indication that they have a bequest coming in the will of the individual.

Mr. MARRIOTT. If the gentleman would yield, just to put things back in perspective, notwithstanding what has been said here, you would not advocate continuing estate taxes on the—that is, destroying the farms, the businesses, in order to provide charitable contributions to universities and so forth?

I just wanted to make the point

Mr. REISTER. Absolutely.

Mr. MARRIOTT [continuing]. That may be a benefit, the State taxes, but it certainly does not offset the problems caused by estate taxes?

Mr. REISTER. No, sir. I think it is also generally true in the farms, businesses we have been discussing, that charitable giving is not a particular factor, at least in our area.

Now, in other parts of the country, there may be variations on it. In our area that is not so.

Mr. VIN WEBER. We are talking there about the super wealthy? Mr. REISTER. Yes, sir.

Mr. VIN WEBER. I want to conclude on that point. That seems to me to be the most significant argument I have heard in favor of continuation of the estate tax.

It occurs to me if our concern is the impact we are going to have on patterns of charitable giving, could we not in some way amend the income tax laws to recover some of that money? In fact, if you are, for instance, an educational institution where you have a department set up to go out and solicit estates and the money comes in in big huge bundles on an irregular basis, wouldn't there be some advantage rather to having a more generous approach to the income tax where you could probably set up a department that would have a little more stability to it? Where you could go to wealthy people and set up a program of giving on a regular basis that would affect their income tax? Isn't that possible?

Mr. REISTER. It is possible. The institutions I am familiar with will be pleased to work both sides of the street.

Mr. VIN WEBER. I am certain.

Mr. REISTER. I think you are perhaps running into something there.

The point is well taken, but two things.

First, if there is a reduction to 50 percent in the income tax on nonearned income-a limitation on nonearned income, a tax rate of 50 percent, that will militate against charitable giving because very often the people who have unearned income are great donors. The other factor that I have found is that people can make provisions for charities but during their lifetime will be generousbut nevertheless they are always hesitant to give up very large amounts because of what happens if there is a terrible catastrophic disease or a stroke or something like that.

Even though, as a matter of reason you can say to such a person you are financially capable of handling any such problem, there is an inherent desire to remain financially independent. So there is a natural impediment to charitable giving in the large amounts I was talking about.

Mr. VIN WEBER. Thank you very much for your testimony. I have enjoyed it.

I have no more questions, Mr. Chairman.

Mr. Nowak. Thank you very much.

Thank you, Mr. Reister. If we do develop other questions as to some of the particulars that you had mentioned, hopefully we will be able to contact you and get those questions in writing and insert them before our record is complete.

Mr. REISTER. I will be pleased to be of any assistance I can be. Thank you.

Mr. NOWAK. Thank you very much.

I wonder if we could bring the representatives of the New England and the Wisconsin associations up to the table, then we will ask joint questions.

I think many of the questions would be appropriate to both organizations.

First, we have from the Smaller Business Association of New England, David Tonneson, the chairman of the committee on taxation. He is an active member on the Small Business Association's board of directors.

He is an accountant in the firm of Tonneson, Wheelock, Curtin & Co., of Wakefield, Mass.

Also, we have before us Mr. William F. Kolbe, who is the chairman and represents the Independent Business Association of Wisconsin. He is a practicing attorney in Racine, Wis., with the firm of DeMark, Kolbe & Brodek, S.C.

If you would like to give your testimony, the record will reflect it in total. Mr. Tonneson, if you will present your testimony, we could hear it and then we will give Mr. Kolbe a chance, before we entertain questions.

TESTIMONY OF DAVID TONNESON, CHAIRMAN, COMMITTEE ON TAXATION, SMALLER BUSINESS ASSOCIATION OF NEW ENGLAND

Mr. TONNESON. I am David Tonneson. I want to thank you for the opportunity to appear today.

I am a director of the Smaller Business Association of New England and chairman of its tax committee.

I am speaking to you today on behalf of Small Business United, a recently organized consortium of 9 regional small business organizations that encompass 25 States.

In 1980 I was a delegate to the White House Conference on Small Business and also served on the U.S. Small Business Administration task force on small business continuity.

The small business leaders who were elected to participate in both of those meetings were asked to rank in order of priority those capital formation issues that they wished to discuss.

Revision of the Federal estate and gift tax law was ranked third at the White House conference and ranked second at the SBA task force hearings.

The impact of estate and gift tax on capital formation is placed in clear focus by listening to statements of small businessmen, men who are entrepreneurs.

I would like to read excerpts from a statement mailed to me by a member of the SBANE Tax Committee, Mr. Thornton Stearns, founder and president of Vacuum Barrier Corp., in Woburn, Mass., and to quote from Mr. Stearns' statement:

Vacuum Barrier has 38 employees and manufactures vacuum insulated cryogenic piping systems for sale internationally. We have been growing at a rate of about 27 percent for the last 5 years and we have invested capital of $67,000 for each employee. We have 10 stockholders and I own a majority of the stock.

