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Taxes and Small Business


TAX ANALYSTS ROUNDTABLE DISCUSSION ON:
TAXES AND SMALL BUSINESS

Washington, D.C.

Friday, January 20, 2012

PARTICIPANTS:

Moderator:


    CHRISTOPHER BERGIN
    President and Publisher, Tax Analysts
Speakers:

    MARTIN A. SULLIVAN
    Contributing Editor, Tax Analysts

    GEORGE ASSIMAKOPOULOS
    Founder and CEO, Eye Traffic Media

    DON WILLIAMSON
    Professor of Taxation and
    Executive Director, Kogod Tax Center,
    American University

    JOHN L. BUCKLEY
    Professor,
    Georgetown University Law Center's Graduate Tax Program,
    and former Chief Democratic Tax Counsel,
    House Ways and Means Committee
* * * * *

PROCEEDINGS

(9:03 a.m.)

MR. BERGIN: Good morning. How is everybody? Welcome to the latest in the Tax Analysts series of discussions on key issues in tax policy and tax administration. Today's topic is Taxes and Small Business. I'm Chris Bergin, the president of Tax Analysts, which is the nonprofit publisher of Tax Notes, Tax Notes Today, State Tax Notes, Tax Notes International, and many other fine printed online products on federal, state, and international taxation.

With today's event, we are starting our 10th year of public discussions on tax policy. Ten years for those of us who have been here from the beginning. It seems like yesterday. If you are new, however, to our discussions, let me say it's great to have you here.

For this conference, we have partnered with the Kogod Tax Center at American University. So I would like to thank the Tax Center for working with Tax Analysts to create a conference on this important topic. We make a great team, if I do say so myself. And I look forward to other ventures with the Tax Center in the years ahead.

Let me take just a moment to explain our process today. It's actually sort of simple. I will open things up with some brief remarks to introduce our topic. I will then introduce our distinguished panel of speakers. Each of them will address aspects of our topic. After that, we will open up the discussion to all of you. And we encourage all of you to participate. Whether you are seated at the table or just a bit away from it, just wave and I'll find you.

We are streaming audio of this event on our website, and we will post both the audiocast and a transcript there. We're also tweeting this event for the first time as we try to reach people beyond this room through social media. So for all media purposes, we are all on the record. For that reason, when I recognize you, please tell us who you are, first and last name, please.

Also please speak into a microphone. There's a lot at the table. For those of you away from the table, we have hand-held mics that we will quickly get to you. I will moderate the discussion, and we will end at 11:00.

Now on to our topic: small business. It's as American as mom and apple pie and just as sacred. It's the American dream for many to start a business in a basement or a garage and become a millionaire, or even a billionaire like Bill Gates. Small business accounts for much of this country's economy, but it also accounts for much of this country's growing tax gap, the difference between taxes owed and taxes paid. A recent IRS report estimates that the tax gap now measures $450 billion a year. And it says that small business accounts for a large amount of underreported income. Does that mean small business owners are all tax cheats? Or does it mean that the typical small business owner finds it impossible or unaffordable to understand and comply with the myriad and complicated tax rules and regulations that he or she faces?

Those questions lead invariably to another one, which is: How should we tax small business? At the moment, we are clearly taxing small business ineffectively, and there may be other words that fit that. We may not be able to avoid this issue much longer either, and in my opinion, that would be a good thing, because several storms are brewing in the policy world that may finally force us to reconsider the way that we tax small business.

First, the country is clearly on an unsustainable budget course. Some of us think that part of the way to get us back on the right path is to raise revenue, and by that I mean higher taxes. And the best way some of us think to do that would be through comprehensive tax reform.

Others argue for piecemeal tax reform. For example, in some corners of Washington, policymakers and pundits are pushing for corporate tax reform. Corporate tax reform, however, as we all know, is not the same thing as small business reform. Many small businesses do not pay the corporate income tax. Most small businesses operate as passthroughs organized, for example, as S corporations, limited liability companies, partnerships, or sole proprietorships. Policymakers can't ignore small business while reforming the corporate income tax. And they shouldn't, at least in my opinion, lower the top corporate tax rate and pay for it by raising taxes on small business.

A third brewing storm is the scheduled expiration of the so-called Bush tax cuts at the end of this year. Many argue that letting the Bush tax cuts for upper-income Americans expire will amount to a tax increase on small business owners. That, they say, would hurt job creation because small business accounts for most of the new jobs created in this economy. Question: Does it really?

So we have a lot to talk about today and we have put together an excellent panel to lead that discussion. But before I introduce them, I want to recognize Dave Kautter, who's sitting right here, from American University's Kogod Tax Center. This conference was Dave's idea, and Dave and I have been working together for several weeks to put it together, with several other people helping as well. I just wanted to thank you, Dave, and I look forward to working with you in the future.

MR. KAUTTER: Thanks.

MR. BERGIN: Let me introduce our panel in the order in which they will speak. Marty Sullivan is a former Treasury Department economist and a contributing editor for Tax Analysts. That's Marty there. He is the author of the new book, Corporate Tax Reform: Taxing Profits in the 21st Century, which is available from Apress Media. And in a shameless attempt to help Marty sell his book, I'm holding it up.

George Assimakopoulos, I practiced that pronunciation all night. George is the founder and CEO of Eye Traffic Media, a small business. And I think it's important that we have a small business owner at the table, so thank you for being here, George.

Don Williamson is a professor of taxation at America University and executive director of the Kogod Tax Center. As a tax practitioner, he works with small business. John Buckley is a professor at the Georgetown University Law Center's Graduate Tax Program. He is the former Chief Democratic Tax Counsel on the House Ways and Means Committee. And I'm proud to say John is also a member of the Board of Directors of Tax Analysts. Thank you all for being here. Marty, would you get us started, please?

MR. SULLIVAN: Thank you, Chris. And I want to extend to everybody a warm welcome. It's a pleasure to be part of this distinguished panel. And I want to encourage everybody to participate. Many years ago, a wise mentor of mine told me two rules of good public speaking, that is to be humorous and to be brief. And since I'm incapable of being humorous, I will try to be very brief. To get the ball rolling, I'm going to quickly run through nine bullet points in front of me. These are nine facts about small business selected by me on no other basis than I found them interesting, and I believe they are particularly relevant to our discussion today. Then I'll finish with some policy conclusions based on these facts.

Warning, I'm going to speak frankly, contrary to the customary inside the beltway practice of unconditional praise for everything small business. Some of these facts are not going to be particularly flattering to small business.

Fact no. 1: Small businesses have high rates of tax evasion. The new tax gap figures are out, but the results are basically the same: Small business accounts for about half of the tax gap. And we don't need data to understand this. Anybody who's lived in the real world knows that small businesses are tax evaders.

Fact no. 2: Small businesses are generally subject to less tax than large businesses. And the main reason for this is that corporate taxes are imposed on large businesses generally and small businesses can escape the corporate tax.

Fact no. 3: New research shows that most small business owners are not entrepreneurs. Entrepreneurs are these super-productive people who use bold, innovative approaches to exploit new business opportunities. And encouraging entrepreneurs can be very good economic development policy. But most small businesses are craftspeople, lawyers, doctors, real estate agents, shop keepers, restaurateurs, funeral directors, whatever, and there's nothing wrong with any of these positions, but these are not people who are at the cutting edge of new technology, opening up new markets, or even in high-growth areas.

Fact no. 4: Small business owners generally provide lower quality jobs than large businesses. What do I mean by lower quality? Lower pay, fewer benefits, less security.

Fact no. 5: New research shows that small businesses are not the engine of job creation; start-up businesses are. There's a myth out there that you hear almost every day that small businesses create most new jobs. But this is just a statistical illusion. New research using new data from the Census Bureau shows that it is start-up businesses that account for most of the net job creation. And, therefore, most mature small businesses are actually job losers.

Fact no. 6: "Small" -- is only about 8 percent of all the income that would be subject to higher rates under the president's proposal to deny extension of the Bush tax cuts. This you can see in Figure 1 of your one page handout. And this big rectangle represents all of the income in the higher-income brackets that would benefit from extension of the tax cuts to the wealthy. But as you see in the lower left hand corner, only 8 percent of that is small business employer income. So if you're trying to help small business, extending tax cuts to the wealthy is not a particularly efficient way of doing that.

So so far all my facts have been reasons to deny or at least be less inclined to give small business tax breaks. Now let's look at some factors that can justify special treatment for small business.

Fact no. 7: Market failure can result in rationing and denial of credit to small business. The market's innate ability to deliver adequate financing to small business is a good reason for the government to intervene in favor of small business.

Fact no. 8: Market failure can result in underinvestment of highly productive research and innovation done by small business. Unlike most tax expenditures, tax benefits for research are economically justified. And there's a lot of evidence out there that research done by small business is particularly productive and much more effective than research done by large businesses.

Finally, fact no. 9: Small businesses bear disproportionate compliance burdens. And you can see this if you flip over Figure 1 to Figure 2. If you think of the compliance burden as a tax on business, the tax is 10 times larger per employee for firms with one to five employees than it is for firms with 50 employees. So small businesses are being hammered with compliance cost, and again, we don't need data to understand this. If you only have two employees, you're going to have to fill out a lot of the same forms, do a lot of the same record-keeping as you would if you had 50 employees.

Now, putting all these facts together, I'm going to make a few tentative policy conclusions, first, about extending the Bush tax cuts to upper-income taxpayers. We know from these new data that only a small fraction of the benefit of those cuts will go to small business. And we also know that only a fraction of that fraction is directed to businesses that are creating jobs. So denying the extension of the

Bush tax cuts will not have an inordinate effect on job creation.

We're going to have a big debate this year about extending the Bush tax cuts. This whole discussion about its effect on small businesses really has no role in that debate. This is not to say that tax policy should not give special attention to small business, but this attention must be carefully and thoughtfully directed. One very promising approach would be to subsidize venture capital. And why do I say that? Well, venture capital suffers from two market failures. They have inadequate access to finance, and they get an inadequate return on their highly productive research. So I think it's a very promising area, at least in theory, for applying special tax breaks.

And then finally, for small business generally, I think it's almost self-evident that the best way Congress can help small business is to eliminate the inordinate burden that it itself created for small business.

Of course, everybody wants simplification, and tax simplification is a wonderful thing. But for small business, tax simplification can be a huge benefit, with little or no cost to the Treasury when we're trying to keep our budget under control. And I think that I will just finish there, and I think that segues into --

MR. BERGIN: George.

MR. SULLIVAN: -- George, yes.

MR. BERGIN: So, George.

