that retained earnings if we're going to have working capital to operate our business. So, first, I would like to see the tax rate reduced. Second, I would most certainly like to see investment tax credit to investors. That's the only other way that we can raise money.

Mr. DRAKE. This is going to be kind of a unanimous panel on this subject. I think one of the amazing things that came out of the White House Conference on Small Business Deliberation was the fact that the first 5 priority recommendations out of a total of 60 possibilities all dealt with capital formation and retention. Clearly, that broad spectrum of small business interests focused on capital and capitalrelated things as the most important factors.

Going one step further and adding our own case, Data-Card, to that which Northwest Growth has presented more broadly here this afternoon, our enterprise, which started from zero in 1969, so far, has paid a little over $102 million in corporate income taxes. Its employees have paid about the same amount in personal income taxes over the same period of time. So if you add those two together as taxes paid to governments, Federal, State, county, and city, coming out of our enterprise to date is something over $20 million in 10 years.

Here in Minnesota we can see the 3M's, Honeywell's, Univac's, and CDC's as examples of real job creation and tax revenue generating homeruns. Supposing we just saw 20 new Data Cards in a State like Minnesota-companies of like economic significance, taxpaying significance, job-creating significance, and product-innovating significance.

Supposing we said there could be 20 in each State that would happen if we did these few tax and regulatory things: First, lots happened with the return of the capital gains tax maximum to 28 percent. It does need to be smaller. I'd vote for eliminating it in a minute. Anywhere in that range is a tremendous influence. Second, the reintroduction of the key employee stock option plan. Third, the rollover idea. If we did these three things, the idea of 20 new Data card-like enterprises in 50 States is almost mindboggling. If you just do some fast arithmetic here, you'll find billions of dollars of revenues, $1 million that happen in a relatively short period of time with no drain, no real tax-revenue drain, but rather a substantial net plus contribution to the Federal and State governments.

Senator BAUCUS. One big problem we have in the Federal Government is the annual budget process and also the inclination on the part of the Congress with House elections up every 2 years and a third of the Senate up every 2 years, you have to think in the short term rather than the longer term. And that also explains why the Treasury has a pavlovian and knee-jerk response, that any suggestions of these kinds have an a dollar revenue loss and, therefore, they are opposed to it and that's why the administration tends to get nervous, because it's reflected in the next year's budget. But the positive benefits are not even addressed because that's 2 or 3 years down the road and nobody thinks that far in Government. One of the fundamental problems in our country, I think, is the present, very strong inclination in our system of government to think in the very short term rather than thinking through the second, third, and fourth order of responses that occur down the road 2, 3, or 4 or 5 years hence. But I think that you're absolutely correct there.

Mr. HAGGERTY. Senator, I would just like to add one thing, if I may. I would like to challenge you gentlemen to think a little bit like venture capitalists for a minute and what you have said is absolutely correct. There is a timelag between the legislation and the collection of funds until the offsetting benefits are received. But one thing I believe we want to keep track of is that those corporations don't stop paying taxes just 1 or 2 years or 3 years. The longer they go and the longer they keep generating, it then provides further incentive to help the machine go.

Senator BOSCHWITZ. Pardon me. Let me make a few comments in response to the comments. I don't agree there is a timelag and there doesn't have to be a timelag; and point out to my friend, Bill Drake, that that's an admirable record $20 million in taxes to be paid over 11 years, is it? It takes the Government I was doing a little bit of figuring-18 minutes to spend $20 million and it is, as we talked this morning, the growth of Government. It's interesting to note that when taxes were reduced last time, when there was a broad reduction of taxes and that was 1963, 1964, 1965, that there was not a drop in Government income at all. It did indeed level out. At that time, there was no inflation, so to speak of, in our society, and at that time, as a result, the Governments' income was not going up very rapidly, anyway, but it did, thereafter, go up very rapidly.

Its also interesting to note that in 1968, the capital gains taxes were increased rather markedly, and in 1968, the Government collected $7.2 billion in capital gains taxes a figure that they have never reached again, despite the inflation. When they raised the taxes, their tax collections went down and they went to 50 percent of what they were when the tax rate was lower. So I do not agree with the idea that there needs to be a timelag. If you lower the rate of taxes, that because of that, you will have a drop or a dip in collection-besides which, if you feel strongly about that, businessmen, I believe, are perfectly satisfied if you give them a bone, so it doesn't have to be right this year. It can be 3 years out. If you say it's gong to be kept throughout, it doesn't have to be 10, 10, 10. It can be 4, 5, 6, 7, and 8 and it can be stretched out over more years so that you can start tax reductions 2 or 3 years down the pike so that the Government can moderate the increases of its spending and be able to accommodate whatever these supposed declines in income might be.

