nization represents one-half million small and independent business men 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 24 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 100 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.

Senator BYRD. Where do you draw the line? When does the small business cease to be small and become a large business?

Mr. FIELDING. We like to think of large business as being publicly owned. Our definition of small business with regard to qualification of membership in our organization is an independently owned organization that is not dominant in its field.

Senator BYRD. Do the other two panelists concur on that?

Mr. TREPTOW. I would concur. We become hung up so often in statistical numbers, number of employees, value of assets, and so forth. The truly qualifying factors are not controlling markets and having an entrepreneurial charter in ownership and management.

Mr. PENDERGAST. Another limitation might be if they have more than 500 employees under any of those definitions they are definitely not a small business. You could have a privately held company not dominant in its market with more than 500 employees. I would certainly consider that a large business.

Mr. FIELDING. I would like to emphasize again that the Congress has failed to distinguish between the difference between small business and large business in the areas of taxation. In the very areas where it has recognized this difference, it has discriminated against the small, unincorporated business.

A prime example of this is the area of tax rates. The maximum tax rate in the corporation, as we all know, is 48 percent. A small, independent business, unincorporated business, the earnings can be taxed at a rate of 70 percent.

For example, an individual with $35,000 of business income pays approximately $8,000 of Federal income tax. By incorporating, the combined individual and corporate taxes would be approximately $6,000. This is a savings of 25 percent, an inducement to incorporate, but an artificial inducement.

Last year, the Council of Small and Independent Business Associations that we call COSIBA, proposed, as a part of its Small Business Growth and Job Creation Act of 1976 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.

Senator BYRD. May I interrupt you there? That is, in essence, subchapter S corporations?

Mr. FIELDING. Yes.

This again, is alleviating the small business person from the expense of incorporating to minimize taxes. Why should an individual have to incorporate? In a subchapter S corporation, you would still have the expense of incorporation.

Senator BYRD. Your idea is to put an unincorporated business in the same category as a subchapter S corporation but not having to go through the expense of incorporating.

Mr. FIELDING. I am trying to put it in the same tax rate. An unincorporated business should pay taxes at the same tax rate as a corporation. A subchapter S corporation pays taxes at the same rate as an individual.

What we are after is the lower rates.

Senator BYRD. You are reversing it.

Mr. FIELDING. We want the lower rates for unincorporated busi

nesses.

Mr. PENDERGAST. At one time, subchapter K used to allow the partnership to be taxed as a corporation. This would do the same thing for individuals.

Mr. FIELDING. Subchapter K was very complicated, very restrictive, and did not work. This is a simple provision that we feel would work. Senator BYRD. You answered earlier that what you wanted was to put individuals in the same category as a subchapter S corporation. I see now that your response meant to refer to subchapter K not S. Thank you.

Mr. FIELDING. Another area of discrimination is the provisions dealing with retirement plans. 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.

Senator BYRD. What is the rationale?

Mr. FIELDING. So many people in Washington think small business is a mom and pop operation-there is nothing wrong with the mom and pop. Small business is the backbone of this country.

NFIC 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.

Senator BYRD. Why do you pick 100?

Mr. FIELDING. 90 percent of the plans have less than 100 participants and prior to ERISA, DOL actually did not come into effect, as far as jurisdiction was concerned, until there were more than 100 employees, so we have used that as a cutoff. It is not a magic number.

Senator BYRD. How is the Federal Paperwork Commission getting along?

Mr. FIELDING. I have had to buy two new cabinets since I became a member so that I can file all of the things that they send me to read. Senator BYRD. Is there any progress being made?

Mr. FIELDING. I think so. We had some specific examples of progress in the area of ERISA, certain recommendations that the Internal Revenue Service has accepted. We have had a very good study on OSHA. We made many specific recommendations on OSHA as to how paperwork could be reduced.

We have had absolutely no cooperation that I know of from the Department of Labor in implementing these suggestions. It is a stumbling block over there. There is a little bit of turf protection going on.

We have also come out with equal opportunity recmmendations. We are in the process now of finalizing our study of the impact of the paperwork burden on small business which will be quite a revealing study.

Senator BYRD. How about the Department of Health, Education, and Welfare? What kind of cooperation are you getting there?

Mr. FIELDING. I believe that we have a great deal of cooperation. Senator BYRD. The superintendent of schools in my State is complaining bitterly about the tremendous volume of questionnaires that they have to fill out.

Mr. FIELDING. The thing that appeared to me as an observer, as a kind of layman in this whole area, our recommendations are well founded. There are a lot of justifications and we have had a lot of cooperation, but no implementation, and that is the thing I fear so as the Commission goes out of existence, which it is scheduled to go out October 3rd.

When it renders its final report to Congress, that will be another bound report which will go on somebody's shelf and become the basis. for somebody's Ph. D. thesis.

Senator BYRD. That is the trouble with this whole situation in Washington. The tendency to continue in the direction that a particular bureau has been going for many years and that means more and more forms and paperwork.

I would like to see your Commission succeed. I would like to see the executive branch put it into operation when you complete your work. Mr. FIELDING. For example, Senator, your Senate passed a resolution recently that requires an impact report on all legislation, but I have not seen any impact reports. I do not think there have been any.