MR. ASSIMAKOPOULOS: Thank you all very much. First and foremost, thank you to Tax Analysts, and, of course, the Kogod Tax Center at the American University for inviting me to be here today. I would say that I'm one of the few people, if not the only one in this room, who is not a tax guy. Who I am is one of those entrepreneurs, sorry, Martin, as well as a small business owner. Again, my name is George Assimakopoulos, I'm the founder of Eye Traffic Media, which is a business headquartered here in Washington, D.C. This business specializes in helping all types of businesses and organizations to reach their audiences online through online marketing tactics.

I guess I want to have you all understand a little bit about what it is like in the day of the life of a small business person. So I'm going to tell you a little bit about a journey that I've taken here.

I guess it could be summarized in the fact that the journey that I've taken as a small business owner is a road full of humps. That's the way I'm going to describe it. And you all have to understand that when I did graduate with my MBA from the American University, I was fortunate enough to start in a small business that was in its hyper-growth stage in the dot com era, so we're talking about the mid-'90s.

I was able to see that company grow rapidly and go through an IPO. And as many of you in this room probably remember, the dot com era gave way to the dot bomb era in the new millennium. And along with the new millennium came many different changes. But I survived for many years in those elements, but not for long. And when our company was acquired by a bigger business, I remember being called into the office by some of the executives, and they sat me down and they said to me, "You know, George, we just don't see this company focusing on online marketing moving forward." And that was 2004. And I said to them, "You know, I think you're kind of wrong here because, you know, Google is starting to do pretty well, and there's this social network thing in this college called -- and I'm seeing it called Facebook, it really looks like it's going to take off," and they're like, "Yeah, yeah, yeah, that's all good, but, you know, we're not really interested, so we're going to let you go."

But I was really passionate about the things that I wanted to do. I love what I do. And I wanted to keep doing it in 2004. So what happens to somebody who wants to do something that no one will hire him to do? You go out and you do it yourself.

So I went out and I incorporated myself, became an LLC, and walked into a lot of businesses to help them understand how they could do online marketing. And that's actually where the journey and that road full of humps begins. So let me explain why.

When you start out as a new business, the first thing you start to tell yourself is, "God, I hope I can make enough money just to feed my family and to provide." Well, you get over that hump, and you start to go down the road. The next thing you start to say to yourself is, "Oh my goodness, I've got so much work, I don't even know how I'm going to get it done. Maybe I should go out and hire some people or get some contractors to help me." And then you start to think, 1099s, and I've got to do payroll taxes, and I've got to account for healthcare insurance benefits and a whole bunch of other things that cause a lot of confusion. But, you know, you get over that hump and you keep going down that road.

Then you suddenly say to yourself, "You know, I've got all these people working here for me now, I guess I should put them somewhere, maybe I should go get an office." And then you start saying, "personal property taxes," and then you've got your assets and your liability and your depreciations, and do I really want to get in the middle of all this, and you say, "Yeah, let's keep going," and you get over that hump.

And you keep going down this road, and then suddenly you stop and you turn around and you look back at that road you came down from and you say, "Look at this, I've got a business." Now, that's the good part, the fun part of being an entrepreneur, of starting a business.

But along the way, there are some significant challenges that you face, and even more so today that almost put you out of business before you continue to be one. And kind of let me explain what I mean by that. Do you know what keeps me up at night? And I love the audience that I have here. Let me actually prioritize for you the things that keep me up at night that I'm constantly worried about. And they're actually in a prioritized order, so you'll see where this topic will fall into category.

No. 1: economic uncertainty. You have to understand, many days I wake up and I have no idea what is going on in this country, let alone what's going on in Europe, and the fact that it's an election year makes things even more uncertain.

No. 2: the decline that my customers are spending with me. They're not spending as much anymore. Do you know why? Number one, they don't like that uncertainty either. They want to see what's going on before they make those decisions and commitments.

No. 3: the cost of health insurance benefits. You know, last year my healthcare cost to cover all of my staff went up 23 percent in one year. Do you know what that does to a small business?

No. 4: talent and staff. I'm a business in the business of client services. I have to have the right people, the best talent, the latest technologies, the skill sets that keep me competitive. That's constantly on my mind to make sure that I can compete in an ever-changing marketplace.

No. 5: federal, state, and local taxes. Now, think about that. Before I even start to think about tax policies and compliancy issues, I'm just trying to keep the lights on. You know, there was a time when being an entrepreneur had a lot of reward. It really was a special time. Today, you've got to be a little bit out of your mind to start a business.

So I guess that makes me the crazy one in this group; that you all get to ask, "What were you thinking?" And I welcome your questions. Thank you.

MR. BERGIN: Thank you, George; Don.

MR. WILLIAMSON: Good morning and thank you very much for inviting me to come and speak, and it's a pleasure to have the Kogod Tax Center partner with Tax Analysts in this project.

The Kogod Tax Center was created specifically for the problems being expressed here today: the problems of small business and tax compliance. And I've taught at American University for, well, a long time. And for many of those years I have also prepared a lot of tax returns for a lot of folks in this area. And what I find, and George has echoed, is that it's just a crushing burden to do the tax return.

So very often I find my work in representing folks like George to be nothing more than being an IRS officer, insofar as my preparation of the return will basically do the job that the IRS would have done, had they appeared at George's doorstep to audit his return. And so in that respect, my work and the work of the tax practitioner in representing small business very often serves that purpose.

But what's happening, and George has expressed that already, is that it's just overload. And the work of the tax practitioner, and the tax preparer, and the tax compliance officer, is too often viewed as something of a necessary evil where we just have -- it has to be done and it has to go away and we have to have Williamson do that work and it's unfortunate.

And it doesn't lead to productive behavior. It really doesn't. In fact, it leads to disrespect for the system because so very often the small business person does not understand what I am doing for him or her and basically it's "Where do I sign the return and how much do I have to pay in tax?" And everything else in between is my responsibility, the tax practitioner's responsibility.

And that's unfortunate because it does lead to disrespect, and there's an attitude towards the law that develops that indeed may create the tax gap that Marty referred to a moment ago. So it is a problem that we have in this business.

I would say, and this is sort of a side comment, that if you want to close the tax gap, perhaps the better way to do it is not to audit taxpayers, but to audit tax return preparers. With the advent of the PTIN, one can go to a tax practitioner's returns, take a look at a sample of those returns, judge their accuracy and compliance, and have a pretty good idea of the accuracy and compliance of all of the other returns that preparer has prepared, regardless of industry or size.

Let me as an aside at this point say, you know, during the course of our conversation today we have not defined small business. That's on purpose, at least in the Kogod Tax Center, because whether that business is defined as a million dollar threshold, five, 10, regardless of this, the small business person, the entrepreneurs, the sort of folks George is and wants to be before they go public, they're not going to have an in-house tax department; they're going to have somebody like me. So really a dollar threshold for defining small business would serve really no purpose.

And so again, I want to emphasize that with the PTIN, the advent of the PTIN, I think you will see greater compliance in the law if the Service picks up on that, as in -- and unfortunately they've issued PTINs to 200 convicted felons, 36 of whom are doing life sentences. But that's neither here nor there. Once they get that taken care of, I think they can look at the tax return preparer and judge the rest.

Now regarding that complexity that both Marty and George have referred to -- and there's no doubt there is complexity -- it is as difficult to do a tax return with six figures at the end as nine. I can assure you, the same amount of time, the same amount of effort, the same amount of expertise and skill on the tax practitioner's part is required. And that becomes a problem when it gets to be a fee-based business as we're on, to comply with the law.

The pressure on fees and keeping the preparation costs down do put pressure on the system, as far as having an accurate and proper return, and one that indeed I can sign.

So what can we do about that? And I think Marty and some of his work has referred to the fact of this simple partnership for example. George alluded to should he be an S company, an LLC, a C company, et cetera, et cetera, in terms of his choice of business when he started that business.

Frankly, I would very often hesitate to have my clients go into the partnership rules because they are some of the most complex in the code. There's nothing wrong with a good old fashioned S corporation with a per share, per day, allocation of profit and I won't get any more technical than that.

But that said, we could very easily, as Marty has alluded to, had simpler partnership rules. In that regard, I don't mean you don't have to have substantial economic effect tests applying to large master limited partnerships, but do they have to apply to mom and pop? Do you have to have disproportionate distribution rules for mom and pop organizations as you would, say, for larger partnerships? And I'll let the technical side go at that point.

You can create simpler rules that apply to small businesses but keep the more complex rules that are absolutely needed for larger businesses. There's no question about that. That can be done. Look at transfer pricing. I have a small company that wants to go overseas. The transfer pricing rules, the transfer pricing studies that have to be created could amount to a fee that would discourage that small business person from even going overseas, creating a foreign company. And the six- or seven-, and I could go on and on with this, the six-or seven-page forms that have to be filled out, if you have an interest in the foreign entity, discourage U.S. persons from going overseas. There's just no question about that.

We can create simpler rules. I could go on and on. The 255 pages of regulations that were issued two weeks ago to distinguish what is a repair from a capital expenditure; you know, I have to analyze those rules, as well as large publicly traded companies. And how does that cost, how is that effort going to be done?

And very, very challenging issues here indeed, but it can be changed. It can be changed is what I want -- and if we can change rules, make them simpler by doing so, we will actually increase compliance and we'll have better returns, more accurate returns that will properly pay their tax and close this tax gap that Marty has alluded to. Thank you.

MR. BERGIN: Thanks, Don. We put Mr. Buckley in the cleanup spot.

MR. BUCKLEY: Yes.

MR. BERGIN: John.

MR. BUCKLEY: Well, thank you very much for the opportunity to speak today. I'm going to talk about tax reform in small businesses and I'm going to start with what's the obvious observation, which I think is quite consistent with what George said. It's that the state of the economy has a bigger impact on small business sector than any potential impact of a tax reform plan.

If the economy is good, small businesses have a reasonable chance to succeed. If the economy is bad, they're the first to fail. They don't have the resources to sustain periods of economic distress. In that respect, I would argue that not Marty's most recent columns about small businesses are relevant, but his column with the not -- what I would consider to be refreshing, nonacademic title, "To Hell With Tax Reform Now," is probably more relevant to what I'm talking about.

In my opinion, the discussions of tax reform today are at best diversions from the real problems that Marty outlined in his article. We have a problem of slow job growth, and we have problem of long-term budget deficits. As I say, at best the discussions of tax reform are a diversion from those real problems.

Indeed, I think one reason why tax reform is so popular on the Hill is exactly because it is a diversion from those real problems. If it were only a diversion, I would say that one could move on and wait for the next election, but tax reform, if not properly constructed, could worsen both problems.

