[House Hearing, 106 Congress] [From the U.S. Government Publishing Office] H.R. 2373, THE START-UP SUCCESS ACCOUNTS ACT OF 1999 ======================================================================= HEARING before the SUBCOMMITTEE ON EMPOWERMENT of the COMMITTEE ON SMALL BUSINESS HOUSE OF REPRESENTATIVES ONE HUNDRED SIXTH CONGRESS FIRST SESSION __________ WASHINGTON, DC, NOVEMBER 2, 1999 __________ Serial No. 106-39 __________ Printed for the use of the Committee on Small Business U.S. GOVERNMENT PRINTING OFFICE 61-270 WASHINGTON : 1999 COMMITTEE ON SMALL BUSINESS JAMES M. TALENT, Missouri, Chairman LARRY COMBEST, Texas NYDIA M. VELAZQUEZ, New York JOEL HEFLEY, Colorado JUANITA MILLENDER-McDONALD, DONALD A. MANZULLO, Illinois California ROSCOE G. BARTLETT, Maryland DANNY K. DAVIS, Illinois FRANK A. LoBIONDO, New Jersey CAROLYN McCARTHY, New York SUE W. KELLY, New York BILL PASCRELL, New Jersey STEVEN J. CHABOT, Ohio RUBEN HINOJOSA, Texas PHIL ENGLISH, Pennsylvania DONNA M. CHRISTIAN-CHRISTENSEN, DAVID M. McINTOSH, Indiana Virgin Islands RICK HILL, Montana ROBERT A. BRADY, Pennsylvania JOSEPH R. PITTS, Pennsylvania TOM UDALL, New Mexico JOHN E. SWEENEY, New York DENNIS MOORE, Kansas PATRICK J. TOOMEY, Pennsylvania STEPHANIE TUBBS JONES, Ohio JIM DeMINT, South Carolina CHARLES A. GONZALEZ, Texas EDWARD PEASE, Indiana DAVID D. PHELPS, Illinois JOHN THUNE, South Dakota GRACE F. NAPOLITANO, California MARY BONO, California BRIAN BAIRD, Washington MARK UDALL, Colorado SHELLEY BERKLEY, Nevada Harry Katrichis, Chief Counsel Michael Day, Minority Staff Director ------ Subcommittee on Empowerment JOSEPH R. PITTS, Pennsylvania, Chairman PHIL ENGLISH, Pennsylvania JUANITA MILLENDER-McDONALD, JIM DeMINT, South Carolina California FRANK A. LoBIONDO, New Jersey DENNIS MOORE, Kansas EDWARD PEASE, Indiana STEPHANIE TUBBS JONES, Ohio TOM UDALL, New Mexico Dwayne Andrews, Professional Staff Member Stephanie O'Donnell, Legislative Assistant C O N T E N T S ---------- Page Hearing held on November 2, 1999................................. 1 WITNESSES Kerrigan, Karen, Chairman, Small Business Survival Committee..... 4 Pages, Erik R., Policy Director, National Commission on Entrepreneurship............................................... 6 Horton, Pepper, CPA, Tax Technology, LLC......................... 8 APPENDIX Opening statements: Pitts, Hon. Joseph R......................................... 23 DeMint Hon. Jim.............................................. 25 Baird, Hon. Brian............................................ 26 Prepared statements: Kerrigan, Karen.............................................. 28 Pages, Erik R................................................ 34 Horton, Pepper............................................... 42 Additional Information: Letter to Congressman Baird from Frank Nichols, President, Silicon Forest Electronics, Inc............................ 44 Global Entrepreneurship Monitor, 1999 Executive Report....... 46 Global Entrepreneurship Monitor, National Entrepreneurship Assessment; United States of America, 1999 Executive Report 94 H.R. 2373, THE START-UP SUCCESS ACCOUNTS ACT OF 1999 ---------- TUESDAY, NOVEMBER 2, 1999 House of Representatives, Subcommittee on Empowerment, Committee on Small Business, Washington, DC. The Subcommittee met, pursuant to call, at 10 a.m., in room 2360, Rayburn House Office Building, Hon. Joseph R. Pitts (Chairman of the Subcommittee) presiding. Chairman Pitts. We will call the hearing to order. I am Congressman Joe Pitts from Pennsylvania. Good morning and welcome. Thank you for joining the Empowerment Subcommittee today for a hearing on the Start-Up Success Accounts Act of 1999, or SUSA. This bill was authored by the Vice Chairman of this Subcommittee, my friend from South Carolina, Mr. Jim DeMint, and by another member of the Small Business Committee who joins us today, Mr. Brian Baird from Washington. I am going to yield most of my time to Mr. DeMint, as it is his bill, and he can speak in more detail about it, but first I would like to thank Mr. DeMint and Mr. Baird for their work on this legislation and their leadership in the area of tax relief for small businesses. One goal of the Empowerment Subcommittee is to promote legislative initiatives that enable entrepreneurs to realize their dream of becoming small business owners and to sustain their small businesses once operational. The Start-Up Success Accounts Act, of which I am a cosponsor, is an example of this type of legislation, one which seeks to lessen the burden felt as a result of a complicated Tax Code that is not small- business-friendly. Excessive taxation is especially detrimental to the success of new small businesses, which typically encounter numerous difficulties as they struggle to grow in the first few years. Quite often business owners are counseled to reinvest their profit into the business by purchasing equipment or giving bonuses, thereby avoiding taxation on the business's profits. But what if there was a way for small business owners to both avoid immediate taxation and save more of the money that they earned? That is exactly what H.R. 2373 proposes. This bill would allow a new small business the opportunity to use a tax-deferred savings account for a period of time during the beginning stages of business development. By utilizing this SUSA as a money management tool, start-up, small business owners would be able to retain capital by putting up to 20 percent of their annual taxable income, up to $200,000 per year, into a SUSA. This supply of capital may help withstand periods of slow business or increased competition by allowing them to save when business is profitable. I want to welcome our witness panel, Ms. Karen Kerrigan, Chairwoman of the Small Business Survival Committee; Mr. Erik Pages, Policy Director for the National Commission on Entrepreneurship; and Mr. Pepper Horton, a CPA from Greenville, South Carolina, and entrepreneur himself. Thank you all for being here, and I look forward to your testimony. [Mr. Pitts's statement may be found in the appendix.] Chairman Pitts. Mr. DeMint. Mr. DeMint. Thank you, Mr. Chairman. I thank you for holding this hearing today, and particularly for your passion to empower the disadvantaged through our efforts for small businesses. Earlier this year Representative Baird and I introduced H.R. 2373, what we call the Start-Up Success Accounts Act of 1999. Our Chairman has referred to that as SUSA accounts. The purpose of this legislation is to give small businesses an additional tool to manage finances