Somebody has to implement them. There has not been any implementation. I would love to see the cost of the impact of the reporting requirements of the recent job tax credit act.

Senator BYRD. I think you are quite right. I believe the Senate just. passed the legislation of which you speak. I do not know that there has ever been a chance to implement it. I think it should be implemented. Mr. Pendergast?

STATEMENT OF EDWARD H. PENDERGAST, CPA, REPRESENTING THE SMALLER BUSINESS ASSOCIATION OF NEW ENGLAND

Mr. PENDERGAST. My name is Edward Pendergast, past president of the Smaller Business Association of New England and currently chairman of the Federal Legislative Committee.

I would like, Mr. Chairman, for expediency's sake to have my statement entered into the record rather than read it in detail.

I would like to make some comments on what has been said by my two friends, also some of the feeling-I guess I have to categorize it as outrage-with some of the comments that I have heard this morning before my two friends had the opportunity to speak, from the lack of understanding of what is going on and the problems of business, and small business particularly.

We had one allusion by the former Chairman of the Council of Economic Advisers to the complexity of tax laws and regulations being one of the most significant problems that small business has to deal with. One little paragraph from my testimony gives some indication. of my agreement with that certainly, although I will emphasize that a lot more has been done than in his discussion.

I think that Congress must realize that it poses at the peak of a rulemaking mountain, trembling down the slope of bureaucracy. Legions of civil servants bring an action. By the time the pebble has come to rest, a landslide of related rules and regulations has tumbled upon the population below. The small businessman is being crushed by an avalanche of words.

Just to give you an example, the discussion today about whether we should have the investment tax credit compared to depreciation liberalization-I think the word is depreciation simplification, which is much more important than that. Let us discuss the ADR, one section of the regulations issued by the Internal Revenue Service, one sentence. This is the sentence. It is on page 4 of my testimony.

"In the case of eligible property first place in service in the taxable year of election (and not otherwise properly excluded from an election to apply this section) the taxpayer may not compute depreciation for any of such property in the asset guideline class under a method not described in section 167(b) (1), (2), (3), or (k) unless he (1) computes depreciation under a method or methods not so described for eligible property first placed in service in the taxable year in the asset guideline class with an unadjusted basis at least equal to 75 percent of the unadjusted basis of all eligible property first placed in service in the taxable year in the asset guideline class and (2) agrees to continue to depreciate such property under such method or methods until the consent of the Commissioner is obtained to a change in method." That is regulation 1.167 (a)-11(b) (5) (v) (a).

Senator BYRD. Can anybody interpret that?

Mr. PENDERGAST. No small businessman can. That is why every tax reform act gets called the Accountants' and Lawyers' Relief Act. I guess I would have to follow the lead of both Congress and the Internal Revenue Service in the interpretation of most of the other agencies of Government.

Senator BYRD. I think you are right.

Mr. PENDERGAST. We talked about the first $200,000 of assets being expensed in effect. I understand that in England, and to a lesser extent Canada, we have full expensing in the apposition of fixed assets in England and the significant rash of additional investment in capital assets as contrasted in the testimony by the Assistant Secretary of the Treasury for Economic Policy and the former Chairman of the Council of Economic Advisers.

The latter, when you ask him if acceleration of depreciation would increase the purchase of capital assets, then contradicted himself and said-I think he used the term "sophisticated facilities analysis" whatever that means, makes their decisions independent of the Tax Code. That is the offset to any exclusion referred to if you allow the opportunity to extend the acquisition of capital assets.

I agree with my friends and all the elements they have spoken about. I would like to emphasize and add maybe a couple of small items that I think may be beneficial to many small businesses, one is to allow a surtax exemption carryover so a corporation who makes no income 1 year and $100,000 the next year would be in the same position as the company that would earn $50,000 the first year and $50,000 the second year.

Under the present law, he has a penalty that he ends up paying some $13,500 because he happened to have his income on a cyclical basis.

Another item that I might ask to eliminate is the accumulative earning tax, as you eliminated the stepped-up basis in 1976. The reason is, it is seriously abated by anything that deterred the generation of additional capital.

I think that ERISA should be amended to encourage pension fund managers to invest in small businesses.

Senator BYRD. How do you do that?

Mr. PENDERGAST. You eliminate the prudent man law to some extent, maybe for 5 percent of the total investment of an investment portfolio, if they are invested in small businesses. The prudent man law is scaring the living daylights out of pension fund managers. They are not going to invest in small businesses.

Another way you can do it is to require any pension fund assets in excess of a certain figure to have a certain percentage of their assets to be invested in certain qualified small businesses.

Senator BYRD. I agree with the objectives you are trying to achieve. I just have some trouble with setting aside the prudent man rule. Mr. PENDERGAST. I am not suggesting it be set aside, just that you mitigate it.

Senator BYRD. Insofar as this one aspect is concerned.

Mr. PENDERGAST. If you set it aside to the extent of 5 percent, for instance, of pension funds for assets in excess of $10 million, you would put a tremendously significant injection of additional capital into small business.

There is no new capital coming into small business, as you know from the statistics, and they are clearly outlined in the report of the SBA Task Force.

I ought to tell you, when I hear talk about integrating between the corporate tax and the individual tax, if this is done without some