The focus on rate reductions would mean that there would be a broad elimination of tax benefits, many of which are quite important not just for small businesses, but the manufacturing sector as well. If you reduce the corporate rate and finance it by a reduction of accelerated depreciation, which is clearly what's being talked about, you could easily have a net tax increase on the manufacturing sector in this -- I don't think that's positive. That's the type of business that is moveable and can move in response to tax rates.

Things are quite different than what they were in 1986. In 1986 you could finance a corporate rate reduction by repealing a permanent tax benefit, the investment tax credit. And by permanent, I mean not just the timing change that reverses in the future.

Today, there is only one large corporate tax preference that is not a timing change and that's the deduction for the manufacturing sector; that's the only one. All of the rest of the corporate tax preferences are timing changes.

Financing a permanent reduction and the rate by repealing timing preferences will balance your bill in the first 10 years because of the one-time tax increases from the repeal of those timing preferences. But it quickly becomes a very large loser in the out -- and that's where our long-term budget problem could easily be worsened.

Now, that goes into the uncertainty, I think, that George was talking about because if you don't have -- it is fine to play games with the budget window, to balance your bill for congressional consideration, but time moves on for those who wish to have a business that intends to last longer than 10 years, and there will be an extraordinary amount of uncertainty when those one-time tax increases are gone and the permanent rate reductions are still there.

Now, finally, let me say after listening to the prior speakers, I've come to the thought that perhaps a tax reform plan reducing compliance burdens may be more beneficial to small businesses than one merely focusing on the headline of reducing the top rate.

As Marty pointed out, I think quite nicely, there are not a lot of small businesses in the top rate. Now, the one thing I would ask is to what extent of your small employers -- Are the doctors and lawyers in that as well?

OK. Then let me say that 8 percent small employer is -- a very small fraction to them would be the entrepreneurs --

SPEAKER: Yes.

MR. BUCKLEY: -- that George represents.

SPEAKER: Did you say the fraction of the fraction?

MR. BUCKLEY: The fraction of the fraction is largely --

SPEAKER: Is what everybody is talking about.

MR. BUCKLEY: It is largely people in this room, with the exception of George; with the exception of the one small business. So a tax reform just focused on that headline, top rate, you know, misses most small businesses. Now, that's probably not the worst part of it and it is the fact that you could easily increase compliance burdens to finance that rate reduction.

And to some respect, that's what happened in '86. And I've talked with -- we had a phone conversation with Don talking about the UNICAP rules. Clearly, he and I may disagree on the policy merits of those rules, but I won't argue with him that they don't impose compliance burdens. And that's the type of thing you will see in the tax reform plan that is focused only on the top line rate.

Now, finally, let me just add the further thought; the Joint Committee on Taxation has provided the ranking member Sandy Levin with the revenue estimate that indicates that if you repeal all corporate tax preferences, you could finance a rate reduction of 28 percent.

Now, that includes repealing items like the current expense treatment for R&D expenditures. Something that I think is both unwise and politically undoable. But you can get to 28 percent if you do that.

To get to 25 percent, you have to do other things and the other candidates, are clear to me, and that is interest deduction and advertising expenses. Those are the only other items of large revenue that would have to be used in the tax reform plan focused on a 25 percent rate. I have said that in front of panels that included representatives from the majority staffs of both revenue committees and they frowned but did not disagree.

So I think the stakes for small businesses are high in this debate and it's one that I'm very pleased that this -- that Tax Notes and the Kogod Center -- have chosen to start this debate and discussion today. Thank you.

MR. BERGIN: Thanks, John. OK, we're going to open it up for discussion and we're right on time. Thank you, panelists. Please help me out. If I know you, please just state your first name and your last name because we're transcribing this and we don't want to drive that lady over there crazy. We'll go to Howard and then we'll go to Jane.

MR. GLECKMAN: I'm Howard Gleckman from the Tax Policy Center. Thank you, first of all. This has been really interesting. Question for George, and unfortunately you're going to become the spokesman for the entire world of small business. Can you give me a sense of how -- what kind of decisions do you make on a day to day basis that are driven by tax policy? In other words, do you think about how I can enhance this deduction if I do this or I can benefit some other way if I do that?

MR. ASSIMAKOPOULOS: Sure. First and foremost you should understand, actually, I've measured how this impacts my annual basis. And what I mean by measurement is it takes me roughly about two to three weeks every year to do my taxes for the business. But it also costs me around $8,000 to $10,000 in cost to prepare my taxes. So that's what I would give to someone like Don over there.

Now, let me explain why that's an impact here. I could use that money in many different ways. I could use that time in many different ways to run the business. But when I look at it, the first thing that comes to my mind is well, if there are deductions to be made, where can I make them immediately?

You know, I get letters from the government all of the time telling me hire veterans that are coming back from the war, employ them, that'll be a tax break for you. I don't even know where to begin with something like that. What does that mean? Stan would tell you, I send sometimes a lot of my technical work overseas to be done because it could be done more cost effectively and sometimes even faster.

So I look at that and I say, "Well, if I bring that work back onshore and I do hire some of these vets to do it, will there be a significant tax break for me? Will it make a difference? Should I keep operating with my resourcing overseas?"

I can't do that math the way that it needs to be done. I need help there. And when you look at resources in the business, and I'm talking about delivery resources, human resources, there's many implications on what you can and cannot do; I don't know where to begin in making some of those decisions. So those are areas where you're saying, you know, "Do I look at the types of business where taxes can help the business or deductions can be made." Sure, all of the time.

They usually happen at the end of every month when I see what my budget was and where I met and where I can cut back to save some money. It also happens at the end of every year when I'm looking at all of my assets in the business and how much the business has made and what's going to pass through to me, because I have a passthrough entity and that has a significant effect.

It's not something that I can't stop thinking of, it's something that I'm constantly addressing, it's just that I've learned over time I cannot address that on my own. I need to talk to somebody to tell me what it is that I should be thinking about.

Sometimes I don't even know where to begin to get that help and I do think that it's very important that when you do run a small business, you need to align yourself with, I think the word that Don used was, a partner, right; someone who is your partner in this, who understands your business, not just the tax policies, so that they can then apply those policies to how you operate as a business.

MR. BERGIN: Jane.

MS. GRAVELLE: Jane Gravelle, Congressional Research Service, and these views are not the Congressional Research Service's views. First, I actually would want to mention some numbers. If you look at partnerships, 60 percent of partners are in finance, insurance, and real estate. Another big -- I think about 15 to 20 percent are in professional services. So I think there's a large fraction of small businesses that aren't what we're thinking about when we're thinking about entrepreneurs. I agree with that completely.

Also, I think when you're looking at the effect of the top two rates, you ought to look at the number of firms as well, unless you think there's a very high correlation between the income and the owner and the number of employees. So I think that's another statistic.

But I think the most important thing is I feel like the elephant in the room has not been mentioned yet. If you listen to the congressional debate about small business and about the top tax rates and so forth, it is all about job creation. That's what it's all about and of course, as George -- I admire you for taking a risk. I don't take a lot in my life, but I'm a professional economist and economics says that long-term job creation is not an issue, per se, in the government. Government doesn't create jobs; the economy creates jobs. Between, we had the entry of women and the Baby Boom into the labor force, millions and millions of jobs created -- the government didn't create those jobs, and it doesn't need to. It needs to worry about jobs during a recession, but the remedies for unemployment during the times we have right now are demand-side stimulus, not tax cuts for high-income people.

So, if we can't get the right concepts underlying our debate, then we'll never be able to make good policy, and I think that is the most important first thing to say about small business; for whatever policy is, the government does not need to create jobs, we need to create a market environment that's efficient, we need to do all of that, but we do not need to create jobs.

MR. BERGIN: Great point, Jane. Let me just remind people in the audience, we have hand-held mics, so don't be shy. If you have something to say, raise your hand. I'm going to go over here now. Gene.

MR. STEUERLE: Hi. Gene Steuerle from the Urban Institute, long-time friend of Tax Analysts. I just have a couple somewhat random comments. The first one is having started a couple charities, I basically ran into almost all the issues that George did except the tax ones and even on the tax side I had to worry about the 990s and the 990-PFs, which were interesting, and I have to say, this is just a side comment, one of the things that offends me the most -- still offends me the most -- is the most highly compensated people in the world -- I'm in the world of charity -- are basically the tax lawyers and accountants you have to hire to do your work, because they're more highly compensated than anybody else, which says something about how we've -- what type of system we have.

I just want to add to John Buckley's final comment, I mean, I think that may not be so much of a small business issue. It depends on how we design it. But, actually, I disagree with these analyses that say, you know, we can't finance rate reduction because we looked at the tax expenditure budget.

When we did tax reform, when we did the '84 Treasury study leading to tax reform, '86, we went way beyond the tax expenditure budget and you finally got to that point at the end when you started talking about things like interest deductions.

There's a huge amount of tax arbitrage going on, from international to domestic to individual, that can provide a huge amount of revenues if we're willing to go at that. It's not in the tax expenditure budget -- we could debate that later.

And, finally, I just want to mention, because I think it's an even bigger issue than the pure tax issues, but it is part of the tax issue, is the new health reform, which has all sorts of tax penalties and subsidies coming in, is a really big issue, and my sense is that the way small businesses are going to get simplification is largely many of them are basically going to say, "The heck with providing health insurance, we're going to go to the exchange, we're going to even pay the $2,000 penalty."

They're going to get simplification, they're also going to get effectively a minimum wage increase because if they -- I'm talking about some of the really small businesses -- get around it, but the businesses that just grow a little bit are going to end up starting to pay penalties, but at least they're going to get out of having to worry about health insurance.

So, they get simplification, they'll get a minimum wage increase, so sometimes we get simplification but it doesn't mean we necessarily get things that small businesses consider good for them.

MR. BERGIN: Thanks.

MR. BUCKLEY: Let me just respond a little bit. You may be right, but you can't -- obody's ever shown how to do it, and to do it would be involved with basic concepts if you're talking about arbitrage on the interest side or the economists generally have far more sympathy for cutting back interest deductions than most lawyers or small businesses, for that matter.

But when you raise the --

MR. STEUERLE: Just to be clear, when we did the passive rules in '86 that basically said you weren't allowed to take these deductions unless you had income against it, so we do have rules against this.

MR. BUCKLEY: But they're there. I mean, the question is how do you finance a new rate reduction, and to some extent the '86 act proves what I'm trying to say. It was financed to a very large extent by timing changes, either uniform cap changes, repeal of reserve deductions, they were timing changes. And the rate reductions lasted a grand total of four years before they had to be reversed because the one-time tax increases from those timing changes were no longer there. The 28 percent rate was not sustainable because it was financed, in large part, by timing changes.