and particularly to retain capital. According to the Census Bureau, over 99.9 percent of business closures are small firms. One of the primary reasons for business failures is a lack of capital. This problem is further aggravated by a tax system that discourages capital retention. The ultimate result is less growth and less staying power. Operating with no capital, even a small downturn in sales, can put a new company out of business. H.R. 2373 would allow new business start-ups to place up to 20 percent of profits but not more than $200,000 into tax- deferred SUSA savings accounts for each of the first 5 years of businesses. This would allow new businesses that are profitable in the first few years to set aside some profits to prepare for a downturn in later years. Money could be set aside in an account for up to 5 years after the deposit. The idea for this bill came from my own experience as a small businessman in starting my own company. It is similar to a bill offered by our colleague Kenny Hulshof, which would help farmers and ranchers manage capital with farm accounts. In starting my own business, I learned how hard it is to manage finances as you try to stay afloat, especially in those first few years of business. It isn't easy, especially with the current Tax Code, and I believe anyone who takes on the challenge of starting a business deserves not only our respect, but our support. I appreciate the work of this Committee in exploring ways to remove obstacles that often stand in the way of the success of small businesses. Small businesses create virtually all of the net new jobs in this country today, with women and minority-owned businesses making up one of the fastest-growing segments of small businesses. It is particularly important for this Committee to take on this challenge. That is why I am pleased that the Empowerment Subcommittee is having this hearing today to try to empower those who try to revitalize our Nation. I would like to add my thanks to all of you who are testifying today: Karen Kerrigan with the Small Business Survival Committee; Erik Pages, thank you for being here; and particularly Mr. Horton from my district, I appreciate you coming up. You not only have a lot of experiences as an accountant, but you started your own business and have a little bit of feel what it is like. I particularly appreciate all of you being here, and I yield back the balance of my time. [Mr. DeMint's statement may be found in the appendix.] Chairman Pitts. Mr. Baird, would you like to make an opening statement? Mr. Baird. Thank you, Mr. Chairman. I want to thank you for holding this hearing, and I thank my good friend from South Carolina, and I thank the witnesses for being here. We have worked together, the gentleman from South Carolina and I, because of our concern for small businesses. I am the son of small business owners. My folks--my mom owned a bridal shop, and then my father and mother together bought an ice cream store, and I saw what they struggled with through the lean and the good years. One of the things that is clear from that experience personally and from meeting with business owners in my own district is the important challenge of finding capital, and the Start-Up Success Account Act is designed to address precisely that. I had a business owner come to me and say it is sometimes easier to find the start-upcapital to just get going than it is once you are in place, and then you really need to set something aside to fund further expansion, and that is precisely what this bill is designed to do. The challenge is how can we make capital more available to our businesses as they try to expand; and importantly, how can we put the control of that capital in the hands of the business owners. As we prepared for this hearing, I talked to some folks who I had the very great privilege of being at the grand opening of their electronics manufacturing plant just a few months ago. A gentleman named Frank Nichols has invested every single penny he has got. He has mortgaged his home. He has gotten help from his church members, and they have a very, very exciting business on the line that could expand. They hope to employ as many as 200 people in our district. The challenge, however, is capital. And with the consent of the Chair, I would like to read a portion of a letter that he submitted to me as he knew I was preparing for this, and it tells the story why the start-up success account is so important. Here is what Mr. Nichols writes: ``we have tried the traditional source of funds. The banks are only interested if you have collateral of a value greater than the amount you want to borrow, preferably in CDs. The local economic development sources of funds are not available to start-ups or are limited to the rural or economically depressed areas. We have tapped our own sources to the max. Everything we own is now mortgaged or used to secure the leases or part of our original capital investments, and our credit card balances are climbing.'' That is not an uncommon statement, and the situation here is if he is successful in his first year and realizes profits, we should put him in a situation where he can set those profits aside for savings for future investments rather than feeling that he has to spend them, perhaps, in the process, incurring further debt, thereby further jeopardizing his capital security. Precisely that mission is what the Start-Up Success Accounts Act is designed to accomplish, and I thank the Chairman and the witnesses today, and I am interested in hearing your thoughts on how we can improve the bill. Chairman Pitts. Thank you. [Mr. Baird's statement may be found in the appendix.] Chairman Pitts. Mr. Moore, any opening statement? Mr. Moore. No opening statement, Mr. Chairman. Chairman Pitts. Then I call on Ms. Kerrigan at this time. STATEMENT OF KAREN KERRIGAN, CHAIRMAN, SMALL BUSINESS SURVIVAL COMMITTEE, WASHINGTON, DC Ms. Kerrigan. Thank you. First of all, let me thank you for inviting our group, the Small Business Survival Committee, for being a part of this important hearing. On behalf of SBSC and its more than 50,000 members, I am pleased to have this opportunity to testify in support of the Start-Up Success Accounts Act of 1999. I am Karen Kerrigan, Chairman of SBSC, a nonpartisan, nonprofit small business advocacy and watchdog organization headquartered in the Nation's capital. Let me also thank you, Mr. Chairman, for holding this important hearing, and, of course, both Congressman DeMint and Congressman Baird for their leadership