed tax rate on pass-through businesses 
offers some interesting issues. On the one hand, the lower rate 
will certainly make entrepreneurship more attractive. On the 
other hand, the large gap between personal wage rate and pass-
through rate could encourage some business owners to reclassify 
their income as business income, so the committee and Congress 
needs to look at this very carefully and write strict rules to 
prevent that sort of behavior. Don't let the rulemaking--or 
leave the rulemaking up to the IRS.
    On expensing, the framework's 5-year, temporary bonus 
expensing provision is certainly a step in the right direction, 
but it falls a little short of what entrepreneurs and the 
economy really need. Our economic modeling shows that temporary 
provisions don't deliver the economic growth of permanent 
provisions, not surprisingly, because they encourage capital 
investment today at the expense of capital investment tomorrow. 
The Tax Foundation's models suggests that moving toward full 
expensing for all businesses would encourage more 
entrepreneurial investment and deliver permanent economic 
growth.
    The estate tax, the framework calls for eliminating the 
estate tax. Tax Foundation economists estimate that the 
economic benefits of repealing the estate tax will exceed any 
revenue losses that repeal would bring the Treasury.
    So, in conclusion, Mr. Chairman, there is a tendency among 
lawmakers to want to do something to help entrepreneurs like 
Maria. You should avoid the urge to subsidize them or give them 
special treatment. Instead, you should aim to get the Tax Code 
out of the way of entrepreneurs by making it more simple, less 
burdensome, and eliminating all the anti-growth biases that are 
throughout the Code.
    So thank you very much for the opportunity to talk to you 
today about this important issue, and I look forward to any 
questions that you may have.
    [The prepared statement of Mr. Hodge appears in the 
Submissions for the Record on page 51.]
    Chairman Tiberi. Thank you.
    Ms. Donohue, you are recognized for 5 minutes.

     STATEMENT OF FALON DONOHUE, CHIEF EXECUTIVE OFFICER, 
                          VENTUREOHIO

    Ms. Donohue. Thank you, very much, Chairman Tiberi, Ranking 
Member Heinrich, and members of the Joint Economic Committee. 
Thank you for the invitation to provide testimony for this 
important hearing. And thank you, Chairman, for the kind 
introduction.
    I am speaking to you today on behalf of VentureOhio's 
membership. We are the entrepreneurs, innovators, and 
investors, who are creating high-paying jobs in the midwest, 
and changing the world we live in. And the topic of revising 
entrepreneurship through tax reform is very important to the 
hearts and minds of the members of VentureOhio. But I am also 
speaking to you today on behalf of a larger group of 
Midwesterners who are most affected by the growth and 
development of our new tech-based economy.
    These are my fellow veterans seeking to transfer the 
technical skills acquired while serving their country into 
high-paying jobs in their hometown. These are my young friends 
who want to build applications that will change the world at 
cool new tech companies, but don't want to leave their families 
for New York or California.
    And, finally, these are the good people of Mansfield, Ohio, 
my hometown, and small towns across the midwest, who are 
seeking access to new technical jobs as they watch their 
current jobs become obsolete due to the rapidly changing pace 
of technology.
    The midwest is in the midst of a renaissance. Abandoned 
warehouses in long-forgotten parts of town, in forgotten parts 
of the country, are being repurposed as tech incubators. 
Startup company successes are dominating the headlines of local 
newspapers, while the community surrounds them and cheers for 
their success. Ohio's best and brightest are starting to remain 
in the State and work at high-tech companies in lieu of leaving 
for the coasts.
    These startup founders are choosing this path to create 
some of the most innovative and disruptive companies of our 
generation. In the coming decade, startups will create whole 
new industries that will impact millions of jobs across our 
country. From autonomous vehicles, to artificial intelligence, 
the impact of these companies will be swift and complete.
    In Ohio, we have seen massive growth in our startup 
ecosystem and venture activities, reaching its highest point in 
history in 2016. From our latest research released in 
VentureOhio's 2017 report, venture capital investments 
increased 46 percent over the past 2 years. And in 2016 alone, 
$470 million were deployed in the 210 Ohio startups. In 
addition, $631 million were raised by institutional investors 
to be deployed into Ohio companies in the near future.
    We have also seen the results of innovation and 
entrepreneurship through the acquisition of Ohio companies like 
CoverMyMeds, which was acquired earlier this year for over $1 
billion. As the largest tech acquisition in Ohio's history, the 
sale was a major milestone for the Ohio entrepreneurial 
community, and is setting the tone for what is to come.
    Success stories like CoverMyMeds in Columbus or Assurex 
Health in Mason, which was acquired in 2016, and many others 
each year, demonstrate that it is an exciting time to create a 
startup company in Ohio.
    Startups are creating millions of new jobs, fueling 
research and development in the technologies of the future, and 
continuing America's innovation dominance. Without them, we 
might have to imagine a world without social networks, 
streaming TV, or the on-demand delivery of nearly everything. 
But we might have to imagine a world without lifesaving drugs, 
or the ability to more easily take drunk drivers off our roads.
    I speak with investors and entrepreneurs every day who are 
taking massive risks to create jobs and grow our economy. These 
people are doing everything that they can to revitalize 
communities, create high-paying jobs in their hometowns, and 
they need our support. They need support from their 
communities, and they need support from their leaders, from 
you. They need a simplified Tax Code and access to capital.
    We believe the companies being created in Ohio today will 
be the next crop of the Apples, Googles, Airbnbs, and 
Facebooks. They will create millions of jobs and change a 
generation of families. This is the most exciting time Ohio 
entrepreneurship has seen in decades due to the hard work of 
the innovative entrepreneurs in our State, and I am pleased to 
be with you today to speak about the ways that the Federal 
Government and a simplified Tax Code can help encourage future 
startups.
    Thank you. I look forward to answering your questions.
    [The prepared statement of Mr. Donohue appears in the 
Submissions for the Record on page 60.]
    Chairman Tiberi. Thank you.
    There is under a minute left. That is pretty impressive.
    Senator Heinrich. That is a record.
    Chairman Tiberi. I think it is a record. Very good.
    Last, but not least, Mr. Arensmeyer, you are recognized for 
5 minutes.

