Mr. PENDERGAST. The House Ways and Means proposal for job creation tax credit was so much simpler than the administration's bill that was in evidence that things can be a little simpler. Every response I get to simplicity is, that is too difficult for us. It causes a wealth of lawyers to spring up and add reasons why it cannot be done. I think probably as a paraphrase of things American—I would say, why can it not be done? Let's get it done.

Senator BYRD. As a result of every so-called tax reform law we have had, the tax system has become more complicated and more complex and requires more and more lawyers and accountants.

Mr. PENDERGAST. In my testimony, Mr. Chairman, I said something that is really dramatic evidence of taxpayer's revolt. As a law gets to a point where it is so complex it cannot be dealt with, it will be repealed by its being ignored.

Bruce Fielding was with me with the National Federation of Independent Businesses. They took a survey of their members with inventories of $100,000 or less. These are members who should be reporting on the accrual basis because inventories are an income-determining factor. Over 50 percent of them are ignoring that and filing on a cash basis. They took the law in their own hands and passed a new law without your knowledge, a very simple one.

Senator BYRD. I would see why they would want to do it. But I would not particularly recommend that course of conduct.

Mr. PENDERGAST. We are suggesting in one of our proposals last year that you allow people with inventories of $100,000 cr less to expense it rather than get them involved in inventory-taking procedures.

Senator BYRD. I am not going to the merits of it. I am just commenting that they might incur difficulties with the Internal Revenue Service.

Is one of the reasons for the scarcity of investment capital that investors are being more prudent today than in the past?

Mr. FIELDING. I would say disenchanted.

Mr. PENDERGAST. I think that the main reason is the Federal Government and the municipal governments have absorbed significant amounts of available capital.

Senator BYRD. You are quite right. I think that gets back to the unsound way in which the Government handles its finances. The more the Government goes to the money markets, the greater deficits, the more Government borrows money to finance the debt, the less money there is going to be for small business, large business, individuals, or anybody else. I think it is important to realize this, which so many Members of Congress do not seem to realize.

Mr. TREPTOW. A good example of that is what happened in 1974 when interest rates reached record peaks and Treasury was in direct competition with the private savings sector. Many people with relatively small savings learned how to buy $1,000 Treasury bills, particularly when the 9 percent issue came out in August 1974.

Once having learned those ropes and knowing they can buy Treasury issues now issued, and continuing to be issued, in relatively small denominations for the small saver, they put Government in competition with the private sector and private enterprise in a way that has never been precedented before.

Senator BYRD. Not only that, Government gets the first opportunity. Mr. TREPTOW. That is right.

Senator BYRD. Everybody else comes in behind Government. I do not think you will get interest rates down until you get Government spending under control.

Mr. TREPTOW. Amen.

Senator BYRD. In fiscal year 1978 we are going to have the second largest deficit in the history of the United States. How important is Government policy as being a reason for the lack of funds for new business ventures?

Mr. TREPTOW. I think it is a significant factor. I sense a great increase in the frustration, perhaps discouragement, of people who have been in small business for some time, as well as those who are thinking about organizing them. The complexity of regulation today is absolutely fantastic.

My associates have referred to that already, and other speakers this morning have. The compliance is a frightening thing.

In my own business, in banking, for example, much of the recent legislation in the consumer area has changed credit standards quite drastically because the fear of compliance-or noncompliance, I should say, is great in my industry and it is within all industry in regards to various types of regulation.

I also think that the general tax burden and the inability to obtain attractive returns on that investment as was referred to by both Mr. Brill and Mr. Greenspan this morning, I think, are significant factors for lack of business growth and a deterrent to new investment.

Senator BYRD. Do you feel that you do have, or will have, sufficient access to the decisionmaking process going on today in the Treasury Department.

of

Mr. FIELDING. Absolutely not.

Senator BYRD. No?

Mr. FIELDING. We have a Small Business Advisory Committee, 19 us, who did work with the Internal Revenue Service. It was a very effective committee, Senator. In fact, we can be traced directly to saving $90 million a year in annual reporting fees in regard to ERISA just because we were there and able to talk to them and point the way out, this is the way it should be done.

Now that we are going into the area of reducing advisory committees, the committee has been eliminated and supposedly is going to be absorbed by the small business advisory group within the Treasury Department. Absolutely nothing has happened. We cannot even seem to get any word, yes, no, or why. If we do not have that, we have nothing.

Senator BYRD. The Assistant Secretary of the Treasury testified this morning that Treasury is in the process of developing a new tax program. Has small business, as such, had an opportunity for input. into that process?