in introducing H.R. 2373. Many times our organization has had--our staff, members, our small business members, members of our board of directors have had the honor to testify before Congress regarding the hurdles faced by the small business entrepreneurial sector of our economy and the ways that our elected officials can help create an economic and policy environment favorable for their growth, success and, of course, their survival. SBSC is pleased that the Congress continues to place the needs of small business at the top of its agenda, and we are encouraged by bipartisan initiatives such as the SUSA Act of 1999 that will make a meaningful difference for many young enterprises across the country. Access to capital remains a serious obstacle for many small firms as it was in 1995 when the delegates to the White House Conference on Small Business ranked the issue as one of its top priorities. Out of the 60 recommendations that were presented to the President and to Congress, 15 of those related to capital needs. Many of the efforts undertaken by the Congress since that conference to lower the tax and regulatory burden on small businesses, to help increase risk-taking and entrepreneurship, as well as increase capital access, for example, cutting the capital gains tax, have been a plus for members as well as small businesses in general. Passage of the SUSA Act of 1999 sponsored by Representatives DeMint and Baird is another way, a creative and common-sense solution that would assist many small businesses through the tumultuous and challenging early years of their development. Because the Tax Code discourages capital retention, many small businesses are often faced with cash shortfalls at critical phases. These periods include times when a business needs extra capital for expansion and growth or cycles when business activity may slow down and there is little flexibility in managing fixed expenses, or simply periods of adjustment when the business needs an infusion of cash to react to changes in the marketplace. The SUSA option whereby new small businesses would be allowed to place up to 20 percent of taxable income into tax- deferred savings accounts for each of the first 5 years of operation opens up new financial planning as well as financing opportunities for small firms most in need of these tools. This Committee has studied the difficulty that many small businesses face in securing adequate capital to finance their growth. As most Committee members know, many banks require a documented track record of success, while venture capital and angel relationships are extremely competitive. These networks are often difficult to penetrate. Unfortunately, the tremendous success of venture funds in raising significant amounts of capital have made small investments less attractive. This means that small businesses need more tools to be self-reliant for their capital needs. The Center for Venture Research of the University of New Hampshire estimated that about 300,000 growing companies and about 50,000 start-ups need equity capital each year. That was estimated in an analysis that the university conducted for the Small Business Administration. CVR projected that total funding needs for these companies amounted to $60 billion. The SUSA solution would help small firms get out of the trap of passing through excess capital to avoid double taxation, subsequently followed by a frenzied search for capital to grow the business or to keep it afloat. Let me add that the owner can spend an inordinate amount of time and resources seeking such capital during times of need. The SUSA alternative in this regard promotes self-sufficiency and efficiency. In addition, the funds in these accounts will probably give the small business owner more leverage in securing competitive loans. As more and more individuals determine that small business ownership is a goal they would like to pursue, particularly women as well as minority Americans, it is incumbent upon our elected officials to identify areas where public policy, particularly the Federal tax system, may beunwillingly assisting business closures. There are steps that can be taken to save some of the 99.9 percent of small firms that close their doors, and it is within the means of Congress to help salvage some of these businesses. This is especially true in many of our urban areas where small business success and nurturing of an entrepreneurial climate may be the only hope for the revitalization of inner cities, and the same can be said for small towns and small to mid-sized cities where factories and businesses have either left the country or moved to more hospitable business climates. There is a need for the SUSA Act of 1999. Since the inception of SBSC just 5 years ago, hundreds of small businesses have contacted our offices in search of capital for their promising businesses. It is little solace to such entrepreneurs when we explain to them that we only serve as a watchdog group advocating legislative measures to increase access to capital for businesses that are in the start-up phase. However, we have learned a lot from these entrepreneurs, and we feel strongly that the SUSA Act of 1999 is one way to equip such businesses with an option that allows each one of them to chart their financial destiny and their survival. Again, I congratulate Representatives DeMint and Baird for introducing and pursuing with great vigor H.R. 2373. We support this initiative and look forward to working with Members of the U.S. House of Representatives to ensure its passage. Thank you, and I look forward to answering questions from Committee members. Chairman Pitts. Thank you. [Ms. Kerrigan's statement may be found in the appendix] Chairman Pitts. Before we ask any questions, we will receive testimony from all three of the witnesses. I now turn to Mr. Erik Pages, policy director of the National Commission on Entrepreneurship. STATEMENT OF ERIK R. PAGES, POLICY DIRECTOR, NATIONAL COMMISSION ON ENTREPRENEURSHIP, WASHINGTON, DC Mr. Pages. Thank you, Mr. Chairman, and members of the Subcommittee for inviting me. My name is Erik Pages, and I am here representing the National Commission on Entrepreneurship. We are a new organization with a 3-year charter to help government policymakers better understand the needs and interests of entrepreneurs, and to inform public policies that support these needs. We were established by the Kauffman Center for Entrepreneurial Leadership, which is part of the Kansas City-based Ewing Marion Kauffman Foundation. On behalf of