And that's all that's left right now and to disregard that when you're talking about tax reform means you'll go into another period of time of uncertainty in turmoil in the tax law, and that's the point I'm trying to make.

Now, if you have some ideas for non-timing changes, feel free to suggest them to the political process. So far I haven't seen them.

MR. BERGIN: This gentleman to my left.

MR. ROBYN: Mark Robyn from the Tax Foundation. This is for George as well. You know, we heard some arguments that complexity and compliance costs for small business are the real difficult thing, you know, the most costly and difficult to handle and expense, and you mentioned federal, state, and local taxes as being the fifth thing that keeps you up at night. Is it, for you, more of a -- is it the compliance and knowing or not knowing what you're going to have to pay and how you're going to organize to minimize your tax burden? Or is it the thing that keeps you up is how much you're going to pay and how that affects your income and the bottom line?

MR. ASSIMAKOPOULOS: So, I was actually going to say the first, but now that you've said the second, yes, it's both, and I think the key thing to understand is that -- well, what I hate being sometimes is ignorant, and the best resource I have is information and when I'm presented with volumes of information that I need to read through to understand and still operate a business at the same time, it's not possible.

I think the worst is -- I think it was Don who just said it -- it discourages you, the way that it is presented, instead of encouraging you that there's opportunities for you to be, you know, saving money for your business.

I don't see where it encourages me. I'd love to see it. I need to have somebody show me. Where is the encouragement in all of this? Because the best thing I can do right now is to save money. Why? For every dollar I save, that's another job that I can bring on board or another laptop I can go and buy or another contractor that can help me be more competitive. That's what I need.

So, yeah, it is all of the above, it is both the fact that, you know, I need to know where I can save money and I need to be aware of what I'm going to have to pay every year.

MR. BERGIN: Yeah, just so you're not alone here, I just -- something that you said, Gene, made me think, and I'll put a caveat out there first. I like lawyers. I am a lawyer. Most of my friends are lawyers. My wife's a lawyer, but when you try to run a business or a charity, I keep tripping over them. They're all over the place.

There's got to be something wrong with a system where you need that many lawyers to advise you, and they are expensive. Thank you, Gene. Who else?

MR. WILLIAMSON: In defense of the lawyers, I can only say, we have to -- or, moi -- as to sign your tax return and to be able to sign the tax return and make it my work product as well as yours, I've got to satisfy myself that the i's

have been dotted and the t's have been crossed. And that's why I'm so -- George is very kind, but that's why he's so frustrated with people like me.

MR. BERGIN: You become the bad guy.

MR. WILLIAMSON: I am often the messenger who gets shot, often, and I've been fired many times where somebody says, "We'll do it my way, not your way," and that was really the last point I was making is that it leads to a certain disrespect and if there's cash flow problems with the business, then it will lead to the taxes not being paid, most notably payroll, that's the real problem, the 941s and making your payroll every quarter.

And when that's not being paid, that gets real serious and it puts us, if I can defend the lawyers again, the tax accountants, it puts us in a difficult position when we see our client not obeying the law and, in fact, not just obeying it, maybe cheating. And that puts us in a very difficult position.

MR. BERGIN: Yeah, I wrote down your point that you made during your remarks. I think it's worth noting again is that this breeds disrespect for the system --

MR. WILLIAMSON: Yeah.

MR. BERGIN: -- a system that's a so-called voluntary compliance system. Who's next? Eric?

MR. TODER: Okay, I have just --

MR. BERGIN: You're Eric Toder.

MR. TODER: Eric Toder, I'm Eric Toder. I have just a comment and a question. I wrote a paper several years about taxation of small business. My conclusions were very much like what Marty's was, that the system, largely because of the availability of passthrough treatment favored small relative to large businesses, but there were very few specific preferences that were targeted on small businesses.

The one important one is section 179 expensing and according to IRS studies of compliance burdens that I've seen, depreciation is one of the biggest compliance issues or burdens for small businesses, at least that's what they found.

So, I guess my comment is, could either the practitioner or the small business person here raise are there any other things that should be done in the tax law that might be of the nature of simplifying things for small businesses? They might involve some revenue loss, but they might be worth thinking about?

MR. WILLIAMSON: Eric, I really didn't plant you in the audience, I really didn't. But The Kogod Tax Center has a theory, and Dave has written on this and will write on this again, about simply simplifying your methods of accounting and going more and more to the cash method. Because in the end, folks like George, it's all about the cash. How much cash do I have and how much cash can I spend?

And, so, if you're on the accrual method or even depreciation methods, you may have book depreciation or tax accounting depreciation -- you mentioned 179, George, that's where you write off everything in the year purchased --

MR. ASSIMAKOPOULOS: Thank you.

MR. TODER: I'm sorry. I'm an economist. I shouldn't be using code sections.

MR. WILLIAMSON: That's OK. But if we could expand the cash method of accounting to more taxpayers, I think that would go a long way to assisting me in terms of the context of preparing an accurate return and assisting George in the knowing how successful his business is, because George is not going to have financial statements, at least until his company is bought by somebody or he needs a bank loan. He's basically going to look at the cash flow, and it's all about the cash. Having a cash method accounting would help that, allowing it to expand.

MR. BUCKLEY: You know, I was going to say, section 179 is an example of sometimes why the appearance of simplicity of a provision is not borne out in practice. For a start-up company in a loss position, you probably would want to waive 179 to stretch out your depreciation to make sure your losses were available in other years.

So, it is -- the one thing I think you have to keep in mind in this debate is simplification is not as easy to accomplish as you would think and even something as simple as the thought that you just write it off in year 1, in practice, has the complexity of choice, which is the reason why --

MR. STEUERLE: That expensing across the board puts small firms, start-up firms, at a competitive disadvantage because they can't take the tax breaks that large firms, established firms are getting.

MR. BUCKLEY: But you're making -- this is kind of the same point I'm making in a different -- that even the provisions targeted to small businesses have complexities and consequences that you describe that they don't --

MS. GRAVELLE: There's a Treasury study that showed that there's not that high an uptake rate for section 179. There's a lot of firms that don't choose 179.

MR. BUCKLEY: I'm from a rural area in Wisconsin and the advice always is not to take it because you want to stretch out your depreciation given the fluctuations. But --

MR. BERGIN: I'm going to go Dave, here, there and there.

MR. KAUTTER: So, Dave Kautter. Eric, to your point, Don and I have spent a fair amount of time trying to go through to determine the sources of complexity and compliance for small business.

You've got some complexity in determining income with doctrines like constructive receipt, economic benefit, and economic equivalence, but the real complexity that we find that consumes time is on the expense side, and there are four sources of complexity with respect to business expenses -- prepayments, inventory, depreciation, and the capitalization rules. And if you're a cash-method taxpayer, you're subject to all of those. If you carry inventory, you've got to follow the inventory rules. Cash-basis method taxpayer and you prepay an expense that's more than 12 months in length, you've got to defer that deduction.

So, just to make the point, the four sources primary that we can find for complexity and the compliance burden, the burden -- Taxpayer Advocate Service has estimated that small businesses pay about $16 billion a year to service providers like Don to prepare their material and they spend 1.8 billion hours -- that was interesting listening to George because he said, I'm paying $8,000 to $10,000 to get the taxes prepared and I'm spending two to three weeks. The study was 1.8 billion hours is spent by small business dealing with tax issues. If you cost that out at $25 an hour, 2,000 hours a year at $25 an hour is about $50,000, it comes to about $45 to $50 billion. So, what you end up with, conceivably, is $65 to $70 billion spent by small business complying with the tax law, and part of the issue, I think, for job growth and job creation is, would the country be better off if you could somehow reduce that number and have small business put more money into their business and less money into the compliance.

MR. BERGIN: And a brief advertisement here, that Don and Dave have written a paper on the simplified cash method of accounting and that will appear in an upcoming issue of Tax Notes and we will make sure it's available on the public site as well.

I'm working my way around.

MS. GOOLD: My name is Linda Goold, I'm with the National Association of Realtors. One of the issues that -- well, first of all, I did want to make the comment that expensing real estate is rarely a good idea. I always laugh at the discussions of depreciation and expensing because if you did expense it, all you've done is create the most ridiculous set of complexities and/or tax shelters that could be imagined. That's just a comment, we'd be back to pre-'86 methods.

The question I have is, none of the panelists talked about employee classification issues. Realtors, as a category, have a statutory protection that grants them independent contractor status so long as they adhere to very simple tests. Every once in a while one doesn't, but the tests are very simple.

So, I'm curious the extent to which employee classification remains a big compliance burden out there and then I'm also curious about how one would govern that intersection of personal activity and business activity that often is what an independent contractor is all about.

MR. WILLIAMSON: Well, is your question related to -- I think of people I represent and they would rather have independent contractors working for them --

MS. GOOLD: Yes, of course.

MR. WILLIAMSON: -- than employees, of course.

MS. GOOLD: Of course, of course.

MR. WILLIAMSON: All that does, though, is, again, taking the independent contractor, I've got to make sure they do the estimated payments each quarter. So, that in and of itself is a problem. You shift it from the business to the individual, which is fine, which is fine, you can do that, but it's just a shift, it's just a shift.

But I think folks like George would be more willing to hire and create new jobs if they knew the person they're hiring is an independent contractor and they don't have withholding each quarter or each two weeks. I think that might simplify George's life.

MR. BERGIN: Jim, do you want to --

MR. KEIGHTLEY: Yeah, a couple of comments, jumping on lawyers one more time -- I was at the IRS for many years and I'm Jim Keightley, and at one point the criminal investigators came to our office and wanted to issue a John Doe summons for all the lawyers in a given state because they believed they had found a pattern of misconduct sufficient to justify that. We suggested they look them up in the phone book and said you could find them very easily because they can't be very effective lawyers if they're not out publicly.

But I was just echoing, and I tend to focus on the compliance issues, and of course one of the big issues with, obviously, I think we all know, the independent contractor is, you've got a lot of tax revenue that is not collected, and that's really the problem with the independent contractor issue in the system. And we're sitting here discussing that there's this huge compliance gap in this small business world and so it seems to me that just aggravates the situation.

Some things that haven't been considered, and I don't know whether this covers this issue, is withholding on interest and dividends. There are simple things that have actually been done in the past that have been abandoned and you can also put withholding in, to some extent, on other kinds of payments at some size and number. And now that adds to the burden, but it would certainly help, to some extent, deal with this very large compliance gap, which is what we're looking at.

And my other question to Don, since he deals with the small businesses, how many do you think are just -- how many of those people who have walked away from you, how many never even come in your door and they just do the best they can, they use TurboTax, and they know how to push override?