 STATEMENT OF JOHN ARENSMEYER, CEO AND FOUNDER, SMALL BUSINESS 
                            MAJORITY

    Mr. Arensmeyer. Chairman Tiberi, Ranking Member Heinrich, 
Vice Chair Lee, and members of the committee, thank you for 
inviting me to speak with you today about policies that can 
help promote entrepreneurship, and to offer testimony about the 
major issues facing America's small businesses.
    I spent many years as a small businesses owner. I was the 
founder and CEO of ACI Interactive, an award-winning 
interactive communications company which I ran for 13 years. 
Then, 12 years ago I founded Small Business Majority to empower 
America's entrepreneurs to build a thriving and inclusive 
economy. We have a network of more than 55,000 small business 
owners across the country with offices in Washington, D.C. and 
eight States. We interact daily with small business owners to 
conduct scientific research on a wide variety of topics.
    In order to ensure our Nation's job creators can thrive and 
help grow our economy, it is crucial that Congress focus on 
policy solutions that are targeted to help our Nation's 
entrepreneurs succeed. Most particularly, the need for access 
to responsible credit and capital, affordable and quality 
health coverage, and tax reform that directly benefits Main 
Street small businesses. Regarding tax reform, we need a tax 
system that benefits small business owners who are focused on 
growing their enterprises, satisfying their customers, and 
making payroll. Right now, according to our polling, 90 percent 
of small business owners feel that our tax system primarily 
benefits wealthy corporate interests at their expense. We don't 
want special treatment. We just want a level playing field. 
That is why we are concerned by the current proposal for tax 
reform. While some are touting the plan as a boon for small 
businesses, the reality is it will not actually benefit most 
Main Street businesses while adding at least $2.4 trillion to 
our budget deficit over the next 10 years.
    Specifically, some claim that the current proposal to cap 
the tax rate for pass-through entities at 25 percent would be a 
boon for America's entrepreneurs. In fact, this would impact 
only a handful of small firms. More than 87 percent of pass-
through entities already pay a marginal tax of 25 percent or 
less. Moreover, if individual tax brackets of 12, 25, and 35 
percent are passed, as is proposed, the pass-through entities 
that would benefit from the pass-through cap rate would include 
only the 1.8 percent earning $425,000 or more.
    And last but not least, a tax code with a large gap between 
top individual rates and top pass-through rates can potentially 
encourage wealthy individuals to game the system by simply 
declaring themselves pass-through entities. I think we have 
seen this in the experiment that Kansas ran.
    If Congress wants to offer a responsible tax cut for most 
Main Street small businesses and offset that cut with a 
reduction in existing loopholes, allowing all businesses to 
deduct a modest amount of their profits from the bottom up 
would have a much greater impact. As for corporate taxes, 
cutting the top rate would certainly help some of the minority 
of small businesses that are organized as C corporations, but 
doing so without getting rid of corporate tax loopholes would 
greatly increase the deficit. Economists from the Tax Policy 
Center estimate that reducing the corporate rate to less than 
26 percent would be impossible to offset with just a reduction 
of loopholes. And the reduction as proposed to 20 percent would 
reduce Federal tax revenue by $1.6 trillion over 10 years. We 
have a set of specific tax proposals that are included in my 
written testimony.
    A more critical issue for entrepreneurs is access to 
capital. Unfortunately, too many businesses, especially women- 
and minority-owned firms, and entrepreneurs in distressed and 
rural communities, are struggling to gain the capital they need 
to launch or grow their businesses. According to our scientific 
opinion polling, 90 percent of small business owners agree that 
access to capital is a problem. Statistics on lending to women 
and minority business owners are included in my written 
testimony, as are the specific reasons that small business 
borrowing has gotten so much more difficult since the 
recession.
    Small business owners need reliable and affordable 
healthcare so they can invest their time and resources into 
growing and expanding their businesses. Prior to the 
implementation of the ACA, entrepreneurs and their employees 
comprised a disproportionate share of the working uninsured. 
Post ACA, the uninsured rate for small business owners, and 
employees, and self-employed individuals, has fallen 
dramatically, and millions of them have gained coverage from 
the marketplaces and from Medicaid expansion.
    Finally, the ACA has greatly reduced so-called job lock, a 
phenomenon where people are tied to their jobs, as opposed to 
striking out on their own, simply due to their inability to get 
health coverage. We have a set of specific access to capital 
and healthcare proposals that are included in my written 
testimony.
    Thank you, again, for inviting me to appear today. I look 
forward to your questions.
    [The prepared statement of Mr. Arensmeyer appears in the 
Submissions for the Record on page 66.]
    Chairman Tiberi. Thank you.
    Mr. Dearie, you made a great point in your testimony about 
how world-class tax systems that promote economic growth lead 
to more entrepreneurship, and often more jobs and more revenue. 
Can you expand upon that, how strong growth and more startups 
become self-reinforcing?
    Mr. Dearie. They are related. I didn't have time in my oral 
testimony to mention that a lot of the testimony and a lot of 
the agenda at the Center for American Entrepreneurship is based 
on roundtables that I and a colleague conducted--as you know, 
Mr. Chairman, you attended the roundtable in Columbus, Ohio. We 
did them in 12 cities around the United States, asking 
entrepreneurs, very simply, what is in your way? And trying to 
get at why this decline is happening. And one of the things 
that they told us over and over again is that the economy 
simply isn't growing fast enough.
    Now, that has a lot to do with the fact that 
entrepreneurship is down. But there is this symbiotic, you 
know, feedback loop kind of relationship between 
entrepreneurship and broader economic conditions. So to the 
extent that we can achieve tax reform that puts the American 
economy on a much more competitive posture, vis a vis our 
American--sorry, our foreign counterparts, to the extent that 
we can achieve tax reform that gets out of the way of American 
business and increases the rate of economic growth, that, in 
and of itself, improving the broad economic circumstances into 
which entrepreneurs are trying to launch their businesses and 
grow will have this very positive feedback effect on 
entrepreneurship.
    Chairman Tiberi. Thank you.
    Mr. Hodge, you and I have talked about full expensing for 
years, and we both agree that it is a good thing. But we are in 
a situation right now where there are limits to small business 
expensing, and bonus appreciation under current law will 
ultimately go away. Can you talk about what we would be 
foregoing in terms of simplicity, in terms of boosting job 
growth and economic growth, if we simply left the current path 
on depreciation rules in place, in your opinion?
    Mr. Hodge. Well, let me just put it in a positive sense 
that moving to full expensing, our models indicate, would be 
the most powerful tax change that you could make to, number 
one, spur economic growth, increase productivity, increase 
investment, and ultimately, increase wages for working-class 
Americans. And what we find that is that a secondary benefit of 
full expensing is that it does something that rate cuts don't 
do. It removes dozens, if not hundreds, of pages from the Tax 
Code, greatly simplifying the amount of complexity that 
entrepreneurs and businesses have to face.
    We estimate that--actually, the IRS estimates--that 
businesses spend about 448 million hours complying with 
depreciation schedules because they are so arcane at a cost of 
about $23 billion a year. So if you were to include that with 
the economic benefits that you get from full expensing, this is 
a very, very powerful tool, an engine, for restarting economic 
growth and investment.
    Chairman Tiberi. Thank you.
    Ms. Donohue, I am thankful to VentureOhio for its support 
of the Investing in Opportunity Act, and for your support as 
well.
    VentureOhio has been an incredible success story in our 
State of Ohio. But I know that there are challenges in terms of 
capital. And I would like you to expand on the challenge of 
venture capital being so concentrated on both the left coast, 
and the right coast, and the impact that has on startups in the 
midwest. If you could just expand on that.
    Ms. Donohue. Absolutely. It has had a tremendous impact. 
While we are very proud that over the last 2 years, capital has 
increased by 46 percent, that still only accounted, in 2016, 
for about a half a percent of venture capital distributed 
nationally. And as the seventh largest State in the United 
States, that is just not good enough. We are tracking a lot of 
really good data. But what we are not able to track is how many 
incredible entrepreneurs left Ohio, how many of them have left 
the midwest and started their company in California or New 
York. It is stories that I hear on the ground all of the time, 
you know, ``I reached out for capital, there just wasn't 
enough.''
    To launch a company, you are talking hundreds of millions 
of dollars, billions of dollars, to get to the level of a 
Facebook or LinkedIn. Six hundred thirty-one million raised in 
Ohio last year is pretty incredible, but that is nothing 
compared to what one company in California would raise to get 
to exit. So we still have a very long way to go.
    Chairman Tiberi. Thanks.
    Senator Heinrich, you are recognized for 5 minutes.
    Senator Heinrich. Thank you.
    Mr. Arensmeyer, you mentioned that there are a number of 
small business and Main-Street-focused tax reform proposals. I 
noticed there is a long list in your written testimony. Do you 
want to talk a little bit about what you think is most 
important from that list?
    Mr. Arensmeyer. Sure, Senator. Thank you.
    I think, you know, as Congress considers, you know, making 
changes to the Tax Code, you have to make some tough decisions. 
I mean, obviously, tax breaks for everybody, people would love 
them. But I think--you know, our opinion is you need to focus 
on what is going to have the biggest impact at the most 
reasonable cost. And, for example, we have proposed instead of 
cutting the top--you know, the pass-through rates down to 25 
percent, why not give small businesses the opportunity to 
deduct the first 25,000 of their income? That is going to 
impact every small business that actually pays taxes which is 
about 70, 75 percent of businesses in any given year.
    There is also, you know, the Investment Opportunity Act 
that the Chairman mentioned. You know, definitely some of the 
proposals from the other witnesses about targeted benefits in 
the Tax Code for very specific types of investments, 
particularly in distressed communities, we definitely support 
that; changing the law allowing self-employed individuals to 
deduct the FICA portion of their healthcare cost before they--
right now they have to pay the tax on that when they earn it, 
and they don't get the benefit that a regular company does.
    So there are a whole host of--expanding the small business 
tax credit under the ACA. So there are some very targeted 
things that can be done that are going to have a much broader 
impact on the majority of Main Street small businesses than 
what is being proposed right now.
    Senator Heinrich. So, generally, I want to ask a question 
about whether or not we should pay for tax reform. Should it be 
revenue-neutral? And I will start with Mr. Arensmeyer, and I 
will just go down the list.
    Mr. Arensmeyer. We believe it should be revenue-neutral. I 
mean, right now, we have reduced our deficit in recent years. 
But I think to turn that around is going to have long-term 
disastrous effects on our economy. Ultimately right now, we 
benefit from low interest rates. But, ultimately, the interest 
rates are going to go up if we continue this. And there is 
really no reason to do that. I mean, most decisions that 
businesses make, quite frankly, are actually not based on 
taxes. They are based on access to capital. They are based on 
whether they have adequate healthcare to go out and start 
businesses. They are based on the availability of qualified 
workers, including immigrants, in their community, which have 
really driven--a lot of the startup success stories, you have 
heard from the other witnesses, are being driven by more 
expansive immigration laws. So there is a lot more going on 
than just taxes. Again, it comes down to a set of priorities. 
What is going to have the biggest impact? And how can this be 
done in a way that is not going to hurt the deficit?
    Senator Heinrich. Ms. Donohue.
    Ms. Donohue. Since my members have not formalized a 
position on this issue, I prefer to defer to my fellow 
witnesses.
    Mr. Hodge. There is nothing magical about revenue-neutral 
tax reform. As we saw a few years ago, when Congressman Dave 
Camp put together his tax reform blueprint, which was revenue-
neutral, the choices he made in order to make it revenue-
neutral actually neutralized the economic benefits that came 
from the plan. What you need to focus on is economic growth. 
And don't get focused on the deficit, because that will lead 
you down the wrong path. The key is identifying the right 
policies that create economic growth. And, over time, a lot of 
those policies can create the kind of growth that can claw back 
some of the revenue loss that might come from the tax cuts.
    Senator Heinrich. Wouldn't the flip side of that be the 
kind of tax cuts we did in 2001 and 2003, which didn't really 
create a situation where we were more competitive, ended up 
driving up our deficit? Gave a way a lot of goodies, but didn't 
provide a fundamentally more competitive United States business 
environment.
    Mr. Hodge. Right. Because they were too focused on 
individual tax cuts and things like child credits, which do 
very little for economic growth. The key policies for creating 
economic growth are, one, moving to full expensing for capital 
investment, lowering the corporate tax rate to competitive 
level, lowering individual tax rates so individual businesses 
are more successful, and making all of that permanent. That 
will achieve the kind of economic growth that the economy 
needs. And, as a result, it will be budget friendly in the long 
term as well.
    Senator Heinrich. We certainly hope so.
    Mr. Dearie----
    Mr. Dearie. I would----
    Senator Heinrich [continuing]. Should we pay for tax 
reform?
    Mr. Dearie. I would agree with Scott that growth ought to 
be the top priority. But I would hope that tax reform would be 
deficit-neutral. Chairman Tiberi asked me about the impact on 
entrepreneurship, of broader economic circumstances, and I 
mentioned these roundtables that I and a colleague did around 
the country. Over and over and over again, at virtually all the 
roundtables, among the problems, among the policy failures that 
they mentioned that comes out of Washington, is the inability 
or unwillingness to deal with the national debt, which, at that 
time, was much lower than it is now. It plays into their 
overall confidence about business conditions and their 
confidence in the economy.
    We had folks tell us, you know, when we look at the 
deficit, we see it, sort of as a proxy for future taxes, 
assuming we are ever going to pay this off.
    So it does feed into the confidence of entrepreneurs, their 
outlook as to economic strength, their willingness to launch 
businesses, to take risks, to hire. So I would hope that it 
would be, at its best, would be deficit-neutral.
    Senator Heinrich. Thank you.
    Chairman Tiberi. Thank you.
    Mr. Paulsen is recognized for 5 minutes.
    Representative Paulsen. Thank you, Mr. Chairman, for 
holding this hearing today on a topic that I think is so 
important to thousands and thousands of entrepreneurs across 
the country, as well as Minnesotans, obviously. Just last week, 
I received an email from a constituent, Paula in Plymouth, 
Minnesota, who articulated what I have actually heard countless 
times. She writes, ``I, along with America's small businesses 
and other hard-working taxpayers, have been struggling under 
high tax rates for years. It is time that we rally together to 
change that. Tax cuts for small businesses will do a 
substantial amount of good for the U.S. economy and everyone in 
it. Businesses would be able to use these savings to create 
more jobs, increase wages, and expand to new locations, which 
would provide a boost to the economy and ensure continued 
economic growth.''
    I couldn't have said this better myself. I strongly believe 
we owe it to Minnesota's innovators, startups, and small 
business owners to fix the broken Tax Code. So, with that in 
mind, Mr. Dearie, maybe I will just start with you. You noted 
in your testimony that 95 percent of all businesses, and 85 
percent of small businesses are pass-throughs, which means they 
are paying those taxes at an individual rate instead of the 
corporate rate. How important is it to have lower rates for 
both C corporations and for those successful entrepreneurs who 
are pass-throughs, especially since pass-throughs saw a massive 
increase in their top tax rate from 35 percent to up to 44.6 
percent recently?
    Mr. Dearie. It is very important. As a matter of fact, I 
will introduce another way to think about this that we have 
learned from a few entrepreneurs who brought it to our 
attention. They have said, you know, we talk a lot about access 
to capital. How am I going to get a bank loan? How am I going 
to attract angel investment or venture capital investment to my 
firm? Tax policy is an access-to-capital issue. Every April, 
the tax man comes and takes a third, or 44--as you just 
mentioned--percent of my operating capital and walks away. That 
can be the difference, they have told us, between failure and 
success.
    So holding on to what little revenue, or profit, or money, 
that startups are making in those critical early years is 
absolutely vital to the chances that that startup is going to 
survive and be able to grow and create jobs. So certainly, tax 
rates, or what the government takes away, is a major 
determinative factor as to the survivability of startups.
    Representative Paulsen. Sure. And just to follow up on 
that, we live in this global economy where Americans can start 
up and move a business almost anywhere in the world. You can 
move capital at the click of a mouse. If you do an internet 
search today for starting a business overseas, you will find a 
lot of advice on how to do exactly that, and why it might 
actually benefit a startup to look overseas. So as we are 
looking at reforming the Tax Code and helping entrepreneurs, is 
it important to not only consider how we tax them here in 
America, but also how our competitors are approaching taxation 
to attract companies.
    Mr. Dearie. That is absolutely right. And it is not just on 
tax reform, it is also on immigration policy; it is on 
education, et cetera. The rest of the world gets it. The rest 
of the world has figured out how important startups are to 
economic growth, that winning the 21st century in terms of 
economic competition is about attracting the best firms, the 
best new ideas, the best talent, and they are rolling out the 
red carpet for entrepreneurs all over the world, including 
ours. So you are absolutely right, that we have got to get our 
game squared away, or we are going to lose this battle.
    Representative Paulsen. Mr. Hodge, do you have a 
perspective on that, as well, in terms of the competition we 
face and the actions we should take?
    Mr. Hodge. Well, the United States has the highest 
corporate tax rate in the industrialized world. There are only 
four small jurisdictions that have slightly higher tax rates 
than us. But the rest of the world, as Mr. Dearie said, has 
gotten it. And as we stand still, we fall further and further 
behind. And it is not just on the corporate side. It is the 
individual rates as well.
    And it is interesting to note that because we had high tax 
rates before the 1986 Tax Reform Act, the number of pass-
through, or small businesses, was declining each and every 
year. And after tax rates fell from 50 percent to 28 percent in 
1986, we saw an explosion in the number of pass-through 
businesses, because tax rates simply matter to entrepreneurship 
and business startups. And so the more that we move in that 
direction, I think the more that we are going to see 
entrepreneurship, the more we are going to see business 
startups, and the economy will begin to boom again.
    Representative Paulsen. Ms. Donohue, do you see competition 
in the State of Ohio and other parts of the midwest, like 
Minnesota, from around the world?
    Ms. Donohue. Absolutely. I don't believe that entrepreneurs 
in Columbus, Ohio, or in Ohio, or in the midwest, see each 
other as competition. Their competition is global. We live in a 
global economy. And, as you stated, access to capital can occur 
all over the world. So anything that we can do to keep our 
innovative entrepreneurs in our State, in our country, we are 
absolutely in support of.
    Representative Paulsen. I see I am out of time. Mr. 
Chairman, I yield back.
    Mr. Arensmeyer. Mr. Chairman, if I could just add one 
thing?
    Chairman Tiberi. Quickly.
    Mr. Arensmeyer. Yes. Just, I want to remind the committee 
on the pass-through rates, when you are talking about 39.6 