all of our Commissioners, I want to thank the Subcommittee for holding this important hearing. We also commend Representatives DeMint and Baird for their leadership in sponsoring H.R. 2373. It is an important proposal that could play a critical role in supporting entrepreneurs across the Nation. H.R. 2373 is designed to provide support to one of the fastest growing sectors in the business world. As the Subcommittee members certainly know, we are enjoying a true boom in entrepreneurship in the United States. Let me give you some recent data to support this point. I would like to submit two reports for the record which detail these points. In cooperation with the Kauffman Foundation, we recently released a study of start-up activity in the United States and nine other industrialized countries. This study, The Global Entrepreneurship Monitor, found that America is far and away the most entrepreneurial country on Earth. This was not a surprise to us. What did surprise us was the pervasiveness of entrepreneurship across the United States. Each year Americans start anywhere from 600,000 to 800,000 new companies that hire employees. That adds up to roughly 14-16 start-ups for every 100 existing businesses. At the same time an additional 2 million new businesses are started each year as self-employment ventures. So overall, roughly 8 percent of the American adult population, that is nearly 16 million people, are in some stage of trying to start a new business. This is a very robust level of new business activity. But as you know, the vast majority of new start-ups do not succeed. This is no surprise as starting a new company is a high-risk venture. We are continuing to study the factors that lead to business success and failure, but I can highlight some preliminary factors that appear to play a role, and H.R. 2373 addresses what is probably the most critical external factor in a new firm's success, acquiring and retaining capital. Our Commission has found that capital is readily available for most businesses in the country today, but unfortunately, this good news does not apply to all entrepreneurs. Our research has uncovered a capital gap that often exists for small start-up companies. When a company is first started and has limited capital needs, say under $50,000, funds can generally be obtained from family and friends or from less orthodox sources like credit cards. Thus, most people who start a self-employment venture can generally find funds for that purpose. However, when a company needs funding in the range of $50,000 to $1 million or $2 million, sources of equity capital often dry up. Most venture capital funds are seeking larger deals, and banks continue to shy away from high-risk start-ups. Angel investor networks, which are growing in importance, are available, but not all start-ups have been able to access these sources of funds. Like venture capital, angel capital funds tend to be highly concentrated in specific geographical regions. Let me talk about the Start-Up Success Accounts Act of 1999. As our analysis indicates, H.R. 2373 is targeted on the right problem. The first 5 years of a company's life are its most tenuous. Even if a company is profitable, it must reinvest its profits into fixed assets, recruiting and training new workers, expanding distribution channels and other tasks. Thus, even successful entrepreneurs face major challenges regarding cash flow during the first 5 years of existence. If firms survive through this transition period, they tend to succeed. Indeed, firms that survive after 3 years show significantly lower failure rates than comparable businesses. Moreover, many of these firms become what are commonly referred to in the economic development profession as gazelle firms. These are companies with annual sales growth increases that exceed 20 percent or more for 4 years. The typical gazelle firm does not simply take off after finding a hot niche. The typical Internet story is not what happens for most companies. It is far more common to see a gradual development phase over 3 to 5 years, say, followed by robust but not explosive growth. H.R. 2373 seeks to support these new firms by creating a tax-deferred account known as a Start-Up Success Account wherein small businesses can place annual deductions of up to 20 percent of income or $200,000 during the first 5 years. These funds would be drawn from operating income, and withdrawals would be treated as taxable income in the year in which they were drawn. These accounts could provide an additional safety net for businesses in their critical start-up phases. During a firm's first 5 years, it will inevitably hit some type of downturn that affects capital flow. Under current rules, entrepreneurs often use credit cards or take on new loans to weather the tough times. These new accounts could provide a direct source of alternative capital, or theycould be used as collateral to secure more competitive loan rates. By allowing new firms to avoid taking on new debt, we can help set the stage for more rapid future expansion and job creation. We believe that H.R. 2373 includes several provisions that are particularly important. First off, the limitations on the availability of the accounts in terms of the time period, 5 years, and the size of the company, under $5 million in gross receipts, makes sense. We believe that this program must be tightly focused on new entrepreneurs and start-up companies. Secondly, the bill contains some restrictions on the use of the accounts, and we believe that the Subcommittee might consider additional language to ensure that the accounts are explicitly used for new business and are not diverted for other purposes. Finally, we believe that the SUSA accounts would be particularly helpful to women and minority entrepreneurs. These business founders often start their firms with lower levels of initial investment, and thus face higher risks of failure in the event of a business downturn. Some other steps in addition to its consideration of H.R. 2373, we urge the Subcommittee to consider other steps to support America's entrepreneurs. We recommend that you examine the issue of angel capital and steps that can be taken to create local angel investor networks around the Nation. We also urge you to review current technology transfer programs and examine how we might make these programs more friendly to entrepreneurs. Finally, we believe ultimately that the most effective programs to support entrepreneurs must start at the State and local level. We would be happy to work