Mr. PENDERGAST. He said also, Mr. Chairman, in his testimony, that they were going to give access to small business; in essence he admitted that they had not in the Small Business Advisory Committee they are establishing.

There was in place, when he came in, a Small Business Advisory Committee which had supposedly been merged with the Internal Revenue Service Advisory Committee. The new one has not been organized.

From his testimony, I understand they are planning to submit the legislation this summer. They will probably get the advisory committee organized in the fall. Then, 6 months after the law is passed, they will ask us what we think of it.

I think it is very distressing.

Senator BYRD. Do you feel, as representatives of small business, that you have access to all the facts and figures necessary to formulate recommendations in the tax field?

Mr. TREPTOW. It is a very difficult problem for us. There are a great many of us who have been active on behalf of small business who are doing this on the evening and weekends and without professional staffs because one of the characteristics of small business is we do not have internal resource people within our businesses devoted to the study of tax impacts and of tax regulation.

Even in our trade organization, which we represent here, we really do not have the resources that can do this. It relies on individuals finding time outside of their normal business activity to do this.

When it gets particularly in the area of tax impact studies, the frustration to me is the first answer from Treasury, is this proposal will result in the immediate reduction of Federal revenues by x dollars. There is no consideration given to the secondary increases in revenue from all of the succeeding factors that will result.

You cut the corporate income tax. Sure, there is going to be an immediate revenue loss. Never can we get an immediate consideration from the sophisticated models that we know are available in Government as to what is going to happen to employment and sales of capital goods and so forth that will result in increased revenues to Government.

This is what I was referring to by a necessity for a longer term, more in-depth view into the impact. We do not have the resources to do it. We think the Government should do the whole side of this thing, not just one side, saying, get lost, fellows. This is going to cost x dollars.

Senator BYRD. In conclusion, would one of you attempt to briefly summarize the greatest needs and the biggest problems of small business today?

Mr. FIELDING. I think you could say capital, discriminatory tax laws and product liability.

Product liability has become an increasing factor in small business. The insurance premiums are going out of control and forcing small businesses to terminate.

You look at a business-I had one client. Their premiums for 1 year went from $5,000 to $65,000. Their profits for the previous year were only $30,000. They ended up with a nice loss the following year. It is an impossible situation. It is becoming a very difficult situation with which to cope.

Mr. PENDERGAST. In summary, all we ask for is simplicity and equity; no more, no less.

Mr. TREPTOW. I agree.

Senator BYRD. Thank you, gentlemen, very much.

[The prepared statements of Messrs. Fielding and Pendergast follow. Oral testimony continues on p. 61.]

STATEMENT OF BRUCE G. FIELDING, DIRECTOR AND SECRETARY, NATIONAL FEDERATION OF INDEPENDENT BUSINESS; COMMISSIONER, COMMISSION ON FEDERAL PAPERWORK

Mr. Chairman, I am Bruce G. Fielding, an Officer and Director of the National Federation of Independent Business (NFIB). Our organization represents onehalf million small and independent businessmen and women throughout the nation. I also am the owner of my own accounting business. In addition to these functions, I am one of two members representing the public on the Commission on Federal Paperwork.

Most of my twenty-four years in the practice of accounting have been devoted to assisting small business persons, ranging from the sole proprietor with no employees to the small corporate employer with less than one hundred employees. During this time it has become very evident that Congress has generally failed to recognize the need to distinguish between small business and large business in the areas of taxation. However, in these areas in which it has recognized the difference, it has discriminated against the small unincorporated business.

The present tax system used in the United States has a serious, negative impact upon the nation's small and independent business community. It consistently discriminates against small and medium size businesses, undermining vigorous and healthy competition, stifling growth, smothering small firms under a mountain of paperwork and theratening the continuation of a strong and viable independent business sector.

The complexity of the tax code, by itself, discriminates against small business. Small firms simply cannot afford to employ the horde of expert lawyers, accountants and tax consultants used by large corporations to exploit and take full advantage of every beneficial provision of the code. This conclusion has been documented by the Senate Select Committee on Small Business, whose Chairman Gaylord Nelson, stated in testimony last year before the House Ways and Means: "Our hearings have demonstrated that the complex capital recovery provisions of the Internal Revenue Code unduly favor large corporations. Accountants and other experts who prepare tax returns for smaller firms say that independent businesses tend to use straight-line depreciation almost exclusively because they are not willing or able to cope with the more complex capital-recovery devices." Large corporations are able to use the provisions of the code to pay a reduced effective tax rate. As a class, the 100 largest corporations in the U.S. paid an effective tax rate of between 25 percent to 30 percent over the past three years, while eight of these with earnings totaling $843 million paid no corporate income tax in 1974. On the other hand, many small and medium sized firms may pay through the nose, up to twice the effective tax rate paid by the largest corporations. The result of this is a decided competitive advantage for big business. (See SEC Quarterly 10K Form data surveyed by Congressman Charles Vanik and also FTC Quarterly Financial Reports surveyed by Senate Select Committee on Small Business.)