percent, and adding on State tax, et cetera, on top of that, 
you are talking about a small sliver of small businesses. Only 
1.7 percent of pass-through entities pay at the 39.6 percent 
rate; 87 percent pay 25 percent or less; 70 percent pay 15 
percent or less. So there is not a really close connection 
between the taxation faced by most Main Street small businesses 
and the individual rate structure at the upper levels.
    Chairman Tiberi. All right. I am going to allow Mr. Hodge 
just to have a little bit of rebuttal since we are both out of 
time.
    Mr. Hodge. No rebuttal, just some clarification. Over 55 
percent of all pass-through business income is taxed at the 
highest tax rate. So while, yes, there are millions of small 
businesses who do pay at the lower rates, the majority of pass-
through business income is taxed at that higher marginal rate.
    Chairman Tiberi. All right. With that, I am going to 
recognize Representative Maloney for 5 minutes.
    Representative Maloney. Thank you, Chairman Tiberi, for 
holding this hearing, and all our panelists. I wholeheartedly 
agree that small businesses and startups are truly the 
lifeblood of our economy, and that the metrics clearly show 
that there has been a startup slump. The Kauffman Foundation 
found, between 1978 and 2012, the number of companies less than 
a year-old, as a share of all businesses, declined by nearly 44 
percent, astonishing number.
    And I agree that there is a great deal that we can do to 
improve the situation. But I am particularly optimistic about a 
new approach to speeding up the creation of new startups in the 
district I am privileged to represent where we literally, just 
a month ago, opened a new school called Cornell Tech, which is 
a partnership between Cornell University and Technion-Israel, 
with the total and sole purpose of training entrepreneurs, 
innovators, tech firms.
    Cornell Tech is a new model for innovation incubators which 
connects science, technology, and engineering researchers with 
venture capitalists looking to speed the application of new 
discoveries in labs to applications in the real world, thereby 
growing our economy. We have already had--before they even 
opened up, and they were planning it--several startups that 
have come out of this initiative.
    But I would like to say that it is not just taxes, although 
everybody would like to get a tax cut. There are other factors, 
such as immigration and health insurance.
    And I would like to ask Mr. Arensmeyer, I would like to ask 
you about health insurance. I noticed a very interesting post 
on your Small Business Majority website that was titled 
``Defeat of the Affordable Care Act Repeal Measure is a Big 
Victory for Small Businesses,'' noting that if the bill had 
passed, people would likely have lost their healthcare coverage 
thanks to the measure's gutting of Medicaid and the subsidies 
that were the primary driver of coverage expansion under the 
Affordable Care Act. And you noted and estimated it would cost 
our economy over 580,000 jobs. Could you expand on your 
concerns for us? This is an ongoing debate before Congress.
    Mr. Arensmeyer. Sure, Congresswoman. The marketplace as an 
expansion of Medicaid has made it possible for millions of not 
only small business owners and small business employees who 
were not receiving job-based healthcare to get coverage, and 
millions of self-employed entrepreneurs. In fact, last year, in 
the California exchange alone, 25 percent of all people who 
signed up for Cover California were self-employed individuals. 
So, for the first time--you know, I talked about job lock in my 
testimony. For the first time, you have the situation where the 
ability to get health coverage is not driving decisions to 
start or grow small businesses. So we have seen a huge boon in 
entrepreneurial activity as a result of the Affordable Care 
Act, allowing people to simply get healthcare when they 
couldn't before.
    Representative Maloney. I would like also to question Mr. 
Dearie on immigration. And a report on your website, Center for 
American Entrepreneurship, notes that immigrants are twice as 
likely as native-born Americans to start businesses. And you 
noted a study by the Partnership for New York American Economy 
found that 40 percent of Fortune 500 companies were founded by 
foreign-born entrepreneurs or a child of immigrants. And a 2012 
study found that foreign-born researchers were involved in more 
than 75 percent of the patents awarded at the Nation's top 10 
research universities.
    So it would seem to me that current efforts to cut back on 
immigration that would supposedly help spur job growth is 
actually more like cutting off our nose to spite our face. Your 
piece is titled ``Robust Immigration: Is America First?''
    Could you expand on that for us?
    Mr. Dearie. Thank you.
    That piece is commenting on the RAISE Act that was recently 
introduced, as you know, by Senators Cotton and Perdue. One 
thing the Senators are trying to do, and they are absolutely 
right about, is, that we need to--we do need to achieve a shift 
in our immigration system to attract more high-skilled 
immigrants. Right now, about 80 percent of about a million 
green cards that we allocate each year go for purposes of 
family reunions, asylum seekers, et cetera. Only about 15 
percent go to high-skilled immigrants. The rest of the world is 
exactly the opposite. I personally am of the view that those 
humanitarian aspects of our immigration policies are very 
important. It is part of what the United States is about. But I 
am in agreement that we do need to do a better job and achieve 
something of a shift toward more high-skilled immigrants, a 
better balance, if you will.
    The problem, in my view, and the view of my coauthor of 
that piece, Doug Holtz-Eakin, is that, number one, the RAISE 
Act does not raise the number of high-skilled immigrants. It 
keeps the cap, the current cap, at 140,000, and it simply 
slashes everybody else. Senator Cotton himself said that within 
a few years of enactment of the Act, that 80 percent that I 
referred to would be cut in half. That is absolutely anti-
growth. Growth in our labor supply is a very important part of 
economic growth, and the largest part of our growth in our 
labor supply, because of demographic tendencies, and the 
retirement of the baby boom generation in recent years has been 
growth in immigration. Moreover, as you point out, we want to 
attract the best and the brightest, and it is in our interest 
to do so.
    Representative Maloney. My time has expired.
    Chairman Tiberi. Thank you.
    Before I recognize Mr. Rooney, Mr. Arensmeyer, the topic of 
healthcare for small business is a bit off topic but has come 
up a couple times now. Would you be willing to meet with me 
afterwards? I would like to share with you a true story of a 
woman-owned business in Ms. Donohue's hometown who is a small 
business owner and manufacturer with less than 50 employees in 
a small group health insurance market. Her healthcare costs 
have tripled over the last 3 years. And the impact that has 
had, not only on her small business, but to her employees, is 
that they are paying more and getting less health care. So as a 
guy who represents small businesses, I would like you to hear 
this story. It is pretty amazing.
    With that, Representative Rooney, back on topic, is 
recognized for 5 minutes.
    Representative Rooney. Thank you, Mr. Chairman. I 
appreciate the chance to speak and for you holding this great 
hearing. As the House cosponsor of the RAISE Act, I would just 
like to say why I did it. I think it is very important that we 
focus on skills. I have thousands of employees. We need low-
skilled and high-skilled workers in this country to drive it, 
because no country has ever improved itself and grown 
economically without higher productivity driven by more 
productive and young workers. So Tom's view of how many refugee 
or immigrant visas should be allowed would be debated, I would 
hope, by our colleagues and modified. But the principle of 
ending chain migration, I think, is critical to accomplishing 
the things you all have talked about.
    Since the comment was also made about that people don't 
locate their business because of taxes, and I would just like 
to say that if you believe that, then look at Texas, Florida, 
and Ireland. I have businesses in all of those places.
    Now, I would like to ask a question about the pass-
throughs, because I think the pass-throughs are critical. You 
know, when you have billion dollar companies that are pass-
throughs, and they are willing to pay the extra 5 or 6 percent 
asymmetry, they must have a lot of value to the economy, as 
well as for startups. And so we know that small businesses are 
the job creators and that they use pass-throughs. But, also, 
larger companies use pass-throughs because of the simplicity of 
the capital structure. I know I do every time we do a real 
estate deal.
    So the comment was made about diversion of salary because 
of the 25 percent rate. Mr. Hodge, don't you think that it is 
possible that the extra jobs that would be created by that 
extra one-third after-tax income by the 25 percent rate, that 
would involve more salary workers rather than owners of 
business, would offset any kind of lost tax revenue, that an 
owner may take less salary?
    Mr. Hodge. Well, I think they are kind of different issues. 
I see your point. But I think you have to be extremely careful 
about creating arbitrage opportunities. And pass-throughs 
already have the benefit of one layer of tax. And albeit, if 
you were to then reduce the rate even further, you do create 
arbitrage opportunities. And you have to be very mindful of 
that in writing the legislation so that----
    Representative Rooney. Oh, sure. I understand.
    Mr. Hodge. You don't want the doctor to be able to 
reclassify his income as pass-through.
    Representative Rooney. And the IRS has some rules about 
that as well. But there has got to be a pretty strong impact of 
putting one-third more after-tax income in every pass through 
entity's pocket in terms of what they do with that money and 
the jobs they might create with it.
    Mr. Hodge. Yes, there is, but--I will just leave it at 
that. It is going to be a thorny issue. I will just warn you 
about that. And I am all in favor of lower taxes on businesses, 
because I do think that that spurs more capital investment, and 
it spurs growth. But I do think you have to worry about these 
opportunities in the Tax Code for people to play games, and 
just, you have to be extremely careful about that.
    Representative Rooney. That is for sure.
    Let me ask you one more. This may be a little off the 
subject, hair-brain idea. A Fortune 100 CEO friend of mine 
proposed it. What if the repeal of the death tax were limited 
to bequests which go to blood relatives? If they don't give it 
to a blood relative, why don't they just pay the tax so we all 
share in it?
    Mr. Hodge. Well, do you really want the government to 
dictate where people give their money? So----
    Representative Rooney. Well, they do it now, a billion 
ways.
    Mr. Hodge. That is the point. That is why we want to get 
rid of the estate tax, to get the government out of the death 
industry.
    I love the sentiments. And I do think too many families 
have been disproportionately harmed because of the estate tax 
and families----
    Representative Rooney. That is the point, yeah.
    Mr. Hodge. But, at the same time, I think, again, you want 
to be careful about this body making determinations on where 
people believe that they should put their money. You know, if a 
guy has got a kid who is basically a ne'er-do-well----
    Representative Rooney. This is the body that created 
renewable fuel standards.
    Mr. Hodge. What?
    Representative Rooney. This is the body that created the 
renewable fuel standards. Talk about where to incentivize your 
money.
    Mr. Hodge. That is right. I rest my case.
    Representative Rooney. Thank you very much.
    Mr. Hodge. You bet.
    Chairman Tiberi. Thank you.
    Mr. Beyer, you are recognized for 5 minutes.
    Representative Beyer. Thank you, Mr. Chairman, and thank 
you all for your testimony. I find it fascinating.
    Mr. Arensmeyer, Mr. Dearie's testimony notes he has the 
chart about new entrants. And it starts to collapse in 2005, 
and I am not aware of any major change in tax policy around 
2005 that had such a crippling impact on new business 
formation. As you pointed out, very few startups have heavy tax 
burdens. Only a very small percent pay the top corporate rate. 
Mr. Hodge pointed out that 55 percent of pass-through income is 
at that high rate. But as the principal in 12 different pass-
throughs, let me tell you that is almost all from large, 
mature, established pass-throughs, some that have been around 
for decades, not the startups, not the entrepreneurs that this 
hearing addresses.
    Wouldn't it make sense to conclude the decline in new 
business formation is primarily not a tax story, but that other 
factors and policies are more critical? For example, college 
debt, barriers to entry in so many different businesses, access 
to capital, which you have talked about?
    Mr. Arensmeyer.
    Mr. Arensmeyer. Yes, Congressman. I would actually agree. 
There are a myriad of reasons why the opportunity, you know, to 
startup goes up or goes down. I should point out that a period 
of greatest economic growth recently, and one where we actually 
temporarily closed the budget deficit, was in the 1990s when 
you-all had passed the tax cut--excuse me, a tax increase in 
1993. And there really wasn't, you know, any relationship 
between that and the fact that the economy was really booming.
    You are absolutely correct. It is access to capital, access 
to healthcare, access to a qualified workforce, which includes 
immigrants, who are, by the way, twice as likely to start new 
businesses as the national average. It is a whole host of 
factors that you cited. And I don't want to imply that taxes 
are irrelevant, but all the polling that we have done shows 
that the concern about a robust economy, access to healthcare, 
rank far higher than taxes as a major reason for making 
business decisions.
    Representative Beyer. Mr. Arensmeyer, to continue, Ben 
Casselman, who wrote recently in the New York Times, quote, 
``The slump in entrepreneurship has coincided with a period of 
increased concentration in nearly every major industry.'' I was 
raised as an automobile dealer. There were 50,000 car dealers 
the year I was born. We are down to about 17,000 right now. 
Something like AutoNation, I think, sells 16 to 17 percent--one 
company--of the new cars sold in America. What is the impact of 
this concentration, in industry after industry, on the ability 
to start a new company?
    Mr. Arensmeyer. I think it has made it more challenging. I 
mean, there is no question that some industries, you know, it 
is okay to grow and some industries or products are delivered 
much better by a larger entity. But we need a balance between 
excessive concentration and to make sure that we are not 
stifling the opportunity for small businesses to begin and 
grow.
    Representative Beyer. One of the things I see is I have 
three millennial children who are all entrepreneurial, and when 
I visit the startups, the equivalent of VentureOhio in 
Virginia, I mean, they are the wonderful, they are great 
energy, but they are all looking for something brand new. They 
are not starting firms that have been around for a long time. 
And so it really creates maximum creativity to try to think of 
some place that has never existed before and starting there.
    Mr. Arensmeyer, you also talked about the limited benefit 
of full expensing. I think, for Mr. Hodge, I, unfortunately 
look at these things through my own family business experience 
and think, boy, if we could full expense, I have all these 
buildings, boom, wonderful for 2017 taxes. But then after that 
I am paying taxes on my interest expense for years and years to 
come.
    Have you looked hard at the tradeoff between taking away 
interest deductibility versus the full expensing?
    Mr. Arensmeyer. Well, interest deductibility is something 
that is taken across the board on a percentage basis by large 
and small business entities, so we are not necessarily in favor 
of reducing that because in fact it is harder for smaller 
businesses to get access to equity capital and debt is a higher 
percentage of what is fueling them. So their ability to deduct 
interest on a percentage basis is actually often greater than a 
larger company.
    As far as full expensing is concerned, I mean, obviously 
right now, under Section 179, small businesses can essentially 
do full expensing up to a half million dollars a year, and we 
don't see a huge benefit to smaller entities to change the law 
to allow for full expensing for much larger entities.
    Representative Beyer. I am going to try to squeeze in 20 
seconds.
    Ms. Donohue, you did a valiant job trying to defend carried 
interests, and you are the first I have really seen that has 
differentiated between venture capitalist and private equity.
    In fact, most of my experience in Virginia has been well-
established, very wealthy individuals risking somebody else's 
money to get a capital gains rate on it. Is there a way to 
differentiate carried interest between venture capitalists and 
private equity?
    Ms. Donohue. Well, most of the venture capitalists in Ohio, 
in fact, all that I can think of off the top of my head, also 
invest in those funds. You know, the average venture capital 
fund size in the U.S. is 22 million, which results in about 
$400,000 per year in management fees and $400,000 per year to 
pay the partners, to pay their CFO, to keep the lights on, to 
keep the rent. That is not how they are making their money.
    The reason they do this is for the opportunity to earn 
carried interest once the fund is successfully deployed and 
they earn their returns back. And for us to keep these venture 
capitalists in Ohio, who are very talented individuals who 
could make a lot more money in New York or California, they 
could, but they are choosing to remain in Ohio, they are 
choosing to be pioneers, they are choosing to have the 
opportunity to make less money because they believe in the 
future of Ohio and they believe in supporting entrepreneurship.
    Representative Beyer. Thank you, Mr. Chairman.
    Chairman Tiberi. Thank you. Good question.
    I would like to now recognize, breaking news, Congress' 
connoisseur of coffee from Arizona, Representative Schweikert.
    Representative Schweikert. Look, I don't go around making 
fun of your problems. But we are thinking of starting a 12-step 
group for coffee. We are holding the meetings Tuesday at 
Starbucks.
    Oh, come on. That is funny.
    Thank you, Mr. Chairman. And a couple things I wanted to 
sort of run through, and I have been making some little side 
notes.
    First off, just a couple things data-wise have been thrown 
out. A substantial number of LLCs, partnerships are actually 
held to hold assets and don't actually, if you actually look at 
the distributional curve of where they are on the IRS forms, 
they are producing actually very little income because they 
actually have tort liability shield.
    So it is actually quite distorting to actually put those 
into your big numbers. And we all know better. So I was a 
little surprised to have someone actually distort the 
discussion that way.
    Mr. Hodge, just because, I think, and please correct me, 
are you the only one on the panel that actually works with an 
organization that actually does large-scale data modeling 
with----
    Mr. Hodge. Yes.
    Representative Schweikert [continuing]. Shall we say, where 
you have a robust enough data set to actually model the model 
on the model each time with the velocity changes?
    Mr. Hodge. Yes, we have a macroeconomic tax model--some 
might call it a dynamic model--that measures the effect of tax 
changes on the cost of capital and the supply of labor. And in 
doing so, we are able to then look at the effects of tax policy 
on the size of GDP, investment, wages, jobs, and, of course, 
Federal revenue.
    Representative Schweikert. Now, why this is important, I 
think, to all of us sitting up here on the right and the left 
is if you actually look where we are in our demographic curve, 
I think there is a common understanding, in a decade, decade 
and-a-half, we are in real trouble, where our aging of our 
population, our entitlement promises, our ability to have 
enough economic expansion to actually cover those entitlement 
promises, almost every dynamic model hits a wall. And so having 
an honest conversation here that is a little less of, ``this 
gets me reelected, this is best for economic expansion.''
    So if I came to you right now and said, let's be blind to 
my next election, what would the most growth-oriented tax model 
be that gives every American an opportunity to actually save 
and have employment and have wage growth, what would that model 
look like, because you are actually using real data instead of 
feelings?
    Mr. Hodge. Well, the paradox of tax reform is that the tax 
changes that are most politically popular, such as lowering 
individual tax rates and child credits, and so forth, do the 
least for economic growth because they incentivize very little 
about people's work effort----
    Representative Schweikert. I know we have the buzzers going 
off. Can you say that again? Because this is actually really 
uncomfortable for those of us who have got in front of 
audiences and talked about doubling the childcare credit or 
some of these other things, and the reaction we get when we 
actually show what happens to your future job prospects if you 
put the money here compared to expensing.
    Mr. Hodge. Compared to expensing. And so, yes, again, the 
individual tax changes do the least for economic growth, 
whereas tax changes that affect the cost of capital, such as 
moving to full expensing, lowering the corporate tax rate, 