with the Subcommittee in examining these issues. We will soon be releasing an analysis of State best practices in supporting entrepreneurship, and we will forward these findings to the Committee when the report is released. In conclusion, on behalf of the National Commission on Entrepreneurship, I commend the Subcommittee for holding this important hearing and for its leadership in supporting America's entrepreneurs. These visionaries are the engine of the new economy, and your support is critical to their continued prosperity and vitality. Thank you, and I look forward to your questions. Chairman Pitts. Thank you for your testimony. [Mr. Pages' statement may be found in the appendix] Chairman Pitts. Mr. Horton. STATEMENT OF PEPPER HORTON Mr. Horton. My name is Pepper Horton, and I am a CPA from Greenville, South Carolina. I would just say I am very nervous. I would like to thank the Committee for the opportunity to come up here and testify today on the SUSA Act of 1999. I started in 1989 as a CPA with Ernst & Young where I worked for 10 years, and eventually left Ernst & Young to start my own practice so I could deal with smaller businesses that could not afford me when I was working with a larger firm. I feel that experience has given me a pretty good understanding of how large businesses operate and how small businesses operate. As a small business itself, I understand the pressures in how companies manage their cash flows. And having a lot of accounts receivable from large companies, I understand how they manage their cash flows as well as how they are stretching their payables. I find a great deal of satisfaction working with new businesses and feel that I can really make an impact with these businesses as they try to get off the ground. In reading through my colleagues' presentations, I was suddenly concerned that my presentation was too technical, and that really comes from my background. Whenever I see a piece of legislation, I immediately read the code and try to answer the questions what does the bill say, sometimes just as importantly what doesn't it say, and try to figure out how I might use that bill to help my clients. So I apologize if I have gotten too technical. After reading the act and rereading the act, I summarized my thoughts into the following points, the first being double taxation. This bill would clearly be a great benefit to regular or C corporations in managing their cash flow. A corporation's net income is taxed at the corporate level, and when these earnings are distributed to the shareholders, the earnings are taxed again as dividends. Double taxation creates an enormous incentive for business owners and their consultants to keep corporate taxable earnings low. As a result, business owners engage in tax-motivated spending at or near year end. If there is one thing I have learned in my career, it is that tax-motivated spending is at best an inefficient use of resources, and is often tantamount to throwing away a dollar to save 40 cents. That is one of the things that I try to continually stress to my clients, that spending money to avoid taxes is usually, like I said, throwing away a dollar to save 40 cents. One of the most commonly used mechanisms for lowering corporate profits is increasing compensation to employee shareholders. Of course, the Tax Code mandates that employee shareholder compensation is reasonable. However, ``reasonable'' is a subjective term and often produces a range of compensation amounts that could be considered reasonable. As a result, business owners often have a huge incentive to accept compensation amounts that are on the high end of what is considered reasonable instead of what the business actually needs. This bill would mitigate that motivation by allowing corporations to receive the same tax effect as ``comping out'' the corporation's profits while still keeping the cash inside the corporation for future use that may or may not be anticipated. Another use for the bill would be funding expansion. As a business grows, it must increase its inventory, secure new office or plant space, purchase new equipment, and train new employees. While section 179 allows many businesses to expense their equipment purchases, all of the other expansion-related expenditures generally must be capitalized for tax purposes. This can leave a new business in the unfortunate situation of having a tax liability because all of the spending that they have done is not deductible, or least not 100 percent deductible. It is amortized over a number of years, sometimes up to 39 years. It can leave the business in the unfortunate situation of having a tax liability with little cash on hand. At the end of year 2, for example, a new business could place some of the cash on hand to fund year 3's expansion into a SUSA account and immediately reduce the business's tax liability. Even if this cash is only temporarily placed in a SUSA account, it provides a new business with a valuable tax deferral. Funds which would have ordinarily been remitted to the Treasury will still be in the private sector creating jobs and funding economic expansion. The third point is smoothing out earnings. As you are aware, our tax brackets are graduated so the individuals and corporations with higher taxable income pay tax at a higher marginal rate. One possible use of SUSA accounts would be in the smoothing out of a business's earnings to avoid income spikes from temporarily thrusting taxpayers into a higher tax bracket. While generally accepted accounting principles, or GAAP, aim to match revenues with expenditures in the proper period, the Tax Code tends to accelerate income recognition and defer deductions inorder to increase revenue. This and a host of other business factors can lead to the bunching of income in a given tax year. This bill could provide taxpayers a tool to lessen the sting of abnormally high taxable income in a single year. On the self-employment tax section, section (e)(3) of the bill provides that the amounts included in gross income under the section will not be included in determining earnings from self-employment. This creates a planning opportunity to lessen the impact of the self-employment tax depending on how the business is classified for tax purposes. Sole proprietorship, single member LLCs and most partnerships' net earnings are subject to self-employment tax. My experience has shown that self-employment tax can have a potentially devastating effect on new business owners if they are not properly advised. If my understanding of