MR. WILLIAMSON: Frankly, not very many. You have folks, small business persons, that will go to the local store and buy the staples and give it a shot, but ultimately they will, at least from my experience, come around and hire you. And, indeed, if you look at the statistics, and a lot of this is due to the requirements for electronic filing, you're close to 80 percent of the returns in this country, at least 1040s, I assume the same for businesses, 1065s, 1120s, they're now being electronically filed and that means, usually, you're going to have a tax return preparer.

So, I think there are preparers, basically, doing the small business returns.

MR. KEIGHTLEY: And, again, having been there, the idea that you're going to track and audit the compliance by the preparers was an extremely controversial policy years ago because it's not lost on anybody that that's what you should do -- see the quality of the preparers -- and I guess that's partly why they went to the numbering system and tracking number.

But I don't know, and it would be interesting to ask whether they are using that technique and maybe they won't tell you.

MR. WILLIAMSON: Well, just as an aside, as a practical matter, 22,000 letters were sent out this spring from the IRS to tax return preparers saying they looked at their returns that they've prepared and they think that they've got some problems with them and wouldn't you like to do them better this year. And, basically, that's what the letter said.

MR. BUCKLEY: Can I say something about the independent contractor issue? I think for somebody like George, the most important thing here is certainty of the rules and clear rules. And I don't think withholding is all that much more burdensome than having self-employment as long as you know what the rules are.

And one of the problems we have with the current bar on regulations is the rules are not certain and we've prohibited the IRS from providing certainty. And that's why, I think, I don't want to put words in your mouth, but you kind of made the statement that certainty of rules and clarity of rules, I think, are very important for small businesses, and it's another example, I think, of a proposal that in the Congress, the bar on regulations was intended or described as a small business benefit.

And I think it has not been a small business benefit because it has only increased the uncertainty that people like you have to face, and that's one of the things, I think, that should change immediately, is let the Service provide guidance as to how to apply those rules.

MR. ASSIMAKOPOULOS: So, as a small business, if I may, I will tell you that the certainty of those rules and understanding them -- as a policy in my business, before I hire anyone, I contract them first. They're an independent contractor. It's easier to bring them on board, not just from the fact that I can get them running as a 1099 or what have you, it's just I've always wanted to -- sorry for the way that I'm putting this -- test drive the resource before I bring them on full time as a hire. And that's a practice that I'm not the only one employing. Most small businesses do because it's easier to find another contractor than it is to, unfortunately, get rid of an employee.

MR. BUCKLEY: But let me say, there is the risk, if that independent contractor is showing up every day at a desk --

MR. ASSIMAKOPOULOS: Correct.

MR. BUCKLEY: -- it would not take much to reclassify that individual as your employee.

MR. ASSIMAKOPOULOS: Correct. Right.

MR. BUCKLEY: And, so, there is a risk that you run there.

MR. ASSIMAKOPOULOS: Right.

MR. BUCKLEY: And what I think would be better is clarity as to when and when you can do that, because I probably would take the position that those people are more appropriately treated as employees regardless of your relationship with them, because they're at your office, they're at a desk --

MR. ASSIMAKOPOULOS: Using my equipment.

MR. BUCKLEY: Using your equipment.

MR. ASSIMAKOPOULOS: Doing the same thing over and over again.

MR. BUCKLEY: Doing exactly the same thing that the person that you test drove and --

MR. ASSIMAKOPOULOS: It's the reason why I don't let them go and hire them back as contractors for the reverse effect that it can have. But you do understand, as a small business, I actually have a cheat sheet near my desk that says what I can ask a contractor to do. And I follow that, literally, like a checklist. Does he do this? Does she do that? Well, that's an employee.

MR. BUCKLEY: Okay.

MR. ASSIMAKOPOULOS: And I have to follow that. Without that cheat sheet, which is my rules by the way, they've been prepared for me, I wouldn't know what the classification would be.

MR. WILLIAMSON: And that's the colloquy I run into as a tax practitioner every day because I'll walk into a client's business and they have somebody who shows up every day and the technical test is means and manner over the work of the individual, not just their end product, and there is an employment relationship. They are employees, and they're being treated as independent contractors. And now I have to tell the small business person that they have to run a payroll, include them in their payroll, and that's where I get the pushback and that's where it gets really awkward.

MR. BERGIN: Okay, we're going to go one, two, three, four. Got that right? OK, Joe.

MR. HUDDLESTON: Joe Huddleston, Multistate Tax Commission. George, I'm intrigued by a specific question I want to ask you because as you've talked a little bit about your business, it seems to me that, one, I don't really know how large or small you are. I'm assuming you fall into the general classification of small businesses, but since you indicated that you were looking for overseas service providers for a variety of business reasons I'm assuming that you do business in more than one state.

So, I would ask you -- if compliance is at the top of your list, how would you rate compliance in state and local relative to compliance with the federal?

MR. ASSIMAKOPOULOS: Well, you know, I'm sorry, was that the question?

MR. HUDDLESTON: Yes.

MR. ASSIMAKOPOULOS: So, compliance, let's talk about this, too, because -- and I don't want you to take the words that I'm saying as, you know, the example here. In the business that I'm in, I have the ability to conduct these studies -- we refer to them as, in our business, e-listening studies. It allows me to analyze what's being said on the web by audiences in a particular industry, market, or trend.

We use social media channels, we use webs, we use blogs, forums, we use all sorts of things. And Lauren Keates -- raise your hand, Lauren -- is one of my social media strategists, and I knew that this question was going to come up and I wanted you all to understand about compliancy.

I asked Lauren to go and survey what's being said out there by small businesses about compliancy. What are the things that are constantly top-of-mind for them, especially the ones that are doing things in more states? And you have to understand, in the compliancy factor, especially across states, the one factor is what do I need to do, as an entity, to set up to even do business in another state?

I would say I counted about 600 comments that just said this: What exactly is a foreign entity? That's small business owners. I have foreign entities set up because I do operate in other states and I have to do that.

I also saw that in the survey work that Lauren did it was asking, you know what, from a compliancy perspective, how much do I need to save for taxes by each date every time I make a buck? Do you see how basic these questions are?

There's no one giving us the answers. There are people giving us the questions of what you need to do, but we need to know what these answers are, honestly, and that's kind of why I need to go and get help about those things.

So, yeah, they are important issues, especially if I want to grow and do work overseas or even operate in another state.

So, before I go and say, you know what, I'm in the tri-state area, I'm in D.C., I'm in Maryland, I want to have offices across the river aside from where I currently operate, I have to go see, is there a tax implication to this? Is there a benefit to doing it on one side of the river over the other?

Let me tell you, that's a very important question I'm asking because I'm growing. I have to get more office space. Where's the best opportunity for me to operate? I don't have that answer. I hope to God Don does.

MR. HUDDLESTON: Let me say --

MR. WILLIAMSON: I can't tell you.

MR. BERGIN: Thanks, Don.

MR. HUDDLESTON: I would have been surprised, George, if your answer had been any different than that, and in relationship to that answer and the earlier discussion that we've been having, I would, as I always do in these roundtables, I would remind people that when you go down the street and you listen to the discussions of tax reform, you're not really hearing discussions of issues that are on the street for small businesses. You're hearing about issues that impact that biggest of the big by and large.

And what I would suggest is that when they make adjustments down there, it does have a pretty dramatic impact on what happens in the states because when they adjust depreciation schedules, guess what the state does? It decouples. And what does that do? Does that reduce your compliance burden or does it increase it? I'll suggest it increases it.

So, what I would want to have said from my perspective is that if small business compliance is at the top of your list, I would caution our friends down the street that when they make big changes in the federal tax code, they need to take into consideration what the ultimate compliance issue is at the state and local level.

MR. BERGIN: Please.

MS. OLDAK: Reggie Oldak, National Women's Law Center. I'd like to make a point about worker classification, just one more point on this --

MR. BERGIN: Sure.

MS. OLDAK: -- and I do appreciate that we're here today to talk about small businesses, but we do also need to remember the workers and it's great that you're giving George the list of the 20 common law factors, but the system is rigged. At this point, the IRS is prevented from really devoting the energy it needs to to proper classification. Section 530 is a safe harbor for employers. Women are highly represented in the low-income, minimum wage jobs. The employers have the upper hand and if there is misclassification, not only do we have a tax compliance problem, to go back to what Marty started with, that small businesses do evade taxes, we have wage theft.

There are work place benefits and protections that are not provided to independent contractors, and you do have workers who are affected by this. Not only do they not get their workplace protections, you have a low-income woman making minimum wage, she goes to claim the EITC, she finds out -- she files her taxes, she finds out payroll taxes haven't been paid, that eats up all of the amount that she was going to get for the EITC refund.

So, it is an issue that I would like us to remember. As John says, there is a problem with proper classification that needs a legislative fix.

MR. BERGIN: Thank you. And way in the back. Got two in a row here.

MS. KIRBY:: My name is Amber Kirby and I'm with the Multistate Tax Commission and I'm sure Joe will stop me if I overstep, but I'm obviously representing MTC's views. George, my question is for you -- and I want to tell you my question and then I want to explain why I think it's relevant. I want to know at what point you will decide that taking on an additional employee -- that that employee should be your partner in tax planning, for lack of a better phrase, versus taking on someone to do the social media exploration or whatever other innovative role that you figure out your company needs. I ask this because I think generally we seem to believe that the larger corporations, the larger businesses, are better able to handle and it's more appropriate for them to have to address more of the complex, detailed tax issues especially with regard to depreciation, but the small businesses really need more simplification. And you have to go to a tax preparer and you said you spent $8,000-$10,000 a year preparing tax forms or your tax returns, but at the same time you don't know whether or not it's wise to invest in that veteran as opposed to another person because you don't understand whether or not the tax consequences in the end are really going to benefit you. How do you decide that it's time to take on someone who better understands the system versus contracting it out? And maybe that's the difference between a small business and a large business.