lowering business tax rates, actually have the greatest effect 
on not only economic growth, but ultimately productivity and 
wages and after-tax income.
    And that really should be the goal of fundamental tax 
reform, is lifting living standards, not just putting money in 
people's pockets, but actually lifting their living standards 
for the long term.
    A tax cut in my pocket is nice, but I would sure like a 
higher wage and higher living standards at the end of the day.
    Representative Schweikert. Well, in continuing this sort of 
logic loop, for those of us who are absolutely fixated on how 
we are going to cover our social entitlement promises in a 
decade-plus, the size of our economy, the ability to have a tax 
base that has grown, which model gets us there?
    Mr. Hodge. The policies that create the most growth, as I 
mentioned, lowering the corporate tax rate, lowering business 
tax rates, lowering the cost of investment, all of those things 
lead to a higher GDP and solve the problems that really are 
facing us that Mr. Dearie mentioned in terms of Social Security 
problems, entitlement problems, et cetera. Growth solves so 
many problems, that has to be the goal of tax reform.
    Representative Schweikert. And here is where we will all, 
those of us who are policymakers, are going to have some soul-
searching to do. Do we pander to our politics--which is what we 
do, it is how we get elected--or do we do actually quality math 
that grows our economic base and gives society a fighting 
chance to have that higher wage, that better job, and for us to 
have enough revenues to keep our promises?
    With that, I yield back, Mr. Chairman.
    Chairman Tiberi. Thank you.
    Ms. Adams, you are recognized for 5 minutes.
    Representative Adams. Thank you, Mr. Chairman.
    And thank you all for your testimony.
    Right now the vast majority of pass-through entities, 86 
percent to be exact, are taxed below 25 percent. So ostensibly 
the tax break is for the remaining 14 percent of pass-through 
entities, most of which are individuals in the top 1 percent of 
economic distribution.
    Mr. Dearie, would the remaining 14 percent of pass-through 
entities really provide enough economic growth to justify 
opening a potentially large tax loophole for law firms, hedge 
funds, and other profitable businesses to exploit and avoid 
contributing their fair share in taxes? Wouldn't the pass-
through setup just shift the tax burden to the middle class?
    Mr. Dearie. Well, I would answer the question by saying I 
think it is very, very important that however the tax-drafting 
committees handle tax rates pertaining to pass-throughs, that 
they do it in a way that does not open up the kind of loopholes 
to which you are referring.
    I have heard the various figures today about exactly what 
portion of pass-throughs actually pay what taxes. I suppose 
that that is--you know, I have heard arguments and data on both 
sides.
    I think it is important to get tax rates right, both 
because it is important for competitive purposes, also tax 
rates send a signal. And they contribute to the confidence of 
business people as to whether or not they are even going to go 
about the trouble of launching a business, their confidence as 
to their ability to survive.
    So in my mind, regardless of which fraction of which pass-
throughs pay which rate, I think getting the tax rates right 
and competitive is very important for both tax as well as 
psychological reasons.
    Representative Adams. Thank you.
    Mr. Arensmeyer, as you are aware, revenue neutrality is a 
key component of tax reform, but to do so major changes are 
needed to offset the cost of lowering tax rates. One such 
provision being considered is eliminating interest 
deductibility.
    So does it make sense to eliminate this provision to help 
pay for reform or would you advocate keeping it?
    Mr. Arensmeyer. As I said earlier, Congresswoman, small 
businesses use the interest deductibility on a percentage 
basis, at least as much as larger businesses, if not more.
    I think if you are looking for other offsets in the Tax 
Code, for example, the offshore deferral, which costs a 
trillion dollars over 10 years, not only does that not benefit 
any small businesses, it actually doesn't benefit most large 
businesses. About 50 to 60 multinational corporations take most 
of that benefit.
    So there are other provisions in the Tax Code you can look 
to other than interest deductibility to look for offsets. And 
we would agree that perhaps some reduction in the corporate 
rate makes sense, we would agree that some of what has been 
proposed by us and others here on the panel in terms of 
targeted incentives for venture capital and other types of 
investing. So you will need to be looking for offsets, but I am 
not sure the interest deductibility is the place to look.
    Representative Adams. Thank you very much, Mr. Chairman. I 
am going to yield back.
    Chairman Tiberi. Representative Comstock is recognized for 
5 minutes.
    Representative Comstock. Thank you, Mr. Chairman.
    And I welcome my constituent, Mr. Dearie. Thank you for 
being here.
    And, Mr. Hodge, I think this is the first hearing we have 
had since we worked back in the 1990s when I was staff. And you 
were very helpful on these issues, so I appreciate seeing you 
again.
    I want to talk about growth again, because I know from my 
experience in the statehouse, we always had to look at who are 
we competing with, with States. To give you an example, we 
worked on data center taxation, because we have a large data 
center industry in Virginia but our taxation was not 
competitive with other States. And so as we went to look at it, 
of course, this was during a Republic administration, they were 
telling us it will cost this much if we changed the taxation 
model.
    The problem was entire businesses were getting up and 
leaving, as they can in the tech industry. So when we realized 
the multiplier would be zero, then it doesn't matter what the 
rate is when you have the multiplier being zero.
    So I really do think it is so important for us to focus on 
that rate, because actually when we did lower our rates the 
data center industry stayed here, grew here, got people from 
all over the country coming here. And obviously that helped 
with our tech industry.
    So I was wondering, Mr. Dearie, you were talking about the 
pass-through rate, the corporate rate, and given that we are so 
much higher than the rest of the world and tech businesses can 
go anywhere and leave, could you address that in terms of the 
competition? Because if I am selling something for $20 and my 
competition is all at $12, if I am trying to pay for how I get 
down to $12, I am losing my business, aren't I?
    Mr. Dearie. Yes. And as I mentioned earlier in response to 
another question, if you look around the world--and it is not 
just on taxes, it is on taxes, it is on immigration, it is on 
education, it is on training, et cetera, it is on access to 
capital--but certainly on taxes, the rest of the world gets it.
    I mean, look at the steps that our competitors have taken. 
Countries like France and Great Britain now have tax rates 
substantially below the United States. They get it. We always 
tend to talk about them as being socialistic economies, et 
cetera, but they get that taxes matter for exactly the purpose 
that you are talking about. Corporations are more mobile today, 
given advances in technology and what have you. They can go 
anywhere. And it is very, very important for us to be on the 
playing field.
    Representative Comstock. And when we are talking about 
competition, too, it is those high-end jobs, as you are talking 
about, in terms of immigration, in terms of visas and 
technology, that then will generate those new growth-disruptive 
industries.
    So having that lower pass-through rate, the lower corporate 
rate is particularly important. And maybe, Mr. Hodge, you might 
want to address that, Ms. Donohue, in terms of getting the 
highest, being competitive in the growth areas all around the 
globe. That is essential, that we are not going to--if we are 
going to attract the talent, we also have to have those lower 
rates.
    Mr. Hodge. Economists at the OECD studied the effects of 
different types of taxes on economic growth and found that the 
corporate income tax is the most harmful tax for economic 
growth. And it is particularly harmful for the most job-
producing, growth-producing, energetic companies, and the ones 
that really, as Mr. Dearie said, have generated the most toward 
new advances and various things, whether it is technology or 
what have you.
    And so that, as he said, the rest of the globe gets it. And 
corporate tax rates have fallen dramatically all over the 
globe, leaving us so far behind.
    Representative Comstock. And something like the medical 
device tax industry, we are losing that because of that extra 
taxation here as well as----
    Mr. Hodge. Yeah, more than 60 companies have left the 
United States and redomiciled in places like Ireland and 
Switzerland and the Netherlands because of lower corporate tax 
rates.
    Representative Comstock. Can I ask for the record, if you 
could provide us all those companies that have left and any 
documentation that you might want to add to that I think would 
be helpful for the record.
    Mr. Hodge. Sure, I would be delighted.
    Representative Comstock. Ms. Donohue, if you want to 
address that.
    Ms. Donohue. I will just add that a healthy corporate 
environment is essential for a healthy entrepreneurial 
ecosystem. To be successful, startups need access to talent and 
access to capital. And access to capital means access to 
customers, which are the corporations who are thriving in their 
region that can provide both of those.
    Representative Comstock. And then having that healthy 
startup also keeps the bigger businesses more competitive 
because they have to compete with the startups. The ecosystem 
that is created with that kind of keeps everybody honest and on 
their toes and far more innovative. And when we lose that 
startup piece, we really sort of atrophy everywhere else, don't 
we?
    Ms. Donohue. Yeah. It is healthy all the way around. We 
call it ``innovate or die.'' You know, it is important for the 
corporations. It is important for the startups. They feed off 
of each other. They are primary economic drivers for our cities 
and to keep our college students within the State, because they 
want to work at cool tech companies, they want to work at cool 
corporations.
    Representative Comstock. Thank you. I yield back, Mr. 
Chairman.
    Chairman Tiberi. Thank you.
    Mr. Delaney is recognized for 5 minutes.
    Representative Delaney. Thank you, Mr. Chairman, for having 
this hearing.
    I want to thank all the witnesses for being here and 
providing your insight.
    So this is a topic that is near and dear to my heart. 
Before coming to Congress, I was an entrepreneur. I started my 
first company in the early 1990s. I took it public in 1996. I 
was the youngest CEO of the New York Stock Exchange at the 
time, sold it in 1999. Started my second business in 2000, took 
that public in 2003, and ran it until I decided to run for 
office. Ernst & Young gave me the Entrepreneur of the Year 
Award. So I have spent a lot of time around entrepreneurship.
    And my second business was a commercial finance company, 
which meant we lent money to small to midsize businesses, and 
we lent $30 billion to 3,000 small to midsize businesses all 
over the country.
    So when I think about being an entrepreneur, the thing that 
has struck me about this hearing is this notion that tax policy 
matters to entrepreneurs. Being an entrepreneur is about a 
dream. It is about thinking you can change the world. It is 
about thinking you have some innovation that can make a 
disproportionate difference in the lives of your community, 
your country, your people. It is about wanting to be 
independent, to chart your own path, to be a pioneer. Those are 
all the emotions of an entrepreneur.
    I have never met an entrepreneur who was making a decision 
about whether to be an entrepreneur based on tax policy. 
Because, in fact, most startup companies don't make money for a 
while, and most entrepreneurs would say, ``God, I hope to pay 
taxes one day because that means my business is working.''
    And to me, what allowed me to start up my businesses is I 
was married to a wonderful woman who had a job, that job gave 
us healthcare, and she was supportive of me doing this. So I 
could take the risk because we had that security in our own 
situation.
    I started my business in a market here in the D.C. area in 
Chevy Chase, Maryland, where we had access to really terrific 
employees. And that allowed me to raise capital, because I had 
an idea, a plan. I was able to go do it. I was able to get a 
team. And I went around the country and pitched people to give 
me money, which in the early 1990s was hard.
    Now it is relatively easy, not for venture capital, so Ms. 
Donohue, I think, is right, but for more professionally managed 
capital because that is just a better risk-return for most 
people than venture capital.
    So this notion of, I guess, Mr. Dearie, you said something 
earlier about how tax policy matters to entrepreneurs and 
startups, but right now 80 percent of the professionally 
managed venture capital goes to northern California, New York, 
and Massachusetts, three of the highest taxed places in the 
country. How do you explain that if tax policy matters to these 
investors?
    Mr. Dearie. You are absolutely right, Congressman, that 
very few entrepreneurs think about tax policy as they are 
thinking about becoming an entrepreneur. They are driven by 
passion, they are driven by an idea, exactly as you said. But--
--
    Representative Delaney. So why does all the money go to the 
highest tax places?
    Mr. Dearie. Well, because, I mean, in talking about the 
importance of tax policy, I certainly don't mean to say it is 
the silver bullet issue, the most important issue, that it is 
the dispositive issue.
    Representative Delaney. Right.
    Mr. Dearie. It is relevant. It is important. How I do 
know----
    Representative Delaney. But the most important issue--
taking back my time--the most important issue is creating that 
environment where people actually want to start a business.
    Mr. Dearie. I agree.
    Representative Delaney. So, I mean, if you had to make a 
choice, and you have to answer the question based on my choice, 
you could either cut the estate tax or increase investments in 
research and development, what would you choose to create more 
entrepreneurs?
    Mr. Dearie. I would do the latter.
    Representative Delaney. Invest in research and development?
    Mr. Dearie. Yes.
    Representative Delaney. Mr. Hodge, if you had a choice, 
which was to lower the tax rates on wealthy individuals--thank 
you for that honest answer, Mr. Dearie--lower the tax rates on 
wealthy individuals or do something like allow people with 
unrealized capital gains to sell those positions and defer 
paying their capital gains tax for 10 years if they invest that 
money in parts of the country that have very little economic 
growth, some of the regions that Ms. Donohue is advocating for, 
which would you choose, if those were your only two choices?
    Mr. Hodge. I don't agree with using the Tax Code to try to 
micromanage people's investment decisions.
    Representative Delaney. So you don't think it is important 
to create policies? Because really what has happened in this 
country is----
    Mr. Hodge. No, I would----
    Representative Delaney. Let me finish. My time.
    You don't believe in policies that actually help put 
intellectual capital and real capital in parts of our country 
that have been hollowed out based on changes in our economy, to 
create more entrepreneurs like Mr. Arensmeyer--if I am 
pronouncing that right, because you sound like a great 
entrepreneur, sir--you don't think that is a role of tax 
policy?
    Mr. Hodge. We have tried things like enterprise zones for 
decades, and they have had limited effect. And I think we ought 
to reconsider those policies.
    Representative Delaney. Ms. Donohue, do you think it would 
be useful to have policies to get capital flowing to parts of, 
like, Ohio, where you are trying to actually get investment 
capital?
    Ms. Donohue. I do. Brilliance is not concentrated in three 
States in the United States, but capital is.
    Representative Delaney. Right. And we have got to do 
something about that problem.
    Great. Thank you for your time everyone.
    Chairman Tiberi. Last, but not least, Mr. LaHood is 
recognized for 5 minutes.
    Representative LaHood. Thank you, Mr. Chairman.
    And I want to thank the witnesses for your valuable 
testimony here today.
    I wanted to see if I could focus just for a couple minutes 
on rural America. And there obviously seems to be a trend of 
people and resources and innovation moving to bigger cities and 
less so in what I call smaller non-urban areas. And I am 
wondering if we have examples of rural areas or non-urban areas 
that have succeeded in innovation and whether the Tax Code, as 
we look at reforming the Tax Code, whether we can help with 
that, incentivize that.
    I also look at statistics. According to the Economic 
Innovation Group, from 2010 to 2014 half of the net growth in 
the number of businesses and 17 percent of the new unemployment 
took place in five metropolitan areas. And I guess, looking at 
does the Tax Code disadvantage rural areas, non-urban areas, 
burdening smaller enterprises as opposed to larger enterprises.
    And I guess, Mr. Dearie, if you could comment on that?
    Mr. Dearie. I don't think the Tax Code disadvantages those 
areas. I think those areas struggle with probably other issues. 
I mean, the two big needs of entrepreneurs, as my colleague 
pointed out a moment ago, are access to talent and access to 
capital.
    In rural areas across the United States, I would say that 
those are the two biggest challenges. Tax policy can complicate 
that, but I would say that those are the real challenges for 
the rural areas to which you are referring.
    Representative LaHood. And do you have any examples of 
rural areas that have succeeded and done well with innovation?
    Mr. Dearie. I would need to think about that and get back 
to you. It is true, it is absolutely true that generally 
speaking--or more than generally speaking--when you think about 
innovation and entrepreneurship, you are typically talking 
about cities.
    Representative LaHood. Ms. Donohue.
    Ms. Donohue. I would agree. We have a long way to go. We 
are very proud of the innovation occurring in Ohio and having 
the first billion-dollar exit occurring this year. But even in 
a city like Columbus, which is the 14th largest in the United 
States, we are still nowhere access to talent and capital of 
our counterparts on the coasts.
    Representative LaHood. And do you have any suggestions as 
we look at comprehensive tax reform where we can help in that 
area?
    Ms. Donohue. A simplified Tax Code is, of course, 
beneficial to entrepreneurs, as is having access to more 
capital. So anything to simplify that and help entrepreneurs 
get that access to capital.
    In Ohio, we have some statewide programs that have proven 
to be successful, such as the Ohio Third Frontier. This is 
capitalized venture capital funds and business development 
organizations that help provide access to capital and talent 
all over the State, including the more rural areas such as 
Mansfield, Ohio. But I think a program such as the Investing in 
Opportunity Act is a very smart way to get capital off of the 
sidelines and into the hands of innovative entrepreneurs who 
might not have access to capital, such as venture capitalists.
    I mean, it is a very small and tight-knit community, 
whether you live in Silicon Valley or you live in Ohio. Access 
to venture capitalists is not something that everyone has. And 
it is the small groups of people that do have access to these 
individuals, that is great for them, but it is not so great for 
somebody in Mansfield, Ohio, who wouldn't even know where to 
look.
    So ensuring that these different groups get to know each 
other, these innovative entrepreneurs in rural parts of the 
country and the investors with capital, putting them together, 
I think magic could happen.
    Representative LaHood. Thank you.
    Mr. Hodge, switching subjects, according to the Global 
Innovation Index, Switzerland, Sweden, and the Netherlands all 
rank above the United States in terms of innovation.
    The arguments for the reasoning behind this can vary, but I 
am interested specifically in how the tax structures compare. 
What specifically about these countries' tax codes should the 
U.S. considering replicating so that U.S. businesses of all 
sizes can be more competitive globally?
    Mr. Hodge. They all have, especially corporate taxes, much 
lower than the United States. And I think most people would be 
surprised that Sweden is actually a relatively low tax country 
compared to the United States.
    Representative LaHood. What is their rate? Do you know?
    Mr. Hodge. It is 22 percent, I believe. And Switzerland is 
even much lower than that. And, of course, it depends upon 
which canton you move to.
    But all of those have structured their tax systems for 
business to be much more competitive. And especially for 
multinational businesses, they are extremely competitive places 
to do business.
    Representative LaHood. Thank you. Those are all my 
questions. I yield back.
    Chairman Tiberi. Thank you.
    I would like to thank the witnesses again for being here 
today. It was a really good session, I believe. The record will 
be open for 5 business days for any member who would like to 
submit questions for the record or to our panelists.
    With that, the hearing is adjourned. Thank you.
    [Whereupon, at 11:29 a.m., the committee was adjourned.]

