STATEMENT OF JOHN LEWIS, EXECUTIVE VICE PRESIDENT, NATIONAL SMALL BUSINESS ASSOCIATION, ACCOMPANIED BY HERBERT LIEBENSON, VICE PRESIDENT FOR GOVERNMENT AFFAIRS, NATIONAL SMALL BUSINESS ASSOCIATION; AND JOHN MENDENHALL, CPA AND ATTORNEY, A MEMBER OF THE LAW FIRM OF WILLIAMS, CONNOLLY & CALIFANO OF WASHINGTON, D.C. Mr. Lewis. Mr. Chairman, my name is John Lewis, and I am executive vice president of National Small Business Association. Our association represents firms doing business in more than 500 categories. On my left is John Mendenhall, a certified public accountant, attorney at law, a member of the law firm of Williams, Connolly and Califano of Washington, D.C. On my right is Mr. Herbert Liebenson, vice president of Government Affairs of National Small Business Association. With your permission, Mr. Chairman, I would like to summarize my statement. Senator NELSON. Go ahead, your statement will be printed in full in the record, and you may go ahead and summarize it. If you would please pull up your microphone so that everyone in the room can hear. Mr. LEWIS. We are very, very grateful, Mr. Chairman, for these joint hearings involving the Senate Small Business Committee and the Senate Finance Committee. In announcing these hearings, you stated that "small and independent business accounts for between 52 percent and 53 percent of the Nation's total private employment, 43 percent of the business product, and about one-third of the gross national product." There are about 10.5 million small business firms in this country today about 98 percent of all of the firms. These firms, their employees and their families, dependent on small business employment, total about 80 million people-more than one-third of the total population of the country. And as impressive as these percentages and these figures are, a great problem for small business is that you cannot bank them, you cannot spend them and you cannot borrow on them. The major problem that small business faces today is that it is losing market share and losing it rapidly. Now, concentration is not as bad in the distribution industries as it is in manufacturing. However, there are certain exceptions. For example, in the retail food industry, there are 142,000 food retailersless than one-tenth of 1 percent-in orther words, 142 food chains, retail chains, make 57 percent of all sales. We almost have a similar situation in the drug industry. Approximately 40,000 retailers— one-tenth of 1 percent-that is, 40 retail drug chains-make onethird of the total sales in that industry. In manufacturing, in 270 out of 413 industries-and that is 65 percent of all Senator NELSON. What are those figures again? Mr. LEWIS. 270 of 413 manufacturing industries. That is, 65 percent of all of the industries for which figures are available the eight largest companies in those 270 industries accounted for 40 percent or more of the value of shipments from their industries. Let us compare manufacturing profits, manufacturing assets, to determine how small business is faring with regard to profits. In 1960, small and medium-size business gained 41 percent of the profits; 12 years later, the share of profits for small and medium-size business had dwindled to 28 percent. With respect to assets, small and medium-size business' share of the assets in 1960 was 50 percent; 12 years later, this had shrunk to 30 percent. Only last week Senator Hart, in introducing his Industrial Reorganization Act, said that 200 manufacturers, 200 corporations, control at least two-thirds of the manufacturing assets of the country. We are concerned with concentration, just as you are. We are not anti the bigs, we are for small business. This country is now in its Bicentennial-200 years ago, there was only small business. Today, there is not one giant that did not start out as a small business-even General Motors, United States Steel. They are a combination of small businesses. If there is one important factor about the giants, their greatest growth, with some exceptions, came when the tax bite was the smallest on them. In other words, they got a headstart in plowing back profits for expansion. Now the tax rates have changed. Theoretically, the smallest of the smalls-the Joe's Machine Shops-and General Motors pay the same tax rate; but it does not work out that way. The truth is that there are provisions in the tax code that only certain companies and generally these are giants-can take full advantage of. And when this happens, there is a discrimination against small business. Averaged out, it is approximately a 15 percent discrimination-15 percent in that the effective tax rate paid by the smalls is 15 percent higher than that paid by the giants. Some day there must be a complete overhaul of the tax code to bring equity for small business and to bring growth for small business. But we are willing to take one step at a time. Senator Nelson, we applaud the leadership of you and the members of the Senate Small Business Committee and the members of the Finance Committee that worked so diligently and so effectively in winning some benefits in the 1975 Emergency Tax Reduction Act. Unfortunately, these benefits are for only 1 year and they do not go deep enough; and they should be made permanent. We have certain recommendations that we believe should be incorporated in the new Small Business Tax Reform Act-the new Nelson-Evins Act-which we hope