MR. ASSIMAKOPOULOS: Revenue that I make, and I'll explain what I mean by that. It's a cost issue of staff and keep in mind as a small business I need to be hiring the individuals -- let me be careful how I say this. I want to be hiring individuals that help the business make money. In the sense of the person you just classified, that's also a person that can help the business save money and be really a part of the business, a partner if you will. Many small business people have different philosophies on the word "a partner in your business" and who you want to bring on board and I've had businesses where I've had partners before and some have worked out and many have not. But I'll tell you the time comes when I need to bring on somebody -- and let me tell you, the evolution of my firm did reach that point where I just could not be giving it the attention that it deserved and I brought in somebody to be more than just a bookkeeper, to be responsible for the accounting and for the principal because I wanted my business to be sold. I saw the ceilings coming down and the walls closing in and I knew that it was getting ultimately too competitive. So I needed somebody who would be part of that business to be able to help sell it. Good news to the end of this

journey by the way. March 9 of last year I sold my business. God, there was a lot of fun in doing that and learning about that. And I have the bigger organizations coming to me and saying show us your EBITDA numbers for the last two or three years. And I'm like EBITDA? I'm a cash business. What are you talking about right now? And I'm talking in common small business terms. And I learned something very important during that process of growing my business to a point where it could be sold -- that I really didn't know a lot and I had to find that person who can really guide me down that road and that's not somebody you can bring in as a contractor. Because you know what? That contractor is also doing it for 5, 10, 20 other businesses and I need that person to live and breathe my business, so it was essential to bring that person on board. That was when I needed to do it. To answer your question, it's when you're ready to move your business from being a small business to the next level. And there are different levels of small businesses and mid-sized businesses and corporations. But I would advise any small business person that the time is when you just know you don't understand it anymore. Get the help and find somebody who wants to be part of your business to help you grow it in the manner of saving it and preparing it for its next step. That's when I brought it on board.

MR. BERGIN: This gentleman here?

MR. HODGE: Andrew Hodge, Commerce Department. My question is about boom and bust for a small business and small businesses over the cycle. It strikes me that providing credit is in fact a key part of this and that small businesses really do boom and bust over the cycle. There are a lot of studies of course that show that small businesses create most of the jobs during the boom. There are some studies that I've seen that I find convincing that show they lose most of the jobs during the bust. So Martin's article and practically everyone else have indirectly addressed here how credit can go away during the bust part of the cycle when perhaps a lot of the small businesses need it most. So I wonder if any or all of you can reflect on how we could make that less cyclical -- not only with how the small businesses get treated, but how the providers of credit to the small businesses get treated or other measures that would smooth things out.

MR. BERGIN: Thanks. Does anyone want to take a crack at that?

MR. WILLIAMSON: I don't help finance businesses to get them credit, but I do know that's the turning point where you might need more accounting help and where you might need financials at that point to get the loan. Then as far as the tax advice and the accounting advice you get, it takes a whole 'nother level if you're looking for -- I mean serious outside financing. So that's where the costs that I've been referring to before do increase substantially.

MR. STEUERLE: I have a footnote here.

MR. BERGIN: Gene, go ahead.

MR. STEUERLE: This last set of comments reminds me that notions that expensing is simpler than depreciation only holds true when tax depreciation is different than financial depreciation. There's a reason we measure income which goes far beyond the tax law. The tax laws glomp onto a set of accounting systems and the accounting systems in their ideal are not just there to ensure that you know where your money is and somebody is not cheating; they're there so you measure whether the firm has economic income, where its value is, what parts of the firm work well if you start expanding and have different branches. And so that's the reason you have things like depreciation and inventory accounting. It's not because the tax law came along and established it, it's because you need it to know your economic income, and the bank needs it to know whether their loan is good and whether they can provide you additional income if you're going to sell the business. So when we talk about the complexity of tax accounting, I think we have to be a little careful. Where things get complex is when the tax accounting differs from the financial accounting. Then if you give special breaks that go to a third level of accounting so now you have expensing and regular tax depreciation and financial depreciation, yes, it gets complex. But if you had economic accounting and financial accounting and tax accounting in line, that actually provides simplification because you have to do the financial accounting anyway and you should be doing the economic accounting to know whether your business is making it or not. I think it's an area where there is tremendous potential for simplification, bringing the book accounting rules and the tax accounting rules together. I don't think book-tax conformity across the board is a wise thing because there are reasons why you have different rules and taxes. But there is no reason why the capitalization rules should be different. There is no reason why the inventory rules should be different. There should be greater conformity in certain areas and therefore you don't have to do two sets of books to compute your income. You can build closer to what you already have done for book purposes. And that's an area where I think it's been dismissed as a proposal in the past largely because people saw it in a big context. In 1986 they put the book preference in the minimum tax and it just was an absolute failure. It taxed people on differences between timing rules between the two systems and what you really want to bring the timing changes, where there is no policy reason for a difference between the two systems. You could have really strong potential for simplification.

MR. ASSIMAKOPOULOS: Let me interject because this is about small business and I did have a caveat in that we didn't define what that term is. But there is a threshold of revenue where you don't have book-books, you just have tax books, and even if you're going to go for the loan, I would hand over the tax return to the bank for the loan because there would be no applicable financial statements. At some point, and George can recall when you sold your business whether you had to have book-books or tax books, but for most small businesses, and again I don't know where that threshold or that breakpoint is, you will not have book-books, you'll just have tax books.

MR. WHITE: Jim White from the Government Accountability Office. George, we've been taking advantage of your experience here and so I've got another question for you. We've talked a lot about uncertainty in the code as it applies to small businesses. There has also been a lot of acknowledgement of noncompliance issues with small business. I'm wondering in running your business the extent to which you worry about whether your competition is paying their fair share of taxes.

MR. BERGIN: Good point.

MR. WHITE: And how that affects you.

MR. ASSIMAKOPOULOS: If I could paraphrase, if they're playing the game fair.

MR. WHITE: Yes, or taking advantage.

MR. ASSIMAKOPOULOS: Taking advantage of the game?

MR. WHITE: Yes.

MR. ASSIMAKOPOULOS: There are so many things I have to worry about with my competition, I can tell you honestly I'm not really worried about whether they're playing it fair in that manner or not. And even if I were to discover this belief that they weren't, if I were to even toot the horn about it, it would probably come in many different ways and haunt me -- not because I don't want to do it and so forth, it's because in our industry especially in small business, we rely on working together in a community. In the small business community, especially in Washington, D.C., we sit at tables just like this and we share what keeps you up at night, what's working for you, what's not. Sometimes I hear things that I'll say I honestly didn't know you could actually do that. It's kind of an interesting phenomenon when that happens because then I'll go back and I'll talk to my accountant and my tax consultant and I'll say, you know what I heard today? And they're like, wait a minute. Who said that? What business are they running? I'm like, never mind. Let's move on to the next thing. That's a standard that happens all the time because they're making mistakes and they're probably not getting the right advice or maybe they just know -- they found a loophole that no one is going to notice. But I do see that occasionally, and whether or not I care much about it to do something about it, there are so many other things that are of priority on my list that that's not on the front burner.

MR. BERGIN: Jim, that may be a question for Don as well. You said people walk out of your office because you gave them the wrong news. Maybe they go down the hall and find somebody else who will answer their question the way they want it.

MR. WILLIAMSON: Eventually they can go to Dupont Circle and get the answer they want for a little more than the price of a bottle of Thunderbird wine. So eventually those sorts of folks will get the answer they want and people like me are not going to stand in their way. That harkens back to what I was saying earlier -- that folks like me can serve as a surrogate for an IRS agent to make sure the return is done the way it should be done because my name is on that return. You found this with the overseas program where people would come and have these accounts overseas and you'd talk about the amnesty program and they walk away. And now they've opened up the amnesty program again an unlimited period of time. Will they ever belly up to the bar and do the report and pay the fines? I don't know. But you see things like this in a small practitioner practice all the time and you do the best to cope with it.

MR. WHITE: Could you expand a little on how the Service could enlist paid preparers to help with compliance?

MR. WILLIAMSON: I say I'm a surrogate for an IRS agent, but I'm not an IRS agent. I could only say that my name is going on those returns and I would expect that the Service would -- I'm serving with the IRS in making sure that the law is properly being complied with. By the same token, I can't work for the IRS. I work for my clients and I take positions in returns to claim the best benefit I possibly can for my client. But I never look at my role with the IRS as being adversarial. We're looking for truth together.

MR. WHITE: It sounded like in some remarks earlier you had this notion that the IRS might audit preparers rather than small businesses and I took from that preparers might develop a reputation over time as someone to go to to get returns done that will pass muster with the IRS.

MR. WILLIAMSON: I don't know the secret. We've had IRS folks come and students have asked them how are returns scored for audit? What is this index function? What is the DIF score? And the officer said I could tell you that but then I'd have to kill you. I don't know the answer to that.

MR. STEUERLE: Jim is raising another issue though which I think I had in a column for Tax Notes many years ago -- is that the IRS actually announces it's going to audit more of those firms or those practitioners who are more likely to be noncompliant. That encourages the firms to go to you or the more honest broker in the world and that is how they can solicit them to play the game -- function that's not known reduces the announcement effect.

MR. WILLIAMSON: I applaud any program where the IRS is going after disreputable tax return preparers. I think that helps my business.

MS. O'CONNOR: I'm highly disappointed that you're not familiar with the injunction program I instituted when I was head of the Tax Division at the Department of Justice, which supports the IRS's effort to identify tax return preparers who are preparing fraudulent returns. And even the same time as a criminal investigation might be undergoing, because their activities have amounted to a crime, the civil side of the Tax Division goes after an injunction and gets an injunction that stops the preparer from preparing any additional returns and gets the preparer's client list so it can then audit all the returns that the preparer prepared.

I'd like to -- as long as I've taken the floor -- comment on another thing that relates to the boom-bust question and the simplification and book tax differences and all of that. It is quite a shame when a small business has to borrow money to pay taxes. In the complexity of the current system, the requirement for the accrual method, the requirement for the percentage of completion method for contractors very often does have a small business having to borrow money to pay taxes and I think that's something that's unconscionable and should be repaired.

MR. BERGIN: Jane?

MS. GRAVELLE: I want to go back to the question about boom and bust too, which I think we wandered away from a bit.

MR. BERGIN: That would be my fault.

MS. GRAVELLE: First, in the paper that I wrote on small business and tax rights, I reviewed very carefully evidence on job growth by small business and let me say I don't think job growth outside of recession is something we ought to be concerned with -- although I've heard two references to it since I made my first statement at this table. The evidence does not show that small businesses are disproportionate creators of jobs, destroyers of jobs in the net. There are a lot of businesses that start and fail. Start-up businesses, they create a lot of jobs, they lose a lot of jobs. But with your ordinary run-of-the-mill small businesses there were methodological deficiencies in some of these early studies. The second is it's hard for me to say I can use direct tax policy directed at small business to moderate the events that happened during the recession. The remedies for a recession are very clear. The problem is inadequate demand. You stimulate demand by expansionary monetary policy and expansionary fiscal policy. So maybe you could expand borrowing with the Small Business Administration a little bit to get people through the hard times, but that is not going to be the remedy. Moreover, until fairly recently we thought we were getting very immune to business cycles. We had this period that economists called the Great Moderation when we saw virtually nothing up until this point. The '82 recession was engineered to ring out inflation. Since then hardly anything. So the hope I guess is that the things that led to this recession, the financial system, maybe we can correct those for the future just as we corrected problems in the Great Depression and that maybe we'll return to a more moderate period. But it is broad-based policies I think that the government has to pursue to protect everybody, small businesses, factory workers, everybody from the pain and suffering of recessions.