Small firms cannot grow and create jobs without capital. The supply of investment capital is relatively scarce and small business is in fierce competition with our industrial giants for a share of the shrinking investment dollar. A business can create growth capital for four ways

By borrowing or incurring debt;

By selling stock or an equity interest in a business;

By recovering capital already invested; and

By retaining profits.

Banks are extremely reluctant to lend to most small firms. Their funds are reserved for and allocated to their best, least risky customers-large corporations. Even if a small business is able to convince a bank that it is a good risk, it will be forced to pay dearly for its money. While big business can borrow at, or close to the prime rate, small firms must pay substantially more for their loan. So much for borrowing or debt financing.

Who would risk buying stock in a small business? According to Senator Nelson and the Senate Select Small Business Committee, very few small companies are able to raise capital in this manner. In 1974 only nine small businesses were able to float stock issue and during the first half of 1975 not a single small firm was successful in raising capital through the sale of its stock.

As I noted earlier in quoting Senator Nelson, small firms are not particularly successful in being able to recover the capital they have already invested, be cause the captial recovery system in the tax code "unduly favors large corporations." This leaves only the retention of profits as a feasible method of generating the capital needed to fuel small business growth.

The present corporate tax rates are 20 percent on the first $25,000 in taxable income, 22 percent on the next $25,000, and 48 percent on all taxable income over $50,000. And, as noted earlier, many small firms pay an effective tax rate up to 50 percent. This system is not conducive to generating the amount of capital needed by small business to expand and create jobs.

It is also important to note that 86 percent of all U.S. businesses are unincorporated, but most of the recent beneficial changes in the tax code have been limited to corporations. Individual tax rates, which are paid by unincorporated businessmen, are higher than the tax rates paid by incorporated businesses. Again, this gives giant corporations an unfair competitive advantage and reduces the amount of after tax revenue available for reinvestment by the small businessmen.

The Internal Revenue Code makes several inequitable distinctions between unincorporated and incorporated businesses. As noted above, the rates of taxation are a prime example. The maximum corporate rate is 48 percent while a sole proprietor could be taxed at a maximum rate of 70 percent. An individual wth $35,000 of business income pays approximately $8,000 of Federal income tax. By incorporating, the combined individual and corporate taxes could be reduced to $6,000. This is a saving of 25 percent, and an inducement to incorporate. Last year the Council of Small and Independent Business Associations (COSIBA) proposed, as part of its "Small Business Growth and Job Creation Act of 1976" (H.R. 13687), that unincorporated businesses be allowed to calculate their tax as though they were incorporated. It is a simple provision and would not require extensive administrative or reporting requirements. This provision would tend to equalize the tax on small businesses and would eliminate the necessity of incorporating just to minimize taxes.

Another area of discrimination is the provisions dealing with retirement plans. There the inequities are so obvious that they "cry out" to be corrected. Contribution limitations, vesting requirements, investment opportunities and the limitation on trustee selections all discriminate against smaller firms. These are basic options which are vital to the owners of businesses in order to encourage them to create retirement plans which are not available to the unincorporated employer.

Why this particular distinction between incorporated and unincorporated businesses? Could it be that Congress and the Internal Revenue Service have determined that the unincorporated business person cannot be trusted and should pay higher taxes? But if he or she incorporates, we have an entirely different "ball game" with a much more liberal set of rules.

NFIB would like to recommend to Congress that there should be separate provisions in the Internal Revenue Code for all voluntary plans with less than 100 participants. These provisions would be the same for all forms of business entities. There would be no distinction between a sole proprietor, partnership, subchapter S corporation, or the normal corporation. We would also recommend that there be no dual jurisdiction with respect to these small voluntary plans. The IRS would have exclusive authority. The provisions would also be geared to simplification and reduction of administrative and reporting requirements. Some other examples of discrimination are administrative restrictions by IRS with respect to selection of fiscal years, the deductibility of medical expenses and group life insurance premiums for the business owners.

These inequities force the successful unincorporated business to incorporate. This is an artificial device. Incorporation should be based upon sound business decisions and not for the sole purpose of minimizing taxes.

As mentioned previously, there has been a failure by Congress and the IRS to recognize that consideration should be given to the practical ability of small businesses to cope with the intricacies of the Internal Revenue Code and its related regulations, rules and reporting requirements.