Letter to Chairman Camp and Ranking Member Levin

Letter

Our nation's economy is gaining strength, and America's small businesses are beginning to hire. The recent rise in employment is positive, but the rate of increase is slow and the labor market is still soft. We need to do more to help small firms. As we near Tax Day, there seems to be broad agreement that the tax code is too complex. That complexity impedes compliance, as well as hiring and investment.

Today, the House Committee on Small Business held a hearing on how tax complexity hinders small business job creation and economic growth. We heard testimony from Nina E. Olson, the National Taxpayer Advocate, and several small business owners. As you may know, in her December 2010 report to Congress, Ms. Olson cited tax complexity as the number one problem in tax administration. She has said that there have been over four thousand changes to the tax code in the past ten years; an average of more than one per day, and there were an estimated 579 changes to the code in 2010 alone.

We are concerned that tax complexity increases the time and money small business owners must expend to comply with the code. Small business owners who can't afford expensive tax advice must navigate the code on their own. Those who can afford outside help could be using those scarce resources instead to raise wages, hire more employees or expand their businesses.

As you know, the majority of small businesses are organized as "pass through" entities, so they pay taxes at the individual rate. It is important to small businesses that tax reform includes lower individual as well as corporate rates. Otherwise, small business owners, our nation's premier job creators, will be left out of the debate and the benefits of good tax policy.

Two new studies highlight the hazards of reforming tax policy for larger businesses without doing the same for smaller ones. A study by Ernst &Young for the S Corporation Association estimates that small employers would be facing sharply higher tax rates on a significantly broader base of income if Congress passed corporate-only reform. A study by American University's Kogod Tax Center similarly found that if corporate-only reform moves forward, small businesses will end up with an increased tax burden, and only comprehensive business tax reform would ensure small business owners needed tax relief.

At the hearing, the witnesses agreed that tax complexity or tax relief has a direct impact on small business viability and job growth. The more time and resources a small business spends on tax compliance, the less time it will have to grow and hire employees. In her testimony, Nina Olson cited a University of Maryland and Center for Economic Studies study for the U.S. Census Bureau, which found that small businesses are generally the creators of most new jobs as well as the employers of about half of the private sector workforce. Ms. Olson testified that "it is essential that the tax system does not present an unnecessary hurdle to the success of these already fragile operations. In addition, because a substantial portion of businesses are pass-through entities, a real reduction in complexity will not occur unless individual and corporate tax reform occurs at the same time."

Monty Walker, a CPA who serves small business clients in Wichita Falls. Texas. testified that "[u]nderstanding tax matters is confusing and tax compliance comes at a cost. This cost results in lost resources that could have been used for business operations and business development.' Mr. Walker also said that because of the code's complexity some small business owners decide to "just stay small and not hire people as opposed to expanding and becoming exposed to regulatory compliance brought on by hiring people."

Steven Strobel, Executive Vice President and Chief Financial Officer of Bluestar Energy in Chicago, Illinois, encouraged Congress to "implement real tax reform: simplify the tax code, broaden the base, lower all individual and corporate tax rates, and make the corporate tax code more competitive for U.S. businesses. These reforms will create a surge in economic growth." In addition, Mr. Strobel said, "efforts to reduce the regulatory and administrative burden on small businesses must focus on overall simplification, eliminating inequities within the tax code and enhancing taxpayer education and outreach."

Leading up to Tax Day, and as you continue your hearings on fundamental tax reform, we hope you will work to enact common sense reforms that will simplify our tax code and enable our nation's small businesses to create jobs and spur investment in our economy.

Sincerely,
Sam Graves
Chairman
House Small Business Committee

Joe Walsh
Chairman
Subcommittee on Economic Growth, Tax and Capital Access

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