MR. HODGE: I would submit that demand is the key part there during the decline or maybe even the biggest part.

MS. GRAVELLE: The key part I think you would want to say.

MR. HODGE: Maybe you ought to look at things like: Can you encourage standby facilities for small business? I'm just throwing a few ideas out.

MS. GRAVELLE: I don't know about small businesses, but corporations are sitting on money right now. As I said, I don't know about small businesses, corporations are sitting on $2 trillion of cash-like assets. They're buying back shares. They're paying dividends. They're not investing and they're not investing because they think they can't make sales because there is still not adequate demand. I think that's very mainstream. It's not weird economics.

MR. BERGIN: Joe?

MR. HUDDLESTON: I wanted to convey some bad news to George. As a former state revenue commissioner looking at small business activities in that room of 20 of our fellow competitors, I would suggest to you that at least a third dropped a dime recently on one of their perceived competitors violating what they thought were procedural requirements. I'll back up on that. That clearly ages me, doesn't it? There's a lot of reported perceived violations in compliance at the state and local level by small businesses. A lot.

MR. TODER: I had another question on compliance. I guess I'm directing this to Don. To preface this, Marty cited the very high noncompliance rates among small businesses. That kind of bottom-line figure doesn't tell you anything about how that noncompliance occurs. It could be because people don't understand what the rules are. It could be because they're overstating deductions. It could be because they're underreporting their receipts. My understanding from talking to IRS that most of it is -- when I was at IRS and I knew the people who did these studies, most of it was underreporting of receipts. Not everyone can do that. If you have an associated 1099, it's hard to get away with that. If you're selling to other businesses, as George is, it's probably hard to get away with that because there's another trail. But people who are dealing in cash and people who are selling to customers, there's a lot of opportunity to understate receipts and I think that's probably the biggest source of the noncompliance that shows up in those statistics. So I guess my question to you as a practitioner is: How do you deal with people you were talking about the role of practitioners and enforcing -- who just aren't reporting to you what their receipts are?

MR. WILLIAMSON: I think you hit on that. The 1099 MISCs or other 1099 reporting that was enacted in December and repealed in April I think would have gone a long way to dealing with the underreporting requirement. It's just that the response was: "Oh my goodness. I have all these 1099s to file then." That to me is not an onerous or too onerous compliance burden. If you've ever looked at those firms, you can do that. That can be done. So I think that's one way. As far as the practitioner preparing the return, there are things he or she could do to look to make sure all the money is being properly reported -- and that's my role, I do that all the time -- and to make sure it's very often. A technical point that I would recommend is if the failure-to-pay penalty could be repealed for people that step up to the bar and enter into an installment agreement with the IRS. So that would increase compliance, and they wouldn't be penalized. You know, that half-percent per month penalty ends up being a lot more than the 3 percent interest.

So when you mentioned that, that's what struck me, because I've seen those cases over and over again.

MR. BUCKLEY: Can I say that non-reporting of income, the Congress did enact credit card reporting. And as you increasingly go --

MR. WILLIAMSON: Yeah.

MR. BUCKLEY: -- yes -- to electronic -- can't remember the last time somebody in front of me at the grocery store paid cash. But you're never going to get reporting on the pure cash. But I think you will have -- that that will have a --

MR. WILLIAMSON: That will have a tremendous impact once it's fully implemented.

MR. TODER: It will be interesting to see. I mean, you wouldn't -- this last study was 2006 audit, so you wouldn't have seen it from that.

MR. BUCKLEY: You wouldn't see it. It would be interesting to see it.

MR. TODER: Yes, I don't think it's fully implemented yet.

MR. BUCKLEY: But once it is, I mean, I think for the IRS, for picking returns, a mismatch between gross receipts and what's shown on the --

MR. WILLIAMSON: The credit card will help.

MR. BUCKLEY: -- the return will have -- nd for the first time, you have what I consider a far less burdensome --

MR. WILLIAMSON: Yes, I agree --

MR. BUCKLEY: -- way of doing it than the 1099.

MR. WILLIAMSON: The forms actually have specialized lines for that kind of reporting from the banks and the credit card companies now, to separately report that kind of income, so that they can tie, doing the CP2000 programs, they can tie that number out pretty good.

Unfortunately, though, it doesn't really come into play until next year, not this year.

MR. BUCKLEY: But it's there.

MR. WILLIAMSON: But it's coming. It's coming. You're absolutely right.

MR. KEIGHTLEY: Speaking again, from the IRS, it's like you just throw billions and billions and billions of pieces of paper at these folks and go, "That's compliance." And then they score it as a revenue raiser.

And it's like, "Wait a minute." And then you contract the staff of the IRS at the same time, and you're going like, "How can you score that? You should score that at, you know, two cents on the dollar, or something like that."

But -- a passing comment.

MR. BERGIN: Yes, a great time to cut the IRS's budget.

MS. GRAVELLE: What about raising the reporting exclusion for payments?

MR. WILLIAMSON: You mean from $600?

MS. GRAVELLE: Yeah. Because it hasn't been changed since it was enacted, like 30 years ago or something.

MR. WHITE: Since the 1950s.

MS. GRAVELLE: Yeah. I mean, it's obviously declined in real value since then.

MR. WILLIAMSON: Yeah, that's something I'd have to think about. But it has been $600 since the beginning of time. That's correct.

MS. GRAVELLE: Yes. And, you know, when that issue -- you know, when we enacted that, and then of course the increased reporting, and then repealed that.

MR. WILLIAMSON: Right. I mean, for dividends and interest, it's 10 bucks.

MS. GRAVELLE: One of the things people talk -- particularly Treasury, I talk to people at Treasury, is maybe we should think about, you know, indexing that to inflation, or raising that exemption. That might simplify things a little bit.

MR. WHITE: Another point on 1099 misreporting is IRS has no idea what the noncompliance rate is for 1099 misreporting.

MS. GRAVELLE: It's high, though.

MR. WHITE: When you look at the numbers, a tiny fraction of small businesses actually file 1099-MISCs. And it's such a tiny fraction it's hard to believe that there isn't a tremendous amount of non-reporting, when it comes to 1099-MISC-type income.

But IRS has no idea how much -- the extent of that.

MR. WILLIAMSON: Well, they've doubled all the penalties for not filing 1099s. All the penalties for nonfiling of 1099s are basically doubled. So maybe that would bring people in from the cold.

MR. WHITE: One other point on noncompliance -- I think Eric's right that a lot of the misreporting is underreporting of receipts. But when we looked at small business misreporting, there is a lot of it on the expense side. And on the expense side, it takes two forms: there's both underreporting of expenses by businesses, but there's also over -- there's over-reporting of expenses by businesses to reduce their net income, but there's also a lot of underreporting of expenses to hide the fact that they're underreporting their receipts. (Laughter.)

MR. BERGIN: Good point. Eileen?

MS. O'CONNOR: I just wanted to mention a couple things to your point about: How can the IRS use tax return preparers as preliminary agents? They've actually been doing that for a very long time. Congress, decades ago, deputized tax return preparers. And the Internal Revenue Code has serious penalties -- which Don has alluded to. And if you get enough of those penalties, you have not only a serious cash problem, but the IRS also has an Office of Professional Responsibility, which can prevent you from ever dealing with them on anybody else's behalf again.

About cash reporting, that is -- the cash economy is very difficult for the IRS to audit, and it does have very specific audit guidelines for cash-intensive businesses. And just as for every solution there is a work-around, many cash businesses have a discount that they provide if you pay by cash instead of credit card.

So, it's just a cat-and-mouse game that will continue.

MR. HENCHMAN: Joe Henchman, with the Tax Foundation. I have to say I'm a little dismayed at this point. I feel like in the first hour we were making a lot of progress of recognizing that small business faces a lot of compliance burden, and that it's just enormous. I mean, the $8,000 to $10,000 figure that George described, just in compliance -- not in what he's paying in taxes, but just in complying with the tax system -- when you multiply that -- you know, I know we don't know how many small businesses there are in the country because we're not quite sure what a small business is. But, you know, if there's a million or 10 million small businesses, we're talking about a lot of money here that's wasted. Sorry, Don -- wasted.

And, you know, I felt like there was a lot of recognition that this is a problem that we need to do something about -- that it is wasted, and that we ought to do something better.

But over the last 40 minutes or so, you know: "Well, we can't lighten up on misclassification." "We've got to let states do whatever they want on depreciation rules." "We've got to make sure that we don't lighten up on cash-based businesses." And so forth. And we're right back where we started, with Don curling up in the bed with his 225 pages on the rules of defining whatever qualifies as whatever. So -- yeah.

And, you know, this morning -- this is why I think, ultimately, it's important. This morning Kodak threw in the towel and declared bankruptcy. And, you know, there's a lot of unique things about Kodak that did them in. But, ultimately, I think our economy, going forward, will look a lot different from the economy in the last half of the 20th century. At the time, people would -- and, you know, get their job at 25 and, you know, work until they were 65 and then draw down the pension. And the paycheck was there twice a month, and they never had to worry about making sure that the payroll could be met or anything like that.

It's a different -- I think it's a different era right now. People are going to have multiple jobs over their lifetime. A lot of people that lost their job in this recession are striking out on their own, and seeing if they can create their own business and make it work. And although they're -- you know, I'll quibble with Marty about his claim that most small business owners are not entrepreneurs, I'd disagree with that.

The important thing to me about being an entrepreneur is risk-taking -- willing to go it alone and, you know, fear that you might not support your family and, you know, not rely on somebody else to give you your insurance and your benefits and your paycheck every two weeks.

So, ultimately, something needs to be done about that going forward. And while I'll disagree with Jane Gravelle on how to fix the economy going forward, I do agree with her that we need an economy that treats all players equally, and so we don't have a tax system for manufacturers, and a tax system for small businesses, and a tax system for this and that. Rather, a tax system for everybody that lightens up on the complexity and solves that problem. Because I think that's the real thing that I get out of it.

MR. BERGIN: Marty?

MR. SULLIVAN: Well, I think it's interesting that we've spent most of our time today talking about compliance burden and the need for simplification. And I think, if I can -- I mean, there were a lot of different directions. I really enjoy sitting here and listening and learning. And a lot of different directions that we could have gone.

But we keep coming back to the compliance burden --

MR. BERGIN: We do, don't we.