this bill is correct, this provision provides an exclusion of the amount deposited in a SUSA account from the self-employment tax. That is a tremendous benefit. One of the things that I have noticed, and I have felt myself as a new business owner, is that the self-employment tax can kill you. Especially for people leaving the corporate world to start a business. They really don't understand how the self- employment tax works, and they usually end up getting the April surprise when they do their tax returns and find out that they have not paid enough to cover the self-employment tax. The bill's most obvious benefits are to provide the business with an opportunity to defer income taxes for up to 10 years while earning a return on the funds. In doing so, however, the bill encourages businesses to retain earnings rather than engaging in tax-motivated spending. However, I am concerned that as the business grows and as its profits expand, that the income from the SUSA will be taxed at a higher marginal rate than would have been paid in the year the deposit was made. What I mean by that is that if a business's earnings are moderate in years 1 through 5, and the business continues to grow, the cash coming out of the SUSA account may be taxed at a higher rate than the tax benefit that was received when it went into the SUSA account. Some tax consultants may be a little reluctant to recommend to clients that they potentially expose themselves to paying higher marginal tax rate. In conclusion, I would like to express my sincere appreciation to the Congressmen for their efforts to assist small businesses. As a consultant to many small businesses and as an owner of a small business, I am impressed with their apparent understanding that small businesses are the backbone of our economy and will be the number one source of new jobs as we move into the next century. Obviously I would love to see a bill that eliminated the double taxation that encourages debt financing and tax- motivated decision-making or a bill that simply lowered the tax rate that new businesses face. However this bill is clearly an effort to assist small businesses in managing their tax liability and overall cash flow. The unavoidable fact is that our Tax Code contains very few provisions aimed at helping small businesses get off the ground, and this bill is clearly a step in the right direction, and I am therefore happy to support it. Chairman Pitts. Thank you. [Mr. Horton's statement may be found in the appendix.] Chairman Pitts. We will go to questioning now from the Members. Mr. Horton, I would like to start with you. You mentioned in your testimony that the U.S. Tax Code often works against small entities. What do you think is the most detrimental effect of our Tax Code on our Nation's small businesses? Mr. Horton. One of the worst is double taxation of corporations, and that is one reason why I try to get clients in early when they are trying to decide what type of entity to choose so I can steer them away from a regular corporation, because the double taxation, the same dollar of earnings is taxed twice. But the general complexity of the payroll taxes tend to give clients a lot of trouble. I feel like every one of my clients get penalized by the IRS in the payroll tax area even though they are trying as hard as they can to comply. In fact, they hire me, and sometimes I get them penalized, too. It is frustrating because I am a paid professional, and I end up slipping up and getting the client penalized. There are provisions like section 179 that allow businesses to expense their equipment purchases, but they have also got to buy inventory, and that is not immediately deductible. That is cash out the door that does not provide an immediate tax deduction. So you can end up in a situation where a corporation has paper profits, but no cash to pay it. Chairman Pitts. Thank you. Mr. Pages, you mentioned in your testimony that you recommend that the Subcommittee examine the issue of angel capital. For those of us not as familiar with that, can you explain? Mr. Pages. Angel capital refers to individual investors, often former entrepreneurs, who invest their own wealth in starting new companies. We found through this study there is a huge amount of angel capital available in this country, around $50 billion. If you compare that to the amount spent last year in venture capital, which I believe was roughly $16 billion in new investments, you have a huge differential there. So there is much more angel capital available for start-up businesses than there is venture capital. Venture capital is largely for bigger deals and is not available for the types of start-ups that we hope to help through this legislation. As Ms. Kerrigan noted, it is very hard to break into networks to put the business together with the investor, and if there is some way to create networks so we could spread, if you will, the wealth from all of this angel capital that is available to other parts of the country, it would be a very helpful step that the Subcommittee could take. What we find now is that the places where there is lots of venture capital, Silicon Valley, Austin, the Boston area, there is a lot of angel capital, too. And in effect you are caught in a chicken and egg situation. People get rich and they invest back in the areas where they grew up, and the places that don't have those entrepreneurs located there, it is very difficult for them to get started in terms of creating an angel capital network. Chairman Pitts. Ms. Kerrigan, how many members of the Small Business Survival Committee are start-ups or small businesses within their first few years of existence? How many of your members would be able to take advantage of the SUSA accounts, and do you feel that they would benefit from this legislation? Ms. Kerrigan. I would say the majority of our members are those small businesses or small firms who have endured the first 4 or 5 years, the ones who have gotten off the ground, who can become more active in an organization such as ours and pay membership and stay informed on policy issues and legislation and how it impacts their business. I would--and this would be a guess, we can go back and do this research certainly with our membership, but I would guess probably about 5 percent of our membership are those businesses who are in the start-up years and who want to know what is going on in the Nation's Capital and State capitals nationwide and how that may impact their business; SBSC members also include a lot of investor types