When I die the corporation will cease to exist as an independent small business and the invested capital must be converted into cash to pay the estate tax at rates of up to 70 percent. The jobs of some of my employees will be eliminated.

The first thing my executors will do is to value the company or to look for a buyer which, if one can be found, will probably be a large company. If no buyer can be found, the assets must be liquidated to raise the cash.

The success of large companies in running small companies in my specialized market is dismal. I also know of two other companies in my field which simply ceased to exist upon the death of their principal owners.

Vacuum Barrier consists of a team of highly qualified people who are capable of continuing without me, yet their jobs will be destroyed by the excessive estate tax. We must keep in mind that $67,000 must be invested for each one of our employ

ees.

The converse is true, that the removal of $67,000 of capital will eliminate one job. We all know that unprofitable operations will eventually deplete capital to the extent that a company will eventually go bankrupt.

The estate tax has exactly the same effect. This year Vacuum Barrier Corp. will pay municipal, State, and Federal taxes of over $700,000. If we include taxes paid by our employees, which include the Federal income and social security tax, we pay over $1 million in taxes. If we protect our growth to the point where we are four times as large as we are now, the annual taxes paid for or through the company will be about $4 million annually.

If I die at that time, my estate liability may very well be in the same order of magnitude or about 35 percent of the net worth of my company.

If the IRS estate tax auditor estimates the worth of my company higher than book value, then the tax liability may be well over 50 percent of my company's net worth. The estate tax would eliminate 50 percent of the capital accumulated, the capital needed to finance 50 percent of the jobs.

I cannot understand why my crime of having forged a successful small company is so reprehensible that the Government is willing to tax away millions in capital through the estate tax and thereby forego tax revenues many times that amount or several million dollars per year for many years.

Before I discussed this problem with my employees, most of them were not aware of any such tax laws. They probably thought it was a good idea to redistribute the wealth.

Now I think most of my employees agree with me that these diastrous tax laws should be eliminated.

I hope that none of them will leave and obtain jobs with large companies where they will not be exposed to such a catastrophe.

Mr. TONNESON. That ends Mr. Stearns' quote. Small Business United and the Smaller Business Association of New England maintain that the declining economic role of small business is due largely to an inequitable tax system, a system whose inequities are magnified in times of inflation and high interest rates.

We believe that capital formation will decline and the tax bias in favor of large companies will be increased unless the following estate and gift tax problems are resolved.

I have submitted seven items which we would like to propose as specific recommendations to help solve these problems.

First, adoption of President Reagan's revised tax cut proposals and the bipartisan tax reduction program.

Second, enact reduction of estate tax rates.

Third, adopt special valuation rules for closely held businesses.

Fourth, adopt special rules for stock redemption and the installment payment of estate taxes for owners of closely held businesses. Fifth, encourage employee ownership by allowing deductible gifts of employer to employee stock ownership plans, ESOP's.

Sixth, provide a faster and less costly means of resolving business valuation disputes.

Seventh, eliminate the income and estate tax traps that are now inherent in the rules of attribution.

I would enjoy reviewing any of these proposals in more detail if you have any questions regarding the specific recommendations for any of these seven estate tax resolutions.

Thank you for inviting me and allowing me to express my views. [Mr. Tonneson's prepared statement follows:]

PREPARED STATEMENT OF DAVID A. TONNESON, C.P.A., MEMBER, BOARD OF DIRECTORS AND CHAIRMAN, TAX COMMITTEE, SMALLER BUSINESS ASSOCIATION OF NEW ENGLAND (SBANE), ON BEHALF OF SMALL BUSINESS UNITED (SBU)

Mr. Chairman and members of the Committee, my name is David Tonneson and I want to thank you for the opportunity to appear before you today. I am the founder of a C.P.A. firm specializing in financial and tax planning for closely-held businesses. I am a Director of the Smaller Business Association of New England (SBANE) and chairman of its Tax Committee.

I am speaking to you today on behalf of Small Business United (SBU) a recently organized consortium of nine regional small business organizations that encompasses 25 states.

In 1980 I was a delegate to the White House Conference on Small Business and also served on the U.S. Small Business Administration "Task Force on Small Business Continuity." The small business leaders who were elected to participate in both of those meetings were asked to rank in order of priority those capital formation issues to be discussed. Revision of the federal estate and gift tax laws was ranked third at the White House Conference and second at the SPA Task Force Hearings.

The impact of estate and gift tax on capital formation is placed in clear focus by listening to statements of the small businessman-the entrepreneur. I would like to read excerpts from a statement submitted to me by a member of SBANE Tax Committee, Thornton Stearns, President of Vacuum Barrier Corporation in Woburn, Massachusetts.

"Vacuum barrier has 38 employees and manufactures vacuum insulate cryogenic piping systems for sale internationally. We have been growing at a rate of about 27 percent for the last 5 years and have an invested capital of $67,000 per employee. We have ten stockholders and I own the majority of the stock.