that all members of the Finance and the Senate Small Business Committee will cosponsor with you. The starting point is what was incorporated in the Bible-Evins bill plus what was almost-and I repeat-almost acted on by the House Ways and Means Committee. This was an excellent start, but there are certain recommendations that we want to make to you today. With regard to the 1975 Emergency Tax Reduction Act, those who needed help and relief the most, actually got the least. The normal tax was reduced from 22 percent to 20 percent. Now, in truth, we favor a graduated income tax for corporations, just as we have with the individual income tax. But being very practical, we know that that cannot be accomplished in all probability. But to help the small smalls, we would recommend that the normal tax be cut permanently to 10 percent for those companies that meet the SBA's size definition. Second, we would like to talk to you about adjusting the fixeddollar amounts in the code. Everytime the debt ceiling, which is the fixed figure, has to be raised, Congress acts. When the cost of living goes up, the social security payments are adjusted; Federal salaries, Federal pensions are adjusted. But the fixed-dollar amounts in the code have been there for decades and are never adjusted. Our recommendation to you is that, to compensate for the erosion by inflation, these fixed-dollar amounts be adjusted accordingly. And to prevent recurrence of this problem in the future, we recommend these adjustments be tagged to the Council of Economic Advisors' index of "Price Deflators for Gross National Product.” Illustrative of what we are talking about is a surtax exemption for 1 year in the 1975 Emergency Tax Reduction Act; it was increased to $50,000. Actually, it should have been increased to a minimum of $100,000. The surtax exemption was enacted in 1938. It has eroded in value to approximately $7,000. What cost $25,000 to buy in 1938 would require at least $100,000 today. Item after item similar to that should be amended in the code to reflect the ravages of inflation. Next, we would recommend to you that the code be equalized. Businesses competing with businesses should all be taxed. We think that it is unfair that the co-ops get a special tax break. We think that there is no such thing as a free lunch-as one of the witnesses said this morning. The co-op and the small businessman are competing for the same dollar. Their earnings are the same; but one is taxed and one is not. Not only are the co-ops sheltered by the tax code, but they are also sheltered from antitrust violations by the Capper-Volstead Act. That act, enacted in the early 1920's, provided that for production purposes a co-op was possible; but they have extended that now into marketing, distribution. They are practically in every industry, from aspirin to zippers. In the dairy industry, a specific example: In 1958, there were 5,828 fluid dairies; 14 years later, 1972, there were only 2,507. Senator NELSON. You are saying fluid dairies? Mr. LEWIS. Fluid dairies. The person that is taking the beating is the independent dairyman. Look about you. In Washington, D.C., where are the independent dairies? Do you remember when the independent dairy used to deliver door to door? They are gone; they are economic tombstones today. Senator NELSON. Caused by what? Mr. LEWIS. Caused by, No. 1, the tax break given a co-op; two, its unfair use of its exemptions given by Congress to the co-ops. The big get bigger. They use their profits for expansion and they drive the small independent dairy out of business. Senator NELSON. Are you referring to the dairies that used to make home deliveries? Mr. LEWIS. Yes, sir, that is exactly what I am talking about— independent dairies like that. Senator NELSON. I do not know anything about the data in this area, but I think, if you are talking about home deliveries, these firms may have gone out of business for other reasons. Mr. LEWIS. Well, the tax break given the co-op is one of the reasons. Actually, the large co-op uses it profits to acquire the independent dairy. Senator NELSON. Well, nobody is delivering at home, not even the co-ops. That business seems to be by the board. Co-ops do not make home delivery of milk, and neither does anybody else, to my knowledge. Mr. LEWIS. Well that is correct, sir, but also it is very, very difficult, practically throughout the country, for an independent dairy to get into many chain store outlets. Senator NELSON. Well that is maybe another question Mr. LEWIS. So their market is vastly limited. The next point that I wanted to make to you relates to the creation of a source of capital for small business. We are talking specifically here about tax-exempt Federal bonds. Our recommendation is that Federal tax-exempt bonds be permitted, with the proceeds earmarked for small business. Mr. Liebenson will be testifying in a few minutes regarding the impact of recession on small business. The facts are that small business today is not attractive to outside investors. The managers of mutual funds, the managers of pension funds would rather put their money in an IBM, a Xerox, a Ĝeneral Motors, rather than in small businesses. Second, when the money market gets tight, that is exactly the time that the bank participation in SBA guaranteed loans dries up. Whenever money is needed the most, it is unavailable. Now what we propose, sir, is that these