who invest in these types of businesses. So what we want to do, obviously, is grow our membership to large numbers, and include the start-ups. That is part of our mission and goal, to not only represent our membership, but also represent the needs of all small businesses nationwide. So I would say 5, about 5 percent or so are in that start-up phase right now. Chairman Pitts. Thank you. Now I would like to recognize the Ranking Member of the Subcommittee, the lady from California, Ms. Millender-McDonald. Ms. Millender-McDonald. Thank you, Mr. Chairman. I am sorry that I was late getting here. Ms. Kerrigan, I want to start with you. You mentioned just a few minutes ago talking with the Chairman about the need to look into small businesses and what will perhaps work for them or to find the exact needs for the small businesses. As we do recognize the first 5 years of small businesses really are tenuous, if you will, because of the obstacles that are there. When you do your needs assessment, are you going to do--what small businesses are you going to do, across the board, women, minority, all, or what? Ms. Kerrigan. When we do a needs assessment, we look at the needs of our members, which generally relate to taxes and regulation and other obstacles that are put up by the government in terms of affecting their growth and success and their competitiveness, but we look at what the obstacles are faced by many start-ups as well. We base that needs assessment on looking at what the climate is for small firms. Obviously with 99.9 percent of business closures being small businesses, we have a concern that, and one of our priorities it, to help those who are just getting in business get off the ground and become successful. So we believe that our tax and regulatory agenda pretty much is generally representative of all different types of businesses. Whether it is agriculture, minority-owned businesses, women-owned businesses, these are broad issues that impact all businesses. I hope that I am answering your question correctly. Ms. Millender-McDonald. In a sense, but let me just ask you this. As you stated in your testimony, access to capital is one of the most important obstacles, and we need to recognize that. The basic assumption of this bill, however, is that a business must be in the black in order to be able to use these accounts. Do you think that during the first 5 years small businesses on the average have enough earnings to make this bill a practical solution? Ms. Kerrigan. Yes. Are you asking if this will address the capital needs? Ms. Millender-McDonald. Yes. Ms. Kerrigan. Absolutely it will. It would be a practical solution, because if you do have a business, for example, that is forced to spend its money year end, as was noted by our expert CPA at the end of the table, rather than putting it aside and keeping it for a need later down the road, this just makes sense, giving them incentives to think ahead not only in terms of financial planning, but also for self-financing opportunities. Yes, I think this is a practical solution for many--is it going to be something for all firms? No. But it will address the needs of many small businesses out there. Ms. Millender-McDonald. But it will not necessarily address the needs of some minority firms that I have talked with given that they do not find themselves in the black for the first 5 years, so they are not a position in terms of any access to capital? Ms. Kerrigan. It is not the silver bullet. I don't think that it will address all needs, but I think it will help many small firms. Ms. Millender-McDonald. And I suppose I get back to the needs assessment then, you will certainly look into how can we help small minority businesses to survive in that they will be the employer of many of those who will be seeking jobs. Critical of that is of women and men coming off of welfare to work. It is important that we look at a needs assessment that is representative of a minority group. Ms. Kerrigan. Yes, a broad-based needs assessment not only in terms of further reducing capital gains taxes or targeting capital needs towards urban areas, but also looking at what local governments can do to lower the tax burden in cities, and in terms of what they are doing perhaps to assist in either business closures or not enabling their own communities. Ms. Millender-McDonald. And I would be interested in seeing what local governments are doing for this, given that they are strapped themselves most often. Ms. Kerrigan. I will get this to the Committee. We have not brought it down to the city level yet, but we do conduct a small business survival index. It looks at the climate for entrepreneurship for all 50 States, and we rank them based on which are more business-friendly than others. We look at a lot of different programs and policies and how these impact small businesses. This is, I think, an important tool. I think this will work for many small businesses, and, in fact, I think it will help many minority and women-owned businesses. But there are a lot of other measures and initiatives that the Congress is pursuing right now, things that the Small Business Administration is doing, things that the administration is doing that I think address this broad-based need. I would agree with you. Ms. Millender-McDonald. Mr. Pages, as I have said in the questioning, speaking with Ms. Kerrigan, that start-up businesses are the most tenuous in that the first 5 years are very critical, and oftentimes they find themselves not in the black after 5 years. But as you stated in your testimony, after the first 3 years, the success rate tends to improve. How would this bill help those companies during the first 3 years when most of the earnings would be used to pay off their debt? Mr. Pages. In many ways I would think I agree with Ms. Kerrigan about the impact of the bill. If you think of start-up businesses in three categories, you have those that are going to succeed with or without some stimulation or support from the government, and those that are going to fail. There is a middle category of firms who are on the edge. I think that is the appropriate target for this legislation, companies that are showing slight profit in the first 5 years. Ms. Millender-McDonald. So it is not for all small businesses then? Mr. Pages. I think that is right. As you have noted, many of these companies do not show a profit during the first 5 years. I think we need to look at other ways to support those companies. This is targeted at those companies that are showing fluctuations