Let me just say that most of the suggestions that you have made the rollover and capital gains-that's addressed in a bill, an omnibus small business bill that I am going to be introducing, which for those of you who are not familiar with that term, is merely if you invest in a small business, you make a capital gain and if you reinvest it— it's like with a house-in another small business, that you do not pay a capital gains tax until you eventually sell and invest it in a non-smallbusiness. So hopefully we will be able to get something like that.

I believe the employees stock option plan is going to be restored. It is in the Finance Committee bill that's been reported out of Senator Baucus'-Senator Long's committee.

Senator BAUCUS. Senator Long.

Senator BOSCHWITZ. Senator Baucus is not in charge there, yet. But that's part of the bill.

Also, some of the other aspects you mentioned the lowering, further lowering of the capital gains tax is part of that bill.

Also some improved depreciation taxes-2, 4, 7, 10 instead of a 10, 5, 3. That made it a little more complicated, unfortunately, but I think it is a fairly decent tax bill. I have some problems with it, but nevertheless, I think that we are going to take care of some of these suggestions that you're making.

Mr. Haynes, I indeed apologize. You mentioned that you didn't have much notice for becoming a witness. The first witness we asked apparently was unable to come and you were asked at the last moment and I appreciate your coming and presenting such a well-drafted and well-put-together statement. I do agreement with the idea of special tax credits for purchasers of newly issued stock in the small companies, whether they be small minority companies or small companies total. Whether or not a 90-percent tax credit to investors suffering a loss in some companies is going to be something that can pass and whether or not the Government should insure, in effect, such losses, is a matter that I might question and I haven't thought through, very frankly, but I do stand behind the idea that small businesses need to be helped, in general, and that small businesses in the minority sector do require some special help. My reliable staff reminds me that the recently passed minority assistance bill, H.R. 5612, does require the SBA to establish a fixed graduation rate for each individual on the set-aside program so that the firms do graduate. But it can be on a firm-by-firm basis, which I think is a good approach.

Incidentally, on that same bill we were able to hook on the equal access under justice amendment, which we talked about this morning, which, in the event that Government sues a small business and loses and it's established that there was no reasonable cause for the suit, you get the legal fees. So that bill contains some help, not only for the minority community, but also for the small business community. I think we're going to achieve some of the tax reliefs that you gentlemen are seeking and I will support that kind of tax relief.

Senator BAUCUS. Thank you very much, gentlemen. You have been very helpful and we appreciate your presence here today.

It is now approximately 10 minutes after 3. Let's recess for about 10 minutes and we will resume the hearing in 10 minutes' time. [At this time a short recess was taken.]

Senator BAUCUS. We have 1 hour, roughly, remaining for two more panels. It might stretch slightly more than an hour.

The next panel is problems in maintaining a small business. We have touched briefly on problems starting a small business. We will now proceed to problems in maintaining a small business.

The participants in this panel are AI Claseman, president of SES, Inc.; Ralph Bruins, president of the Summit State Bank of Richfield; and Janet Deming, president of DOR & Associates in Minneapolis.

If you three could please come up here and we'll get started.

I encourage each of you, too, to be succinct, brief, crisp, pithy, to the point.

MS. DEMING. Just don't ask any questions.

Senator BAUCUS. We will also, Rudy and I, try to refrain ourselves as well in speaking too long and trying to get to the point here.

With that, let's begin and you can proceed in any order. If you have prepared statements, I encourage you to submit them for the record and very briefly summarize your positions.

Mr. CLASEMAN. My name is Al Claseman

Senator BAUCUs. Al, the people in the back told me at the beginning of our recess that you have to be up close and to speak up.

STATEMENT OF AL CLASEMAN, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, SES, INC., ST. PAUL, MINN.

Mr. CLASEMAN. My name is Al Claseman. I'm chairman and chief executive officer of SES, Inc., a public accounting firm that specializes in accounting and financial services to businesses of 50 employees or less. About 20 percent of my clients are minorities, women in business or the socially disadvantaged.