                       SUBMISSIONS FOR THE RECORD

 Opening Statement of Hon. Patrick J. Tiberi, Chairman, Joint Economic 
                               Committee
    I call this hearing to order. The Joint Economic Committee is 
holding this hearing because entrepreneurship matters. It matters 
because startup businesses drive the innovation that fuels economic 
growth and opportunity--innovation that can improve or even save lives. 
In fact, anyone who uses a cell phone today should thank an 
entrepreneur. And very importantly, entrepreneurs matter because nearly 
all the gains in job creation come from businesses less than a year 
old--true startups.
    The bad news is that the rate of business startups has been 
declining over the past few decades. That decline became an outright 
collapse during this recovery when--for three straight years--companies 
closed their doors more rapidly than they were opened.

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    During similar periods in recent recoveries, the greatest gains in 
the number of American companies occurred during the Reagan 
Administration, perhaps not coincidentally when tax rates were falling. 
In contrast, this recovery saw only about a fifth of the business 
growth. That has real consequences for middle-class families.

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    According to analysis by the nonpartisan Economic Innovation Group, 
each startup creates an average of six jobs, meaning that if the number 
of startups had simply held steady at 2006 levels, America would have 
gained a total of 3.4 million additional jobs by 2014. Plentiful 
startups and plentiful jobs create a virtuous cycle where potential 
entrepreneurs are more willing to take a risk on a new venture because 
they'll have a job to fall back on. By the same token, weak levels of 
entrepreneurship and job creation create a downward spiral for both.
    Another alarming trend is that the number of places where startup 
growth is actually happening is shrinking, which is a topic we 
investigated in a hearing in this committee earlier this year. In fact, 
from 2010 to 2014 half of all business growth and 17 percent of 
employment growth occurred in just five metropolitan areas. 
Unfortunately, much of the heartland was left behind. Blighted areas 
across the country are desperate for new businesses and the jobs and 
opportunities that would come with them. That is why I introduced the 
bipartisan Investing in Opportunity Act to attract capital and 
investment in distressed communities, and I hope it can become part of 
tax reform.

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    I didn't call this hearing because I believe tax reform is a silver 
bullet that will suddenly cure all of society's ills, including the 
startup slump. But it is a key tool in our policy arsenal that could 
remove artificial barriers to starting a business and foster an 
environment where entrepreneurship can thrive.
    Truth be told, entrepreneurs probably don't think much about taxes 
when they launch a startup, and they shouldn't have to. But before long 
they are hit with mind-numbing complexity that drains precious 
resources from the business. They may spend every dime of profit buying 
expensive equipment to scale up production, but the tax code may not 
allow them to immediately deduct the cost. That means they'll owe taxes 
on profits they no longer have.
    If they do manage to become profitable, startups that are corporate 
taxpayers will face the highest rate in the developed world. And 
successful startups that pay individual taxes because they're set up as 
pass-through businesses will face an even higher individual rate that 
has increased dramatically recently. The tax code also punishes success 
by forcing family business owners to do costly estate planning so the 
death tax doesn't steal their ability to pass the business to the next 
generation of entrepreneurs.
    In this increasingly global economy, entrepreneurs can start or 
move a business anywhere in the world. Yet our tax system is out of 
step with our competitors, not only punishing our companies with the 
highest rate but imposing a large tax penalty when they invest profits 
earned overseas back in America.
    Tax reform done right will grow jobs and grow paychecks, helping 
restore the virtuous cycle that gives entrepreneurs the confidence to 
take a risk and reach for the American dream. Tax reform done right 
will provide them with more capital, the lifeblood of entrepreneurs. 
And it will help make America the best place in the world to invest and 
start a business. Our future prosperity depends on it.
    I look forward to hearing the thoughts of our excellent panel of 
witnesses today. I will introduce them in a moment, but first I 
recognize our Ranking Member Senator Heinrich for his opening 
statement.
                               __________
 Prepared Statement of Martin Heinrich, Ranking Member, Joint Economic 
                               Committee
    Thank you Chairman Tiberi and thank you to our witnesses for being 
here today.
    The tax reform debate is underway, and I'm happy our committee is 
taking this opportunity to examine the Nation's tax policy. I agree 
that our tax code must be simpler for families and small businesses.
    Where we can promote policies that make sure that the tax code is 
working for working Americans, growing the economy, creating good 
paying jobs, and supporting families and communities across the 
country--I will be among the first to support it.
    Unfortunately, the Republican starting point seems heavily focused 
on giving more tax-giveaways to large, multinational corporations and 
the wealthiest among us rather than on small businesses, rural 
entrepreneurs, and those communities still struggling to recover 
following the recession.
    There's time to shift that focus and hearings like this one can 
help.
    In New Mexico, small businesses make up more than 95 percent of all 
businesses and employ more than 55 percent of private-sector workers.
    They are the heart and soul of our State's economy.
    They are companies like RiskSense in Albuquerque that helps firms 
assess and manage cyber security risk.
    Founded as a small business technology transfer from New Mexico 
Institute of Mining and Technology (NMT), the company now has 100 
employees and earnings growing 50 percent annually.
    It's a great story and we need more of them.
    At the national level, start-up activity has picked up in the past 
three years, but the share of startups has declined by almost half 
since the late 1970s.
    New firms are increasingly concentrated in a few big cities and 
states.
    One report found that just 20 counties were responsible for half of 
the net increase in new businesses from 2010 to 2014.
    And the share of startups created by veterans and in rural areas 
are both down in the past two decades.
    There are a number of actions we should take to boost start-up 
activity, few of which have anything to do with the tax code.
    It's vital that we strengthen the basic economic foundation--more 
jobs, higher wages, and improved access to education and health care.
    And we must lay the groundwork for start-up activity in rural 
areas.
    That means increasing access to capital, speeding the deployment of 
broadband in rural communities, and taking other steps to ensure that 
rural and tribal areas are able to compete when it comes to start-up 
activity.
    We also should be clear about what will not help small firms.
    Large tax cuts for large, established companies do nothing for 
startups--which have little to no taxable income in those critical 
early years while working to get their business off the ground.
    And it does little for small businesses in need of capital to 
grow--capital that has been shrinking and drying up since the 
recession.
    As we've seen time and again, tax giveaways for large corporations 
and our highest-earners do nothing to help small businesses, rural 
communities, and working people get ahead.
    And it leaves fewer and fewer dollars to invest in roads, schools, 
entrepreneurs, and working families, compounding the challenges facing 
small cities and towns around the country.
    The primary goal of reform should be to use the levers we have to 
level the playing field. One, because it's the right thing to do. And 
two, because every American should have the opportunity to turn their 
dream into a reality.
    A zip code should not determine a child's success or her chances of 
starting a business.
    The entrepreneurial spirit is alive and well from Las Cruces, New 
Mexico, to Boston, Massachusetts. It's our job to make sure we give 
every American the same chance to succeed, no matter their background.
    Two things we could do right now to boost our economy and put more 
money in the pockets of working families are expanding the earned 
income tax credit and strengthening the child tax credit.
    Our focus needs to be on creating better opportunities for the 
folks on Main Street, not delivering more tax breaks for bankers on 
Wall Street.
    We have an opportunity this Congress to work together to craft a 
bipartisan tax reform package that promotes entrepreneurship, 
simplifies our tax code, and puts more money in the pockets of working 
people.
    If we do that, we will give Main Street the boost it desperately 
needs. I'm ready to get to work.
    I look forward to the panel's testimony.
    