tax-exempt bonds be issued with the proceeds earmarked solely for small business. This has many advantages. A new agency would be unnecessary. There would be no additional Federal employment, no additional red tape, no additional paperwork. Secondly Senator NELSON. You are talking about Federa bonds? Senator NELSON. So that investors could purchase them, then the money would be available for small business. Do you mean through loans? Mr. LEWIS. That is correct, sir. Through the Small Business Administration. The Treasury would actually operate the program, but the loans would be made by the Small Business Administration using their experience and expertise n this. In other words, there would be no need for any additional appropriations by Congress for direct loans to be made by the Small Business Administration. The proceeds would be available from the Federal tax-exempt bonds. There is a story in The Washington Post this morning. One of the staff members of the House Small Business Committee said that the OMB is opposing any appropriations for direct loans. The problem is there that the need for direct loans is great and this is a direct solution to that problem. Also, we feel that part of the proceeds could be dedicated to the housing industry, and SBIC's for use in stimulating small business and making capital available to it. Furthermore, because certain areas of the country have extremely high unemployment, preference could be made for loans into those areas. 54-397 O-75-11 For the long pull, our tax code should permit a greater accumulation of liquid assets by small business. This would be a cushion to enable small business to survive wild economic fluctuations. For the short term, this Congress should give small business a challenge and an incentive to pull this country out of its current economic tailspin. We have three specific recommendations with respect to this. One is that the small business be permitted to retain $250,000 in accumulated earnings. Second, we would recommend that small business be given a 10-year carry forward and carry back, and we are going to file a supplemental statement on this within a matter of days. Third, we recommend that small business be given a one-time job creation credit of 50 percent of the cost involved in hiring one or two new employees. The maximum credit being limited to $20,000. Now, this bill is being readied for introduction into Congress. There are good indications that this bill will have broad support from both aisles of Congress. Under it, permanent jobs and permanent taxpayers will be created. There are 9.2 million people unemployed today. This is no time for doles, no time for trickle down remedies. It is a time for direct solutions and we recommend that you give small business both the challenge and the incentive to put people back to work. [The prepared statement of Mr. Lewis follows:] STATEMENT OF NATIONAL SMALL BUSINESS ASSOCIATION BEFORE THE SENATE COMMITTEE ON SMALL BUSINESS AND SENATE FINANCE SUBCOMMITTEE ON FINANCIAL MARKETS ON TAX REFORM LEGISLATION TO BE PROPOSed, June 17, 1975 Mr. Chairman and Members of the Joint Committee: my name is John Lewis, and I am Executive Vice President of National Small Business Association (NSB). Our Association represents firms doing business in more than 500 industry categories. With me is Herbert Liebenson, the Association's Vice President for Government Affairs. Also with us is John Mendenhall, attorney-at-law and certified public accountant, and a member of the law firm of Williams, Connolly and Califano of Washington, D.C. Mr. Mendenhall will testify shortly as will Mr. Liebenson. By chart he will document, based on the government's own figures, that small business is hurt longer and more, as a general rule, than big business in economic downturns. We believe that the current recession will be no different unless help is given quickly by Congress, especially to the very small. The Chairman of the distinguished Small Business Committee, in announcing these hearings, said that "Small and independent business accounts for between 52% and 53% of the nation's total private employment, 43% of the business product and about one-third of the gross national product." Small business represents at least 98% of all the business firms of the country. These firms, together with their employees and families dependent on small business employment, constitute at least 80 million of this country's people— more than one-third of our population. But you can't deposit numbers or impressive percentages in a bank. Or spend them. Or borrow on them. A much more important yardstick is market share. Small business is falling further behind year by year in market share. In 270 of 413 manufacturing industries—in 65% of the industries for which figures are available the eight largest companies account for 40% or more of the value of the shipments from their industry. In 1960, small and medium-sized corporations in manufacturing had 50% of the assets and were responsible for 41% of the profits. By 1972 this had declined to 30% of the assets and 28% of the profits. Only last week Senator Hart (DMich.) stated on the Senate floor that 200 corporations control two-thirds of all manufacturing assets in the country. Relatively, small business is doing better in distribution market share than in manufacturing market share. But there are some frightening exceptions. One |