MR. SULLIVAN: -- and would it be fair -- I mean, there's other ways we could have gone. We could have started talking more about entrepreneurship, and the need to incentivize it.

And I don't want to get into a long discussion about what the definition of entrepreneurship is, but there are -- it is not -- at least, there is an argument from people much smarter than me who say that entrepreneurship is not just about risk-taking. Because we all face risks, and all small businesses are, you know, almost all of them are inherently risky.

But it is the innovative approaches that entrepreneurs take on using cutting-edge technologies, and cutting-edge methods that really distinguish entrepreneurs from just pure risk-takers. But that's just a side issue, and a very deep issue.

But would it be fair to say, when we look back on this conference, that what small businesses really -- the proper tax policy emphasis for improving the situation of small business is to redouble our efforts on compliance burden, to reduce the compliance burden. To do more simplification. And not do it -- and here one question is, I'm looking at John -- we've lived through many, many "simplification" efforts.

And it's very easy to want simplification. But then you start looking -- ene Steuerle, remember, we were going to simplify the 990? Which is, I don't know how many thousands of pages long it is. And when you sit down with very smart, good-intentioned people, well-intentioned people, and you start going through the details, there's a lot of reasons for those complexities. And you can't simplify. At first blush, it looks easy, but then it gets very hard.

So I don't want to be naive about the prospects for simplification. But, would it make sense, as a result of discussions like these, to make a long list of things that we can do to simplify the system? Or is that just something that people have already done, and we're just going to keep circling the -- chasing our tail on that?

MS. GRAVELLE: I think it's a short list, is the problem, Marty.

MR. SULLIVAN: Mm-hmm?

MS. GRAVELLE: I mean, it's just hard to think of things --

MR. SULLIVAN: Has it been done before? Or do --

MS. GRAVELLE: Well --

MR. SULLIVAN: -- should we -- is the next conference, "Let's make that list and let's really pursue it"?

MS. GRAVELLE: The tax reform -- you know, President Bush's advisory panel, for example, proposed cash accounting and simplified depreciation for small business.

MR. SULLIVAN: Mm-hmm.

MS. GRAVELLE: The Wyden-Coats bill has a provision in it to allow, you know, small businesses below a certain size not to keep inventories.

And somebody said there were four things: you know, inventories, depreciation -- I forget the other two.

MR. WILLIAMSON: And we tried depreciation.

MS. GRAVELLE: But, you know, that's kind of it. I mean, how you keep your books.

I mean, and the other thing is, isn't it good for a small business that has inventories to keep inventories for business purposes? I mean, is it a good idea to just abandon the notion of keeping inventories at all? And if you've got to keep them for business purposes, then what's the additional problem with keeping them for -- I mean, maybe you can answer that for me.

MR. WILLIAMSON: Well, what I can answer is there's a list you could make on techie things -- OK? Things like where, if my client goes overseas and forms a foreign company, I have to keep the earnings and profits that that company earns on an accumulated basis, on a Schedule J of a 5471 Form, in anticipation that someday those profits may be repatriated to America, for which then I would claim a section 902 credit for any foreign taxes paid on IDMP.

Now, if my client is making a few million dollars a year, that's the kind of complexity I think could be corrected administratively.

MS. GRAVELLE: You could do that by ending deferral, you know.

MR. BERGIN: You got it in. Dave, and then Gene.

MR. KAUTTER: Don and I have spent a lot of time sort of going through -- and I think you can come up with a list of areas that create complexity with respect to small business and compliance.

But I think the big issue is that as a society, we have to accept a slightly different concept than we've been willing to accept up till now, which is that we're willing to trade off reduced compliance burden for less precision in the computation of taxable income.

Years ago, there was a joint ABA-AICPA conference, and I was asked to write a paper on simplifying the compensation benefits and retirement area. And so I spent a lot of time, right? -- the 401 rules, section 401, which are the qualification rules, are now 37 subsections in 401(a) to qualify as a qualified plan. When I went through, basically my conclusion was you could get about 95 to 98 percent of where you wanted to be with fairly simple rules. It's that last 2 or 3 percent, where we're not going to let anybody come up with anything that could possibly slip through this net that creates a lot of complexity.

And so it's a philosophical question. We have to be willing to accept that some things are going to happen that in a perfect tax world we would prefer not to happen, for the trade-off of substantial simplicity. And that is a huge philosophical gap for some people to leap.

MR. SULLIVAN: So the next step, taking this last, drafting the Small Business Tax Simplification Act of XXXX, and getting somebody to sponsor it? Is that naive? Or has it already been done?

Or how do we follow through on this? Or not?

MR. WILLIAMSON: Well, that's the point for our conference today, and why the Tax Center is devoting itself to small business. Because small businesspersons just aren't organized that way, to go downtown and to lobby, shall I say?

MR. SULLIVAN: As Jane pointed out, many of these suggestions have been made before, but they have been parts of larger efforts.

MR. WILLIAMSON: Yeah.

MR. SULLIVAN: And I, frankly, I didn't notice. Maybe one thing is just keeping it separate from the rest of tax reform.

MS. GRAVELLE: Yep. And Gene, and then going over here.

MR. STEUERLE: I'd like to suggest -- I think the list actually is longer. Because I think there are times when we know that Congress and the states are going to do other things, for other purposes, to other incentives.

You know, you've already proposed, Marty, on top of your list of simplification, you've asked us to do some sort of venture capital credit or subsidy -- which, by the way, has to add complexity, right? We're going to add that on top of the R&D credit, as opposed to just having an R&D.

So I'm not saying I agree that we should do that. But if we're going to do things like that, what we also have to ask is, when we do these things, are there simplifications? Are there simpler ways of doing this for the small business? If we're not going to abandon doing them -- which is one thing to get simplification, if you go there.

And I just have to mention one other thing -- and I don't know how to bring this in, but it's bothered me. But another part of my research life, I try to study things like mobility and income distribution and things like that.

And what's very clear is, in those communities where small businesses are active, you end up having much more success of particularly low-income and minority groups to move up and be mobile. There's something about the sense of risk-taking -- maybe it's not entrepreneurship -- hat does lead people in these communities to succeed. Maybe it's the example. Maybe it's just like having good parents, you've got good small business people in the neighborhood. And there are certain communities we have around the nation where there's not much in the way of small business, and those communities stay poor year after year.

So, I've never figured out what the right incentive is. And it's probably not in the tax system. But if we're going to provide one, then I've got to figure out, you know, how can I live with this in and have tax simplification at the same time?

I mean, there are small business issues that go far -- bigger issues. I mean, Jane mentioned some, in terms of -- there are bigger issues we're trying to address. And small business is always there on the side. And we have to figure out how to implement that.

So the bottom line on your suggestion on simplification, I think you've got to figure out simplifications in a world where we're doing these other things, as well.

MR. BERGIN: The young lady here. And then I'll go to you, Howard.

MS. WANG: Good morning. My name is Linda Wang, and I work for U.S. Department of Agriculture, Forest Service. I'm a National Forest Tax Specialist, economist, and CPA.

We serve about more than 10 million taxpayers in this country who own woodland. They grow trees, and produce timber and build your houses.

I wanted to speak to one issue about -- it's for everybody, not just the small business taxpayer. It goes back to the uncertainty of the tax law -- particularly about the temporary nature of the tax provisions.

And I'm a CPA. I don't do tax returns anymore, I'm more on the tax policy side -- is that -- for example, one of the things that the forestland owner is concerned about is the capital gains tax rate, the 15 percent. And we do tax workshops, people are really concerned about: Is that going to expire soon? Is it expired?

And it just creates so much uncertainty to the timber market operation. And it's really difficult for the CPAs, even, to keep track of all this temporary nature -- I mean, we call it "incentive," but a lot of times it's creating so much workload that it's really difficult to keep track of things.

And so people are talking about from 15 percent, if the provision expires, it goes to 20 percent. And for a lot of small landowners, that probably doesn't create a huge tax liability increase. But they were talking about percentage term, so that's about 33 percent increase. And so that creates some kind of panic when they talk to each other. So, we do tax workshops, and we kind of figure things for them and provide assistance to them.

And just another side note, not relating to the timberland owners, just illustrate the temporary nature about the payroll tax two-month extension. I know that it's very well-intentioned on both sides and all that. And, you know, I just had my dentist, he said, "Oh, you're a CPA. I've got a question for you." And although I said, "I don't do tax returns, so I'm not sure I can give you the right answer -- I need to find attorneys who tell me."

But, anyway, he said: "I have a payroll tax question." And I said, "Oh, you've got to know there is a two-month extension." He was just so overwhelmed that, right on the spot, he said, "Then I did my return wrong, that I withhold 6.2 percent instead of 4.2 percent." He said, "I don't want to deal with 941."

And I was immediately very impressed. I said, "You are able to deal with 941 by yourself? You've got to hire a professional to do that." And he was going on telling me about, "How do I make adjustment, and back to my Quickbooks to reflect that little difference there?"

And I know that also lots of examples -- for example, the farm equipment depreciation. You know, it's a huge tax incentive when they changed the depreciation from five years and increased to seven years. It's just a huge problem for the tax CPAs to even keep track of that. And it's really small potatoes, I guess. But just my own opinion is that, is that going to really provide incentive for farmers? Probably so.

But I wanted to really wish that we want to think about -- provide the certainty to the tax law for the benefit of our whole industry, from tax attorneys, CPAs, enrolled agents, financial planners, and the importance of that. And I recognize it's a very difficult job. I appreciate that every day, when I work with them.

Thank you.

MR. BERGIN: Yes. You know, you want to meet a depressed person? Meet somebody who has high-wealth clients, and trying to figure out what to do with them.

I don't know if this mess is well-intentioned, though. I don't think I can agree with that. But you're a nicer person than I am.

I'm going to end with Howard -- because I'm really sensitive to everybody's time.

MR. GLECKMAN: That's probably unfortunate, because I'm going to be the skunk at the garden party, here. Everybody's talking about special rules for small business.

If we can't agree on what a small business is, I don't know that we're ever going to get special rules for small business. And it seems to me that in the real political world, when that gets up to the Hill, it's going to be a debate that's going to end not well.

MR. BERGIN: On that note --

MR. GLECKMAN: I warned you.

MR. BERGIN: Well-intentioned, though. And that's one of the reasons the Kogod Center exists. So it now has -- there's a constituency.

I want to echo what Marty Sullivan said, this has been fascinating to sit here and listen -- which is why I've got the best job in the room.

Thank our panelists. Thank our audience. I'm sensitive to your time. It's 10:59 and 30 seconds. Thank you. (Applause.)


(Whereupon, at 10:59 a.m., the PROCEEDINGS were adjourned.)

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