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    Questions for the Record Submitted by Senator Mike Lee and Responses 
                        from Mr. John R. Dearie
    In contrast with the scope of the corporate tax debate, one of the 
lesser-known debates in overall tax reform has to do with two different 
methods of accounting: cash accounting and accrual accounting. Under 
our current code, small businesses that make less than $5 million in 
annual gross receipts have the option of using a cash-based system, as 
opposed to the more complex accrual accounting system, which records 
revenue and expenses as they are booked, even if the actual money has 
not changed hands. Mr. Dearie, can you comment on the impact these two 
accounting methods have on firms hoping to grow their annual revenue 
above the $5 million threshold, and the implications either raising or 
lowering this threshold may have on the ability of new and growing 
businesses to flourish in our economy?
    New businesses are enormously important to the vitality and 
productive capacity of the economy. New businesses are 
disproportionately responsible for the innovations that drive gains in 
productivity and, therefore, economic growth. Recent research has also 
shown that start-ups account for virtually all net new job creation.
    And, yet, new businesses are also extremely fragile--a third fail 
by their second year, half by their fifth. Given the importance of new 
businesses, the aim of public policy should be to create circumstances 
favorable to new business formation, survival, and growth.
    Unlike larger or more established firms, start-ups typically don't 
have the resources to hire a chief financial or compliance officer to 
navigate complex and ever-changing tax and regulatory codes--they do it 
themselves. Entrepreneurs distracted with tax and regulatory 
compliance, or complex accounting requirements, rather than focused on 
their product, service, and the marketplace are much more likely to 
make mistakes, miss opportunities, or even fail.
    The cash method of accounting is simpler, less costly, and easier 
for new businesses to understand than accrual accounting or other more 
complex accounting methods, and, therefore, simplifies financial 
reporting and tax compliance--which improves operating circumstances 
for fragile, resource-strapped start-ups.
    One policy option would be to allow start-ups to use the cash 
method of accounting, if they choose to, for the critical first five 
years of operation, regardless of revenue or total assets. Another 
option would be to apply the definition for Qualified Small Business 
(QSB) under Section 1202 of the tax code, which pertains to the tax 
treatment of any gains on investments in QSBs. QSBs are currently 
defined as C corps with total gross assets under $50 million. The 
National Venture Capital Association has recently advocated that the 
QSB asset threshold be raised to $100 million.
                               __________
    Questions for the Record Submitted by Senator Amy Klobuchar and 
                   Responses from Mr. John R. Dearie
       the deferred action for childhood arrivals (daca) program
    Mr. Dearie, on October 3, I attended a Judiciary hearing on the 
Deferred Action for Childhood Arrivals (DACA) program. DACA has 
provided protection to nearly 800,000 DREAMers--including more than 
6,000 in Minnesota--who were brought here as children and only know the 
United States as their home. They serve in our military, pay taxes, and 
contribute to communities across the country. The vast majority of 
these young people--more than 97 percent--are in school or the 
workforce. And one recent study found that 72 percent of all DACA 
recipients currently in school are pursuing a bachelor's degree or 
higher.
    Immigrants have been part of our Nation's greatest achievements. In 
2010, Fortune magazine found that more than 40 percent of the Fortune 
500 were founded by immigrants or their children--including 3M and 
Hormel Foods in Minnesota. I joined a letter, along with 41 of my 
Senate colleagues, urging the President to keep DACA in place. I also 
support the bipartisan Graham-Durbin Dream Act.
    How would immigration reform boost entrepreneurship?
    Economic growth comes from growth in the labor force and/or gains 
in productivity. In recent years productivity growth has been half the 
historical average, making population growth especially important to 
economic growth. And given demographic realities like the retirement of 
the baby-boom generation and historically low birth rates, immigration 
has accounted for half of labor force growth in recent years. Were it 
not for immigration, the United States would be Japan--shrinking in 
population, economically stagnant, waning in global importance.
    But the benefits of robust immigration reach far beyond the impact 
of simply more people working and consuming. Research shows immigrants 
to be highly entrepreneurial. To immigrate requires a willingness to 
pick up one's life and move, often at great personal and financial 
risk, to a different country, with a different culture, and often a 
different language--a profoundly entrepreneurial act.
    It should be no surprise, then, that immigrants are twice as likely 
as native-born Americans to start a business. Though just 15 percent of 
the population, immigrants account for a quarter of all small 
businesses. And, as you point out, 40 percent of Fortune 500 companies 
were founded by foreign-born entrepreneurs or a child of immigrants. 
Iconic American companies founded by foreign-born entrepreneurs--and 
employing millions of Americans--include Intel, Google, Yahoo, eBay, 
Tesla, YouTube, PayPal, Nvidia, Pfizer, LinkedIn, Levi Strauss, Sun 
Microsystems, Dow, AT&T, DuPont, and Anheuser-Busch. We want the next 
generation of these companies launched here in the United States, 
creating jobs, opportunity, and careers for Americans.
    Immigrants are also highly innovative--again, a reality that should 
not surprise. A 2012 study found that foreign-born researchers were 
involved in more than 75 percent of the nearly 1,500 patents awarded at 
the Nation's top 10 research universities. Last year, all six of 
America's Nobel Prize recipients were immigrants.
    The net result of immigrants' propensity for innovation and 
entrepreneurship is job creation. This effect is most pronounced for 
immigrants with advanced degrees from U.S. universities working in 
science and technology fields. According to a study by the American 
Enterprise Institute, between 2000 and 2007 each group of 100 foreign-
born workers with such backgrounds was associated with 262 additional 
American jobs.
    With these realities in mind, immigration reform to enhance 
American entrepreneurship and ensure America's economic competitiveness 
reform should include:


      A new green card category should be created to attract 
foreign-born graduates in science and technology based on a points 
system focused on skills, level of education and training, and other 
key metrics.

      Green cards should be granted to foreign-born students 
who complete a degree from an American college or university who wish 
to remain in the United States and who meet national security 
requirements. Under current policy, foreign-born graduates are required 
to return home, taking their U.S.-acquired human capital with them.

