In our industry the average investment per employee is somewhere around $40,000 to $60,000. So a $5 million asset business is somewhere around 100 employees. It is not a huge business. In a competitive industry-and ours is pretty competitivepretty low profit margins, if it is 2 percent, let's say, and I will get you the correct figure, you are talking about $100,000 profit per year against the figure he quoted of, what, $2,050,000 liability for estate taxes? Mr. CENTNER. Thank you, Mr. Chairman. Mr. TONNESON. I would like to address one other myth. First, the Smaller Business Association of New England will respond with statistics. We have 1,700 members in the association in New England. I will supply you a profile of the types of industries, the employee side and the capital base. The myth I would like to explore is that worth is usually measured in machinery, equipment, real estate, hard assets. Whether you are a wholesaler, a distributor, or what type of business you are in today, part of your investment is in inventory and accounts receivable. Small business continually cannot finance those types of assets with bank loans, so the ability to finance a company today who has accounts receivable, who have inventory, it might merely be a wholesale distribution company, but you could have a large asset base. So the problem we are addressing is particularly significant when the cost of money is high and the availability of money is scarce. It is all interrelated and very timely. Thank you. Mr. NOWAK. Thank you very much. Mr. Fary? Mr. FARY. I have several questions. Could you comment on how inflation is a problem with respect to bracket creep in the taxation of estates? Mr. HAHN. The obvious problem of bracket creep is as your cost of assets go up, and they have gone up even faster than inflation in our industry, particularly for machine tools, your liabilities go up even faster than that, because for estate purposes, your taxes are in a higher set of brackets, your exemptions have been used up and you are being taxed at a much higher rate. But the problem goes beyond that. The gentleman here alluded to the high cost of loans. Well, it is often very difficult in times of high inflation for some small businesses to get loans, just to get them at all; never mind the rate. If they do get them, they are several points above prime. That in turn is related to inflation. It is a circle that feeds on itself that gets worse the greater the inflation and the greater the estate taxes. The other thing too, I think this might be a point that could be made to the Ways and Means Committee. Small business is labor intensive. We know they create 80, 90, 95 percent of the new jobs. These are jobs that are being liquidated by estate taxes. As those jobs are liquidated, not only does the national productivity decline, but you have more people who are not contributing to the tax base. Indeed, if they cannot be employed somewhere else, are actually tax drains because of transfer payments. [Mr. Hahn submitted the following operating statement and balance sheet:] Mr. NOWAK. Thank you very much. We have had these 2 days of hearings, and I think in the subcommittee's mind they have again shown this is a very important capital formation area for small business, when considered with the hearings last year on the interest rates, LIFO reform, and some of the other ideas that have been proposed. When you look at this particular aspect of capital formation, it really goes well beyond the ability of a small business to pay this tax. It really does skew those types of business decisions that I think-to a much larger part than people have previously believed-leads to discontinuation or the stoppage of growth within the small business itself. The end result of all this tax planning is the uneconomical investment of moneys. It really has a broader meaning than the limited capital formation concepts previously held. Once again I want to thank all of the people for taking their time and presenting the testimony. I think it is something that is very vital and timely, as we go forward with this to the Ways and Means Committee and substantively give them important input that they will consider as they start to look at this tax bill. I am still under the impression that if only the straight 5-10-10 as it is now perceived, and the 10-5-3, as that has been amended up and down several times, passes, then the small business community will still not derive enough direct benefit to give it the incentives that it needs to expand and to really become a vibrant part of our economy. There is no use repeating the benefits that our economy receives through the competition of small business or the job creation of our small business community. Unless we revise what has been built into our economic system through the tax code and through the regulatory reforms that have been made over the last 20 years, we are going to get a narrower ownership of small business. Certainly in the long run this is not going to be the way to overcome inflation or to create the opportunities that we have to create, if we are going to increase that so-called quality of life that all Americans hopefully will be able to participate in. It certainly does broaden the ownership concept and give people who participate an idea of what the free enterprise system is all about. Hopefully we can continue and I certainly hope that I will have the continuing cooperation of the subcommittee in holding hearings and preparing information on these issues. I have the feeling that for the first time since I have been in Congress, the small business community is finally having an impact, not only on this committee, but on other committees. We want to act as a catalyst for that type of input. Once again I want to thank all the witnesses who appeared and stayed with us through the hearings. You can be assured that your testimony will be brought to the attention of all the other committees that will be looking at these legislative changes. Thank you very much. [Whereupon, at 12 noon, the subcommittee adjourned to reconvene subject to call of the Chair.] APPENDIXES APPENDIX A EXHIBIT 1 AMERICAN BAR ASSOCIATION 1800 M STREET, N.W., 2ND FL., SOUTH LOBBY, WASHINGTON, D.C. 20036 TELEPHONE 202/331-2230 WRITER'S DIRECT TELEPHONE NUMBER (202) 223-4260 CHAIRMAN Harvie Branscomb. Jr. Box 129 1700 Bank & Trust Tower Corpus Christi, TX 78477 CHAIRMAN-ELECT John S Nolan 1700 Pennsylvania Ave. NW Washington, DC 20006 VICE CHAIRMEN Committee Operations 1700 Union Commerce Bldg. Government Relations 1000 16th St, NW Washington, DC 20036 Publications James B Lewis 345 Park Ave New York, NY 10154 SECRETARY ASSISTANT SECRETARY PO Box 1102 SECTION DELEGATE TO THE COUNCIL 555 S. Flower St. Washington, DC Washington, DC Robert E. McQuiston William H. Smith Washington, DC LIAISON FROM ABA BOARD OF GOVERNORS Merrill R Bradford LIAISON FROM YOUNG LAWYERS DIVISION 4700 First International Bldg. LIAISON FROM LAW STUDENT DIVISION 3119 Randolph, #101 STAFF DIRECTOR Pamela J Arnold 1800 M St, NW 2nd Flr South Lobby Washington, DC 20036 Honorable Henry J. Nowak Subcommittee on Tax, Access to June 9, 1981 B-363 Rayburn House Office Building Dear Congressman: This will acknowledge your letter of June 1st with respect to your Subcommittee's hearings dealing with the impact of estate and gift tax on capital formation scheduled to be held June 16th and 17th. You requested that the Tax Section of the American Bar Association present testimony on June 17th. Due to the rules and procedures of the American Previously the Section had obtained authority to testify before the Senate Finance Committee's Subcommittee on Estate and Gift Tax, and gave testimony on June 5, 1981. In line with my discussion with Benson Goldstein, I am enclosing a copy of the Section's statement that you may wish to place in the record of your Subcommittee's hearings. We appreciate receiving your request to testify, and are sorry that we will be unable to appear. |