I would like to focus my testimony today on taxes and government regulations. I would like to start by quoting, in part, from the August 20, 1980 News Day newspaper. And, in part:

Of new jobs during the past decade, nearly 98 percent of them about 5.5 million-were small businesses. The Nation's largest corporations contributed only 0.5 percent of the new jobs from 1969 to 1976. Furthermore, studies indicate that a few simple, inexpensive reforms would allow businesses to create millions of additional jobs. Despite the fact that small businesses have created the most jobs in the past and show the greatest potential for solving unemployment problems in the future, many existing tax laws discriminate against them by offering exclusions, incentives, and write-offs that only large corporations can utilize.

The U.S. Chamber of Congress, the National Federation of Independent Businessmen endorsed the White House Conference recommendations calling for a more graduated corporate income tax structure, new estate laws that would encourage the retention of family owned business, including family farms, a simpler investment tax credit program, a revised depreciation policy and other forms of tax policy that create production jobs and boost small business growth. Among the specific recommendations are the following:

1. Reduce the low end of the tax scale from 17 percent to 12 percent and adjusting the top side of the scale from 100,000 to 500,000. I would like to point out that 67 percent of the delegates to the White House Conference voted on this topic as their most important recommendation. The legislation purposed by Senator Boschwitz deducting 40 percent of growth income from taxable income is an excellent alternative as it gives proper consideration to sole proprietor businesses that don't have the corporate structure for tax protection. You may also want to consider a tax policy that taxes interest or dividends of small business at the capital gains rate.

2. The second most important recommendation of the White House conference was the well-heard-of 10-5-3 allowing depreciation recovery of capital investment. I will not elaborate on this subject today as there are several bills pending in Congress. I do encourage your support for its passage.

3. According to the Internal Revenue Service, there are 350 companies obtaining more than 50 percent of investment tax credit dollars under the tax credit program. This reflects the low profitability of

small business that doesn't allow them to take advantage of a wellintended program. A simplified depreciation program with corresponding investment tax credits would eliminate a portion of this problem.

4. At one time the Federal Government allowed a no-strings jobs tax credit that encouraged the development of production jobs in the smallbusiness community. This has been replaced by a program that allows businesses jobs credit only if their new employees are exconvicts or socially disadvantaged. There is a strong need to reinstate the previous program of jobs credit for all new employees.

5. Another item I would like to focus on relates to employer tax withholding liabilities. Federal tax statutes require payroll withholding deposits of $2,000 or more at the end of each monthly or quarterly period. If, at the end of any monthly quarterly period, your total undeposited taxes for the quarter are $2,000 or more, the taxes must be deposited within 3 banking days after the end of the quarterly monthly period. A period ends on the 7th, 15th, 22d, and the last day of any month. For example, if the taxes on wages paid from the 1st through the 7th of a month are $2,500, these taxes must be deposited within three banking days after the 7th of the month. If the taxes on wages paid from the 8th through the 15th are, say, $1,500, and the taxes on wages paid from the 16th through the 22d are $1,200, a separate deposit is not required for the $1,500, but add it to the $1,200, and a deposit of $2,700 must be made within 3 banking days after the 22d. Failure to meet these timely deposits expose the employer to a penalty plus interest. These statutes have not changed substantially during the last 27 years when first adopted. In the 1940's, $2,000 of tax withheld applied primarily to larger employers and enabled the Federal Government to schedule cash flow requirements during wartime. In today's employer environment, this $2,000 now applies to a larger portion of the business community. Money, being an expensive commodity today, is placing a heavy burden to small businesses with lines of credit enduring interest rates in excess of his margin of profit. While the businessman is meeting his production overhead on a weekly basis, he many times is not billing for his products or services until the end of the month, and waits for his receivable collection to catch up with his cash flow.

A sample survey of our clients shows this cash burden consists of 26 percent in the form of withholding deposits against wages that have not been billed to his clients or customers. A recent IRS decision has changed the $2,000 level to $3,000 effective in 1981. They also inserted a new series of compliance standards that will impose additional burdens on the small business community, subject to penalty. It is recommended that the $3,000 limit be raised substantially, maybe as high as $10,000, in tune with today's economy, with a lag time of 30 days to permit the business to bill for services or products affected by the respective taxes and hope the cash flow will follow to pay current overhead liabilities. It may be well to mention that most labor agreements today have updated their requirements of employer liabilities to be more closely related to cash flow. It would seem appropriate that the Government could do likewise.

In 1979, the Senate Finance Committee reviewed a proposal to increase the monthly level of deposits to $13,000, and the quarterly level to $1,000. To date, nothing has resulted from this proposal.