When I die the corporation will cease to exist as an independent small business and the invested capital must be converted into cash to pay the estate tax at rates of up to 70 percent. The jobs of my employees will be eliminated. The first thing my executors will have to do after the value of the company is set is to look for a buyer which if one is found will probably be a large company. If no buyer can be found, the assets must be liquidated to raise the cash. The success of large companies in running small companies in specialized markets is dismal. I also know of two other companies in my field which simply ceased to exist upon the death of their principal

owners.

Vacuum Barrier consists of a team of highly qualified people who are capable of continuing without me, yet their jobs will be destroyed by the excessive estate tax. We must keep in mind that $67,000 must be invested for each of our employees. The converse is true that the removal of $67,000 of capital will eliminate one job. We all know that unprofitable operation will eventually deplete capital to the extent that the company will be bankrupt. The estate tax has exactly the same effect.

This year Vacuum Barrier Corporation will pay municipal, state and federal taxes of over $700,000, and if we include known taxes payed by our employees which includes withheld income and social security taxes, the amount is over $1,000,000. If we project our growth ahead to the point where we are four times as large as we are now, the total annual taxes paid for by or through the company will be about $4,000,000. If I die at that time, my estate tax liability may very well be the same order of magnitude, or about 35 percent of the net worth of the company. If the IRS 'state tax auditor estimates the worth higher than the book value, then the tax

liability may be well over 50 percent of the company's net worth. The estate tax would eliminate 50 percent of the capital previously accumulated, capital needed to finance 50 percent of the jobs.

I cannot understand why my crime of having forged a successful small company is so reprehensible that the government is willing to tax away millions of capital through the estate tax and thereby forego tax revenues many times that amount or several million per year for many future years.

Before I discussed this problem with my employees, most of them were not aware of any such tax laws, and probably thought it was a good idea to redistribute the wealth. Now I think most of them agree with me that these disastrous laws should be eliminated. I hope that none of them will leave and obtain jobs with large companies where they will not be exposed to such a catastrophe!"

DEFINITION AND SCOPE OF THE PROBLEM

Besides the more tangible, quantifiable effects of small business on the economy and society, small business people today are important community leaders. A recent study of American opinion conducted by the U.S. News and World Report (February 13, 1978, page 42) found that of 25 basic institutions, small business ranked second in "honesty, dependability and integrity.'

When a community's economy is controlled by leaders who live in the community, the balance between social and economic requirements is determined by those with vested interest in the community.

On the other hand, absentee control of publicly held companies changes the corporation's view of the surrounding community. Communities are viewed as locations for plants which are appropriate only so long as the location provides economic advantages. When such a location is no longer economically rational, the plant is cleared and facilities built elsewhere.

Alfred Dougherty, Director of the Federal Trade Commission's Bureau of Competition, said that conglomerate corporations have created a new set of rules for an investment game that is played solely for their own benefit:

"A conglomerate-lacking community loyalty in playing an investment game with rules different from those that nonconglomerate companies-privately-held companies have traditionally followed-can simply write off a line of business, a plant, a work force, or a whole community and can turn its attention, leaving others to pick up the pieces."

The dangerous move towards concentration of assets through conglomerate merger and acquisition as represented by House of Representatives Committee on Small Businesses, House Document Number 96343, is only one of the many problems facing the issue of small private businesses continuing as small private busi

nesses.

SBU also wants to express its concern for the current economic climate and its impact on small business. Recent economic history in the United States reflects very difficult times for the businessman. A severe recession in 1974-75 and another recession in 1980 have been extremely hard on the small businessman. Both of these recessions were preceded by soaring interest rates and credit crunches and accompanied by inflation which sent costs higher in the faces of falling demand for products. Throughout the 1970's labor productivity was falling and the equity securities markets were closed off to only the very best of small businesses. Such conditions have created significant problems for small businesses seeking financing on reasonable terms. Many businesses sold out to larger companies in order to assure a continuing source of financing. Others sold out to achieve security rather than face uncertain economic conditions and the potential loss of value.

With respect to the issue of continuity it is the belief of SBU that small businesses have a difficult time surviving and maintaining their identity over the long-term due to external pressures brought on by poor economic conditions, high interest rates, taxes on earnings and estates, and governmental legislation and regulation. Other pressures on the small company are internally generated such as poor management and the inability of family members to successfully deal with one another and the problem of succession. Some entities go out of business involuntarily due to bankruptcy. In other cases, forced sales or liquidations occur because of the need to raise funds to pay estate taxes. There are also a great number of entities which sell out or liquidate voluntarily to solve problems of stockholder liquidity, company financing, management, regulatory compliance or future estate taxes.

Because of the necessity for the expansion of the private sector of America's economy we cannot afford to have successful small privately held companies terminated. SBU hopes that consideration of their recommendations be given the highest priority.