      A start-up visa should be created for foreign-born 
entrepreneurs who want to launch new businesses in America--the United 
States is the only industrialized nation that does not have such a visa 
category. A 2013 study by the Ewing Marion Kauffman Foundation 
concluded that a start-up visa would create between 500,000 and 1.6 
million new American jobs over 10 years.
                            the startup act
    Mr. Dearie, one of the most important things we can do to support 
entrepreneurs and our innovation economy is to increase the pace of 
commercialization--bringing research out of labs and into the 
marketplace. I am an original cosponsor of the Startup Act, which 
includes provisions to support entrepreneurs in getting Federally 
funded research off the shelf and into the market. Supporting this kind 
of activity creates new companies and jobs, along with a payoff on the 
Federal dollars invested in the initial research.
    From your experience supporting entrepreneurs and in venture 
capital, how will increasing the commercialization of new technologies 
support these entrepreneurs and our innovation economy?
    Federal funding of research and development (R&D), most of which is 
conducted at colleges and universities, is a critical aspect of 
America's innovation and entrepreneurial ecosystem. Accelerating the 
process by which new innovation is commercialized--by reducing 
obstacles and bottlenecks, and streamlining the commercialization 
process--will greatly enhance entrepreneurship and help accelerate 
economic growth.
    The Federal Government accounts for about 30 percent of all R&D 
investment. Most critically, whereas businesses fund and conduct the 
vast majority of applied R&D, about 70 percent of basic research is 
funded by the government and conducted primarily at U.S. colleges and 
universities.
    Basic or pure research is conducted to gather general information 
and to build on existing knowledge and understanding. Applied research 
is conducted for more targeted purposes--to resolve a particular 
question or to achieve a specific commercial objective. For example, a 
neurologist who studies the human brain to understand its structure and 
general workings is conducting basic research. A neurologist who 
studies the brain to determine the causes of Alzheimer's disease is 
conducting applied research.
    While businesses conduct some basic research, they are generally 
not well suited for such research. First, individual businesses are 
generally unable to take on the scale and risk that basic research 
entails. Moreover, firms are highly unlikely to invest in research that 
has an unknown outcome or that is unlikely to produce an immediate 
practical application. Basic research results are also not patentable. 
Finally, because businesses naturally hope to capture the full economic 
payoff of any R&D expenditure, they are less inclined to share any 
spillover benefits, limiting the broader societal value of such 
research.
    And yet basic research--in addition to expanding human 
understanding of science and technology--is also the basis for applied 
research, establishing the context of knowledge and understanding 
within which additional progress can be made regarding specific 
inquiries.
    In this sense, applied research by businesses depends on basic 
research funded principally by government. Indeed, government funding 
of basic research has played a critical role in driving many 
technological breakthroughs that have helped U.S. industry become a 
global technology leader. Sun Microsystems, Pfizer, Google, Genentech, 
and Cisco are examples of companies whose origins can be traced back to 
basic research funded by the government.
    Unfortunately, the U.S. government's commitment to R&D has waned 
dramatically in recent years. The Federal share of total R&D peaked at 
67 percent in 1964, before slowly declining to 30 percent by 2009. 
After growing at an inflation-adjusted average annual rate of 7 percent 
between 1950 and 1990, growth in government outlays for R&D fell to an 
annual average of just 1.4 percent between 1990 and 2012.
    Meanwhile, other nations have dramatically expanded government 
support of R&D. Over the period 1992 to 2009, Australia increased 
government R&D spending at an average annual rate of 9 percent, South 
Korea by 11 percent, Singapore by 14 percent, and China by nearly 20 
percent.
    Circumstances are even more alarming when government R&D 
expenditures are considered as a percentage of GDP. U.S. government R&D 
fell steadily from a high of 2.2 percent of GDP in 1964 to a low of 0.7 
percent of GDP in 2000, and has remained at or below 1 percent of GDP 
ever since.
    If America is to retain its status as the world's innovation 
leader, the multi-decade decline in the commitment of Federal dollars 
to scientific research must be reversed.
                               __________
 Questions for the Record Submitted by Senator Mike Lee and Responses 
                        from Mr. Scott A. Hodge
    In our current tax reform debate, there is a stark contrast of 
opinions about some of the major concepts being considered. For 
example, take the corporate tax. One side of the aisle consistently 
argues that a cut to our 35% corporate tax would be a simple handout to 
the wealthiest executives. However, a real look at exactly how the 
corporate tax works reveals that this regressive tax actually taxes a 
combination of capital and labor--both the investor's dividends and the 
wages of the workers. Although economists debate what this ratio truly 
is, it is commonly understood that lost worker wages make up between 
one-quarter and one-half of corporate tax revenue--and possibly even 
more. This is why in January I proposed eliminating the corporate tax 
altogether, and shifting the tax burden on investors instead of 
workers, by taxing capital gains and dividends at ordinary individual 
income rates. Under this strategy, workers would be liberated from 
their share of the corporate tax burden, and America would, without a 
doubt, become the most popular place to invest and do business. Mr. 
Hodge, can you comment on this proposal, and possibly elaborate on the 
effects that such a strategy would have on the entrepreneurial 
community and overall investment in new and growing firms?
    The approach of reducing entity-level taxes and raising 
shareholder-level tax on income earned by C corporations is a 
fundamentally sound one.
    Generally speaking, a tax system is more efficient when it applies 
taxes to immobile activities, rather than mobile ones. Corporations are 
highly mobile: in an era of open global capital flows, corporations can 
easily move operations into more competitive jurisdictions if U.S. 
marginal tax rates are high. On the other hand, U.S. shareholders are 
less mobile: when taxed on their investment income, they will not 
generally decide to expatriate (although they may decide to save less 
and consume more).
    Furthermore, there is reason to believe that current entity-level 
taxes on C corporations are more harmful to investment than 
shareholder-level taxes on the same income. This is because the current 
corporate income tax contains a significant bias against physical 
business investment: businesses are not allowed to deduct the full cost 
of their investments in equipment, machinery, and structures. 
Meanwhile, shareholder-level taxes are levied on distributed business 
cash flow--a tax base that does not include a bias against physical 
investment.
    All in all, lowering entity-level taxes and raising shareholder-
level taxes is a policy trade that could encourage investment in the 
United States and increase growth.
    There are at least two concerns to which lawmakers should be 
attentive when designing a plan to lower entity-level taxes with 
shareholder-level taxes.
    First, a significant amount of U.S. corporate equity is held by 
foreign shareholders. These parties would benefit from a lower U.S. 
corporate rate, but would not necessarily remit higher shareholder-
level taxes to the U.S. Federal Government; this could lead to 
significant revenue loss. This problem could be ameliorated by creating 
a withholding tax on corporate dividend payments, which would be 
refundable to taxable shareholders, but non-refundable to foreign and 
other tax-exempt shareholders.
    Second, raising tax rates on capital gains may create a lock-in 
effect, where shareholders become more reluctant to sell their equity 
holdings in the presence of high rates that occur upon realization. 
This problem could be ameliorated by creating a partial deduction for 
realized capital gains that are reinvested.
    Mr. Hodge, you have testified about your skepticism regarding a 
special rate for pass-throughs, but given the current tax reform 
framework's proposal to have a separate pass-through rate and to have 
rules to minimize tax avoidance--what, in your opinion, should those 
rules look like?
    Many lawmakers have proposed enacting a maximum tax rate on pass-
through business income which is lower than the top ordinary income tax 
rate. For instance, the recently released Unified Framework from 
Republican leadership calls for a maximum tax rate of 25 percent on 
pass-through business income, while proposing a top tax rate of at 
least 35 percent on ordinary income (such as wages and salaries).
    This proposal would mean that, for the first time since the 
creation of the Federal income tax in 1913, income from pass-through 
businesses would be taxed on a separate rate schedule from income from 
wages and salaries.
    A number of economists, accountants, tax lawyers, and policy 
experts have raised concerns that this approach could lead to tax 
avoidance. Specifically, the proposal would create an incentive for 
sophisticated taxpayers to try to re-categorize their wage income as 
pass-through business income for tax purposes, in order to take 
advantage of the lower rate.
    One particularly concerning avenue for abuse is the case of 
individuals who are both owners and employees of a business--such as a 
lawyer or accountant. In these cases, a business would have an 
incentive to lower its wages for owner-employees, which would lead to 
higher business profits. As a result, the owner-employees would report 
lower wages and higher pass-through business income on their personal 
returns, which would lead to tax savings.
    In my view, there are three basic families of approaches for 
combating the potential tax avoidance that could arise under a 
preferential rate schedule for pass-through business income. The first 
two would attempt to define the portion of a business' payment to an 
individual that represents bona fide business income, as well as what 
portion represents a compensation for labor provided (i.e., disguised 
wage income). The third would simply exclude certain pass-through 
businesses or owners from the benefits of a lower rate.
    The first family of approaches could be termed ``formulary'' 
approaches. These would attempt to define the portion of a business' 
income that is eligible for a lower pass-through rate by a mathematical 
formula. Formulary approaches are likely more effective at combating 
potential abuse of a lower pass-through rate, because they leave less 
room for creative accounting. However, they run the risk of 
mischaracterizing arrangements between businesses and owners, as 
formulas may not always reflect economic realities.
    One formulary approach would be to deem 70 percent of a business' 
payments to an owner-employee as ``wages'' and 30 percent of the 
business' payments as ``profits.'' The benefit of this approach would 
be to remove ambiguity about what counts as business income, making 
abuse more difficult. However, business arrangements with owner-
employees vary widely, so this approach might not perfectly match the 
reality of each arrangement.
    A more promising formulary approach would focus on the amount that 
each owner has invested in a pass-through business (this is known as an 
``asset-based approach''). After all, if the rationale for a lower rate 
on pass-through businesses is to encourage investment in the United 
States, it may make sense to limit the benefits of the lower rate to 
owners who have invested the most in the business. Under this approach, 
owners would track their basis in each pass-through business and 
calculate a ``normal return'' to their investment. The amount of normal 
investment return would be eligible for a lower rate, while income that 
exceeds a normal return would be deemed ineligible for the lower rate. 
After all, business profits that exceed a normal return are likely to 
represent investments that are so profitable that they would have been 
made even without a rate cut (or, alternatively, disguised wage 
income).
    A second family of anti-abuse approaches are those based on ``facts 
and circumstances.'' These would attempt to describe, in qualitative 
terms, which payments from businesses to individuals should be 
categorized as compensation for labor services provided and which ones 
should be categorized as business profits.
    Current law already contains at least one ``facts and 
circumstances'' anti-abuse rule: the requirement that S corporations 
provide ``reasonable compensation'' to owner-employees for the labor 
they provide to the business. This rule is intended to discourage 
taxpayers from recategorizing wages as business profits for the purpose 
of reducing self-employment taxes.
    However, there is reason to believe that the current reasonable 
compensation standard is relatively weak. In 2009, the Government 
Accountability Office found that there is significant use of S 
corporations to recategorize wages as business profits.
    Some have proposed trying to strengthen the reasonable compensation 
standard, or creating a new ``facts and circumstances''-based standard 
for preventing abuse. One proposal would require businesses to 
compensate owner-employees in line with industry norms. Another would 
create a new third-party verification system, relying on large 
accounting firms to independently ensure that pass-through businesses 
are not disguising wages as business profits.
    The strength of the ``facts and circumstances'' approach is that 
these standards may more accurately reflect the arrangements between 
businesses and owners. However, because these tests are ultimately 
subjective, they run a much larger risk of abuse and manipulation.
    Finally, a third approach to combating abuse of a lower pass-
through rate would be to exclude certain pass-through businesses or 
owners from the benefits of a lower rate. For instance, some lawmakers 
have proposed excluding ``personal service companies,'' such as law 
firms and accounting firms, from the benefits of a lower rate. The 
rationale for this idea is that such businesses typically earn a large 
share of their gross revenue from labor, rather than from investment; 
as such, these businesses might be especially likely to recategorize 
labor income as business profits.
    This third approach could greatly limit the available opportunities 
for abuse of a lower pass-through rate. However, it could also make the 
tax code less neutral between different sectors of the economy.
    Ultimately, none of these approaches would be perfect at preventing 
abuse. Indeed, whenever lawmakers create different tax rates on 
different categories of income, there will always be some potential for 
creative accounting to maximize the amount of income subject to the 
lower rate.
                               __________
 Questions for the Record Submitted by Representative Barbara Comstock 
                 and Responses from Mr. Scott A. Hodge
    Below is the citation for my comment to Representative Comstock 
about the number of companies that have moved offshore.
    More than 50 companies have moved their headquarters abroad since 
1981. Zachary Mider, ``Tax Inversion,'' Bloomberg, March 2, 2017. 
https://www.bloomberg.com/quicktake/tax-inversion
                               __________
    Questions for the Record Submitted by Senator Amy Klobuchar and 
                    Responses from Ms. Falon Donohue
                              crowdfunding
    Ms. Donohue, both of you have helped raise the capital needed by a 
startup. I supported the JOBS Act, which will help entrepreneurs to use 
crowdfunding as another source of capital.
    How is crowdfunding different from traditional bank financing and 
how can crowdfunding help start-ups gain access to capital?
    Crowdfunding can be a very useful source of capital for many 
startups. In Ohio, my friends at OROS Apparel used the crowdfunding 
site Kickstarter to raise more than $350,000 and gain early users of 
their NASA inspired outdoor apparel. In this case, crowdfunding allowed 
the OROS founders, undergraduate students at Miami University in 
Oxford, Ohio, to start a highly capital intensive apparel product 
company before they even graduated. Since that time, OROS has raised 
more than $1,000,000 in traditional venture capital from NCT Ventures 
and continues to create innovative products.
    A clear benefit of crowdfunding is the ability to validate your 
product and acquire early customers before committing large sums of 
capital to build out your company or product. In addition, because 
crowdfunding takes place on the internet, geographic boundaries do not 
limit the companies to a particular set of investors.
    Generally, crowdfunding is best for companies with mass public 
appeal. While crowdfunding does not work for every company and many 
will have to continue seeking traditional financing to help build their 
companies, crowdfunding can be a very useful way to access capital for 
companies with mass appeal.
                            the startup act
    Ms. Donohue, one of the most important things we can do to support 
entrepreneurs and our innovation economy is to increase the pace of 
commercialization--bringing research out of labs and into the 
marketplace. I am an original cosponsor of the Startup Act, which 
includes provisions to support entrepreneurs in getting Federally 
funded research off the shelf and into the market. Supporting this kind 
of activity creates new companies and jobs, along with a payoff on the 
Federal dollars invested in the initial research.
    From your experience supporting entrepreneurs and in venture 
capital, how will increasing the commercialization of new technologies 
support these entrepreneurs and our innovation economy?
    Tech commercialization and tech transfer is an important way for 
many people to begin their entrepreneurial journey.
    Employing technology, which is born from validated research and 
experimentation at a university or research institution, may increase 
the chance of success for a company, in turn creating good-paying jobs. 
It also ensures new products and companies are created from the 
taxpayer-funded research and development process of our public 
universities.
    Many of the research institutions and universities in Ohio have 
seen increasing success commercializing their technology and 
intellectual property. In many cases, the institutions and venture 
capital partners have combined resources to enable capital deployment 
for companies which have successfully commercialized technologies.
    In Ohio, companies like Nikola Labs, which was born from research 
in The Ohio State University's ElectroScience Lab, and Assurex Health, 
which licensed technology from Mayo Clinic and Cincinnati Children's 
Hospital Medical Center, are both examples of companies demonstrating 
why strong tech commercialization is increasingly useful to our 
innovation economy.
                               __________
Questions for the Record Submitted by Senator Amy Klobuchar and Answers 
                        from Mr. John Arensmeyer
                              crowdfunding
    How is crowdfunding different from traditional bank financing and 
how can crowdfunding help start-ups gain access to capital?
    Crowdfunding is an alternative method for startups to raise 
capital. Equity Crowdfunding (targeted by the JOBS Act) differs from 
traditional financial institutional lending, in that a large group of 
small-contribution shareholders provide the necessary startup capital. 
This is primarily based in online social media, a form of social 
lending.
    Crowdfunding helps provide entrepreneurs with limited access to 
financial lending with a chance to get their businesses off the ground 
with community support. It is believed that crowdfunding has raised 
over $34 billion since 2003.
    While many entrepreneurs have been afforded great success with 
crowdfunding, a large majority do not. On their own, most entrepreneurs 
can expect to raise an average of $10,000 or less through online 
crowdfunding. Several cities, like Philadelphia, have made attempts to 
correct this by facilitating crowdfunding through the Kiva platform.
    Small Business Majority was also a strong supporter of the 2012 
JOBS Act. This legislation allowed rules to be put in place to allow 
companies broader access to startup capital through crowdfunding.
       the deferred action for childhood arrivals (daca) program
    How would immigration reform boost entrepreneurship?
    DACA recipients make up a vast number of our Nation's youngest and 
brightest students, entrepreneurs and small business owners. From the 
Center for American Progress, based on a scientific survey of 3,063 
DACA recipients: 5% of all DACA enrollees and 8% of those older than 25 
years old have started their own businesses in the United States, 
compared to a rate of 3.1% for the U.S. population as a whole.
    All immigrants start businesses at twice the national average. It 
is crucial to ensure proper immigration reform allows for these young 
men and women--who have grown up and lived their lives in the United 
States--to stay and continue contributing to a robust and innovative 
economy. It is not in the best interest of the small business community 
for the DACA program to remain unresolved.
    Small Business Majority's polling shows a vast majority--74%--of 
our Nation's small business owners agree that the most appropriate 
immigration solution is to create a path toward citizenship accompanied 
by effective enforcement. Three-quarters believe we would be better off 
if people who are in the country now illegally became legal taxpayers, 
so they can pay their fair share. We must implement responsible 
immigration reform and combat policies that inhibit the economic 
benefits our immigrant population brings to our country. This includes:

      Passing a comprehensive immigration law guaranteeing 
eventual citizenship for those who play by the rules and contribute to 
our economic success, coupled with appropriate and reasonable 
employment verification provisions.
      Supporting expansion of the existing H-1B visa program to 
allow more visas for low-skilled workers.
      Opposing efforts to needlessly inhibit the success of 
immigrants in the country when there is no countervailing security 
reason to do so.
               start-up and small business tax incentives
    What other commonsense tax policies can we put in place that target 
businesses as they are starting out?
    We need a tax system that benefits America's entrepreneurs who are 
focused on growing their enterprises and making payroll at the end of 
each month. Small business owners feel that our tax system primarily 
benefits wealthy corporate interests at their expense. They don't want 
special treatment; they simply want to compete on a level playing 
field.
    Small Business Majority's polling has shown that 90% of small 
business owners believe big corporations are using loopholes to avoid 
taxes that small businesses have to pay, and 92% believe corporations' 
use of those loopholes is a problem.\1\ Similarly, 9 in 10 small 
business owners believe that U.S. multinational corporations' use of 
these loopholes to shift U.S. profits overseas is a problem. What's 
more, three-quarters believe their small business is harmed when 
loopholes allow big corporations to avoid taxes.
---------------------------------------------------------------------------
    \1\ Small Business Majority, October 2012, http://
smallbusinessmajority.org/our-research/government-accountability/
opinion-poll-small-business-views-taxes-and-role-government
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    That's why we're concerned by the current proposal for tax reform. 
While some are touting the plan as a boon for small businesses, the 
reality is that it will not actually benefit most Main Street 
businesses and would greatly add to the deficit. Indeed, the proposal 
would add at least $2.4 trillion to the deficit over 10 years according 
to the Tax Policy Center, and would continue to put small businesses at 
a disadvantage by not addressing corporate loopholes.\2\
---------------------------------------------------------------------------
    \2\ Tax Policy Center, September 2017, http://
www.taxpolicycenter.org/publications/preliminary-analysis-unified-
framework
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    Some claim the current proposal to cap the tax rate for pass-
through entities at 25% would be a boon for small business. In fact, 
this would impact only a handful of small firms according to the Tax 
Policy Center analysis. More than 87% of pass-through entities already 
pay a marginal tax rate of 25% or less, and less than 2% pay the 
current top marginal rate of 39.6%. Moreover, if individual tax 
brackets are streamlined to 12%, 25% and 35%, pass-through entities 
that would benefit from the pass-through cap rate would include only 
the 1.8% earning $425,000 or more.
    A startling 88% of the savings generated by cutting the pass-
through rate to 25% would go to the top 1% of earners. In short, this 
proposal would primarily benefit hedge fund managers, lobbyists and 
investment bankers--not Main Street small businesses.
    And, last but not least, a tax code with a large gap between top 
individual rates and top pass-through rates can potentially encourage 
wealthy individuals to game the system by simply declaring themselves 
pass-through business entities.
    If Congress wants to offer a responsible tax cut for most Main 
Street small businesses, and offset that cut with a reduction in 
existing loopholes, allowing all businesses to deduct a modest amount 
of their profits would have a much greater impact.
    As for corporate taxes, cutting the top rate would help some small 
businesses that are organized as C corporations, especially considering 
small businesses are unable to take advantage of the same accounting 
loopholes as large corporations. But doing so without getting rid of 
corporate tax loopholes would greatly increase the deficit. Economists 
from the Tax Policy Center estimate that reducing the corporate rate to 
less than 26% would be impossible to offset with just a reduction in 
loopholes; a reduction to 20% would reduce Federal tax revenue by $1.6 
trillion over 10 years.\3\
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    \3\ Tax Foundation, May 2016, https://taxfoundation.org/costs-20-
corporate-tax-rate-are-temporary-while-benefits-are-permanent/
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    This is why it's crucial to implement policies that will help all 
entrepreneurs rather than giving tax breaks to those who need it least. 
Any substantive changes to the tax code must promote economic 
development from the bottom-up, enacting policies that benefit small 
businesses, rather than the top-down. Our specific proposals include 
the following:

      Ensure any changes to the corporate and personal tax 
codes have a significant, direct benefit to small businesses and self-
employed individuals, as opposed to large businesses, hedge funds and 
the very wealthy.
      When considering a targeted, responsible reduction in 
business tax rates, ensure that it is accompanied by the elimination of 
costly loopholes that primarily benefit the wealthy and large 
corporations, such that the result is revenue-positive, or at least 
revenue-neutral.
      Instead of reducing pass-through business income tax 
rates from the top down in a manner that benefits only a sliver of 
small businesses, we urge the committee to examine a proposal as part 
of regular order discussions about tax reform that would benefit small 
businesses from the bottom up, rather than the current top-down 
proposals that will only benefit wealthy individuals. For example, we 
propose allowing small businesses to deduct their first $25,000 in 
business income whether or not they file their tax returns as a pass-
through entity or as a C corporation. This deduction should be paid for 
by eliminating loopholes and be accompanied by a phase-out for 
businesses with $150,000-200,000 in income to ensure it is targeted to 
the majority of Main Street small businesses.
      Consider a modest reduction of the nominal corporate tax 
rate, thus reducing the actual tax rate for most C corp small 
businesses, while eliminating unfair, inefficient tax loopholes in a 
manner that ensures a net revenue increase to bring down our deficit 
and fund key programs. Loopholes that can be eliminated include 
offshore tax deferral and the carried interest deduction.
      Reject the current proposal for ``full expensing'' of all 
capital purchases. Small businesses can now expense their first 
$500,000 of capital expenditures under Section 179. Allowing for full 
expensing above that level would have little benefit to them.
      Oppose any efforts to reduce top individual tax rates. It 
is a myth that top individual tax rates adversely harm Main Street 
small businesses. Only 1.7% of pass-through businesses pay income tax 
at the top rate.\4\
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    \4\ Tax Policy Center, August 2016, http://www.taxpolicycenter.org/
model-estimates/distribution-business-income-august-2016/t16-0185-
sources-flow-through-business
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      Oppose the enactment of a ``territorial'' corporate tax 
system that would allow a select few large multinational corporations 
to game the system by funneling their profits to the lowest-taxation 
foreign jurisdictions.
      Crack down on the ability of large corporations to reduce 
their tax burden simply by parking their profits offshore or moving 
their headquarters outside the country.
      Uphold the estate tax in its current form, understanding 
that it currently protects virtually all small businesses and family 
farms.\5\
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    \5\ Tax Policy Center, 2017, http://www.taxpolicycenter.org/
briefing-book/who-pays-estate-tax
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      Ensure parity between online and bricks-and-mortar 
businesses with a reasonable and fair internet sales tax solution.
      Simplify and expand the small business tax credit created 
by the Affordable Care Act--helping more small businesses qualify for 
and utilize it.
      Pass healthcare tax equity for the self-employed so that 
freelancers can deduct their healthcare expenses from their FICA tax 
obligations--just like other business entities.
      Enact the bipartisan Investing in Opportunity Act that 
will help revitalize economically distressed communities by, among 
other things, allowing investors to temporarily defer capital gains 
recognition if they invest in an ``opportunity zone.''
      Increase limits for deducting start-up and organizational 
expenses from the current $5,000 levels to $10,000 each.
      Allow very small firms to use a simplified method of cash 
accounting.

    These changes will provide critical benefits to the entrepreneurs 
and small business owners who need it most, allowing them to grow and 
expand their business on a level playing field with large corporations.
                            the startup act
    From your experience supporting entrepreneurs and in venture 
capital, how will increasing the commercialization of new technologies 
support these entrepreneurs and our innovation economy?
    The Startup Act has facilitated the commercialization of technology 
through critical Federal funding to higher education institutions and 
developmental laboratories. Taxpayer supported research gives the 
United States economy a competitive edge over our global competitors by 
fast tracking technological developments to commercial production 
phase. This is key to stimulating our innovative economy. Not only did 
the Startup Act provide research provisions, but sought to attract 
immigration by STEM graduates by offering permanent residency. 
Increasing the number of STEM innovators in our economy provides us 
with the human capital to remain the world's leading technological 
innovator.
                               __________
Questions for the Record Submitted by Senator Margaret Wood Hassan and 
                   Responses from Mr. John Arensmeyer
                         woman-owned businesses
    What are some ways that we can include these types of service-based 
firms and thus make it easier for women-owned businesses to start-up 
and grow?
    There are over 8 million women owned firms in the United States 
today, and of those, 90% are small businesses.
    Since our inception, Small Business Majority has been active in 
redressing business-related inequities across the board, including by 
advancing entrepreneurship opportunities for women and pressing for 
workplace policies like family medical leave, secure healthcare and 
paid sick days that ease work-life complexities for women.
    In 2015, we launched our Entrepreneurship Program, targeted to 
underserved communities. The program delivers information that small 
business owners need to launch and run a successful business, including 
resources and education specifically geared toward women business 
owners. The program builds on our 12 years of work organizing small 
business owners and establishing partnerships with business 
organizations such as regional Women's Business Centers. The program is 
focused initially in nine cities across the country where we have staff 
on the ground--Baltimore, Columbus, Chicago, Denver, Los Angeles, San 
Francisco Bay Area, Springfield (MO), St. Louis and Washington, D.C.--
with companion national webinars and educational websites.
Women's Entrepreneurship Program
    As part of our expanded Women's Entrepreneurship Program, we will 
deliver targeted education and resources specifically geared for women 
business owners. We will launch this program nationally, with an 
initial focus on 2-3 metropolitan areas. Here is our plan:
Access to capital
    Increasing women's access to and options for obtaining capital is a 
top priority of our Entrepreneurship Program. Although women-owned 
firms are the fastest-growing segment of businesses, studies find that 
women do not get sufficient access to loans and venture investment. 
According to the Small Business Administration, women account for a 
paltry 17% of SBA loans, even though they represent 30% of all small 
companies. In their report, ``Empowering Equality: 5 Challenges Facing 
Women Entrepreneurs,'' Third Way researchers found that women 
entrepreneurs are more likely to finance their business startup with 
personal debt.
    Our access to capital program was designed to address these issues. 
It offers unbiased, business-based education and information about 
access to responsible sources of capital. Topics range from how to find 
and secure financing, to navigating the growing number of lending and 
repayment options, to raising awareness about predatory lending. Our 
unique role in this growing ecosystem is to reflect and deliver on the 
needs of entrepreneurs in a comprehensive, unbiased fashion. We do not 
provide the actual loans or technical assistance services. We do, 
however, make sure that after we educate entrepreneurs that we direct 
them to the appropriate doors to address their needs.
    The umbrella program offers the following activities and resources:
        1. Education and outreach: We educate women entrepreneurs about 
        lending options, how to protect themselves from predatory loans 
        and funding opportunities specifically for women entrepreneurs, 
        such as Federal grants, microloan programs geared toward women 
        such as Kiva, and venture capital opportunities such as SheEO. 
        We will expand our partnerships and form new partnerships with 
        business organizations that serve women entrepreneurs, 
        including the Association of Women's Business Councils, to co-
        sponsor online and in-person for women entrepreneurs.
        2. Resource and community portal: We will expand our online 
        resource portal that helps entrepreneurs make sense of the 
        financing environment. The portal currently includes our 
        educational resources, a locator to find local CDFIs and 
        technical assistance providers, blog posts, industry news, and 
        additional resources such as online calculators, tips on 
        creating a business plan, and other advice such as information 
        on how personal credit scores can affect small business owners' 
        loan eligibility.
    To expand the portal, we will develop a community portal within our 
existing website that will facilitate peer-to-peer connections. The 
first version of this portal will be targeted to women. Members will be 
encouraged to leave comments, ask questions, create profile pages and 
reach out to other members. The goal of this community portal will be 
to build networking opportunities for women entrepreneurs. The portal 
will also include information on mentorship and procurement 
opportunities and resources (see below). We will launch this portal as 
a pilot in a few designated cities and expand it over time.
        3. Online lending portal: We will design our SimpleGrowth 
        online lending portal and outreach efforts to target women 
        entrepreneurs, by including CDFIs and other lenders that have 
        loan program specifically geared for women and marketing the 
        platform to our women business owner networks.
Procurement
    Women entrepreneurs also lag in procuring State and Federal 
contracts. While the Federal Government has had a stated goal since 
2000 of ensuring women-owned businesses receive at least 5% of Federal 
contracts, this goal was only just met in 2015. To help women in this 
critical area of entrepreneurship, we will offer targeted assistance to 
national, State and commercial efforts to improve procurement 
opportunities for women through the following activities:
        1. Outreach and education: We are adding a procurement 
        component in our Entrepreneurship Program designed to educate 
        women business owners about their procurement options, 
        particularly Federal procurement, and how to obtain 
        certification as a woman-owned business. It will include an 
        overview of the SBA's WOSB Federal Procurement program, 
        strategies for pursuing corporate procurement, and local 
        resources and networks that can help.
        2. Partnerships and resource connections: We will form 
        partnerships with groups that specialize in procurement 
        opportunities, provide them with audiences from our small 
        business network, invite them to speak at our events, cohost 
        events with them and distribute information through our 
        networks, portal and events. We also will build out a section 
        of our portal dedicated to procurement opportunities for women 
        entrepreneurs.
Mentorships and networking
    It is widely known, through anecdote and analysis, that women have 
a more difficult time finding mentors than men. Indeed, according to a 
survey of more than 1,000 working women conducted by networking site 
LinkedIn, 1 out of 5 women say they've never had a mentor. The Third 
Way report also found that women lack the networks and ``social 
capital'' entrepreneurs need to start and grow their firms. Our own 
informal focus groups of women small business owners have shown us that 
women seek and need more mentorship and networking opportunities. We 
will address this issue through the following activities:
        1. Education and resources: We will include a mentorship 
        component to our Entrepreneurship Program, educating women 
        entrepreneurs on mentorship opportunities and programs such as 
        those offered by Small Business Development Centers, SCORE 
        offices and our other partners. At our events, we will 
        encourage women business owners to sign up for and use our 
        community portal, with the goal of building a network of 
        entrepreneurs who can both offer and seek out mentorship and 
        networking opportunities through our portal.
        2. Partnerships and resources connections: We will add to the 
        networking and knowledge bank on the issue by compiling these 
        resources, listing them on our website and forming partnerships 
        with mentors whom we can connect to small business owners. Over 
        the years, we have developed strong relationships with local 
        Small Business Development Centers and other mentorship groups 
        such as Pacific Community Venture's BusinessAdvising.org 
        program, which offers free mentorship to entrepreneurs across 
        the country.
Childcare
    For women with children, the cost and difficulty of finding high 
quality childcare remain an obstacle to their entrepreneurship. A 2010 
Census paper on married stay-at-home mothers noted that ``especially 
for mothers who have more than one child under 5, the cost of day care 
might be higher than she could support unless she has fairly high 
earnings.'' A recent study by the Ms. Foundation found that full-time 
child care costs for an infant eat up 41% of the average income of a 
single mother. This puts the mother in the position of working just for 
childcare. Our childcare work will include the following activities:
        1. Outreach and education: We will launch an outreach program 
        designed to educate women business owners about childcare 
        policies that they can set up at their businesses as well as 
        policies and tax changes being studied at the national level. 
        We will set up and hold a series of roundtable discussions to 
        examine the issue of affordable, high quality childcare and its 
        consequences for the success of a woman-owned business and 
        effects on her bottom line.
        2. Partnerships and resource connection: We will form 
        partnerships with groups that specialize in childcare issues, 
        provide them with audiences from our small business network, 
        invite them to speak at our events, cohost events with them and 
        distribute information through our networks, portal and events. 
        We will build out a section of our portal dedicated to 
        childcare issues, resources on tax credits and other policies 
        that provide benefits to small business owners for providing 
        childcare, and policy updates for women entrepreneurs.
Policy support
    On the Federal, State, and commercial levels, Small Business 
Majority will track the following issues and engage our small business 
network and alliances. This engagement will be designed to bring the 
small business voice to the table. We start with research and polling 
to determine small business owners' needs and concerns. We then use our 
outreach and educational events to locate these spokespeople and then 
deploy our outreach and communications staff to vet and train them to 
speak out in a variety of settings and audiences: op-eds, letters to 
the editor, legislative hearings and meetings with policymakers. We 
also work to create opportunities for them to get their voices onto the 
public stage and coordinate with advocacy partners to provide 
spokespeople on a given issue.

      Supporting the Women's Small Business Ownership Act: 
Introduced in October 2015, the act would address the gender gap in 
lending by expanding or improving SBA programs to reach more women 
seeking business loans.
      Making permanent the fee waiver on SBA loans under 
$150,000: This has been extended through 2016, but a permanent waiver 
would be helpful because these smaller loans often help finance women, 
minorities, veterans and other underserved individuals interested in 
creating new startups and entrepreneurship. According to the Urban 
Institute, SBA loans are three to five times more likely to go to women 
and minority-owned businesses than conventional loans.
      Support the current movement within Federal procurement 
to increase Federal Women Owned Small Business (WOSB) total dollar 
procurement targets to 10% of all contracting dollars
      Support the development and expansion of training 
programs that teach women entrepreneurs how to leverage SBA 
certifications for Federal, State, and commercial work (such as WOSB, 
Women Business Enterprise and Economically Disadvantaged WOSBs)
      Support State efforts to remove the need for 
certifications from State-level procurement programs
      Support HR 4524, the Child CARE Act. Introduced in 
Congress this year, the Act would expand access to high-quality child 
care for infants and toddlers from low-income families who do not 
receive child care funded through the Child Care and Development (CCD) 
Fund
      Support State earned income tax credit and child care 
credits. Research has shown that both credits offer numerous benefits 
for working mothers and their children alike
      Support Federal and State efforts to implement paid 
family leave and paid sick days for small businesses, such as the 
FAMILY Act
Additional Women-Owned Business Research Material
    Small Business Majority partner and Director of American 
University's Kogod Tax Policy Research Center, Professor Caroline 
Bruckner, testified before the House Committee on Small Business 
earlier this month on tax reform for entrepreneurs. Specifically, her 
research has a focus on women-owned businesses. We have separately sent 
her testimony and findings to supplement these answers for the record.`