in income in the first 5 years. They do need to be profitable to be supported by this bill. Ms. Millender-McDonald. Is there any specific industry area which would find these accounts more useful than others, Mr. Pages? Mr. Pages. Well, we haven't looked at that. My general sense would be that more volatile industries might have greater benefit of--these types of provisions because they would see their earnings fluctuate more greatly over a 5-year period. You think of the classic Internet businesses or information technology businesses where there is a lot of turmoil in the company and a lot of ebb and flow of its profits. This is the type of safety net, if you will, that might help those typesof sectors rather than a more established traditional sector of the economy, but we have not looked at this in great detail. Ms. Millender-McDonald. While we have many pieces of legislation coming before us with small businesses, and we do recognize small businesses will be the catalyst by which the economy continues to spur in the new century, we have to look at how we can get those small businesses that are going to employ that work force that is going to be the majority women and minorities. And given that this bill does not specifically target individuals whose main source of income is a small business, but rather allows a deduction of funds received from a qualified small business, would requiring that the funds deferred not only come from a small business but be the main source of income for the individual serve the underlying purpose of the bill better or what? Mr. Pages. I think the bill is appropriately targeted. I think it will have a big impact on women and minority entrepreneurs. If you look at start-up business rates, minorities, particularly African-Americans, show much higher rates of entrepreneurship than whites and Hispanics, particularly as education level goes up. What we do find, however, is that they are undercapitalized. Ms. Millender-McDonald. I was going to say that they do not succeed because of not having access to capital. Mr. Pages. That is correct. So this is one way to help them preserve the limited resources they have. It is not going to save everyone, if you will, but it is one other way to sort of conserve that precious cash that they need, particularly if there is a downturn. If we do have an economic downturn, the companies that are most poorly capitalized are going to be the first to fail. So this is very important to help these kinds of companies conserve their cash. Ms. Millender-McDonald. Mr. Horton, you stated that H.R. 2373 would be a great benefit to regular C corporations in managing their cash flow. You also stated that the bill would allow corporations to achieve the same tax effects as compensating to the employees the corporation's benefits while keeping the cash inside the corporation for future use. As I understand the bill, the only eligible entities allowed to use the tax-deferred under the SUSA accounts are individuals. Am I correct, or would the provisions under this bill allow corporations to defer their profits through the SUSA accounts? Mr. Horton. My understanding is that it is available to all entity types, unless I am misunderstanding that. Ms. Millender-McDonald. Both individuals as well as corporations? Mr. Horton. Right. Ms. Millender-McDonald. If you were to buy stocks from a small business corporation, would I place my dividends in a SUSA account, Mr. Horton, even though this is not a main source of income, and I have no direct stake in the day-to-day managing of the corporation? Mr. Horton. The corporation itself--if my understanding of the bill is correct, the corporation itself would put the money in the SUSA account, not the stockholders. What I was referring to about compensating out the earnings, what typically happens at year end is the corporation looks at where it is earningswise and tries to compensate its owner/employee as much as possible in order to increase the compensation to the shareholder and decrease the earnings to the corporation to avoid the double taxation. Am I answering your question? Ms. Millender-McDonald. To some degree I am following what you are saying, anyway. Did you want to finish up because I am concluding here. You have answered as you see fit? Mr. Horton. Right. In the C corporation environment the double taxation is an incredible motivation to taxpayers to try to lower the corporate earnings, and that is why I think a lot of the statistics at the corporate level are somewhat doubtful, because these corporations do whatever they can to keep their earnings as low as possible in the corporation. Ms. Millender-McDonald. Mr. Chairman, thank you. Many small businesses agree that the SUSA bill is a good bill and has the potential to lead to many positive outcomes for small businesses, like the ability to use the tax-deferred funds for leveraging with larger companies. However, most start-up businesses struggle in the first 5 years, as I have said before, and this is what concerns me about the bill. I think we should look at the--I think we should look at the current support mechanisms that are in place to see why more businesses are not succeeding, and with that I thank you. Chairman Pitts. Thank you. Because of the excellent attendance of the membership, we are going to start using the lights. We are asking go ahead and use your time limit on the first round. If we need to, we can go to a second and third round. Mr. DeMint. Thank you, and thanks again for your encouragement of this bill. And one of the things in addition to just getting your endorsement today is to find ways to help make this bill better. We do want to look at the language that was questioned. The intent of the bill is that it relates to a business entity. The point is to encourage people to leave capital in a business entity rather than have tax-motivated spending or to pass it through as salary. My experience in business as a solo consultant, my first couple of years in business, is we didn't make a lot of money. At the end of the year, it was just a matter of do we leave a few thousand dollars in the company, or do I take it out as salary. The accountant always said take it out as salary because you may need it as salary in a couple of months, and you would have paid taxes twice on it if you do that. So consequently, as I went through those first few years of business, there was seldom enough capital to move ahead to hire people, and I think the growth was slower. It was not necessarily just a matter of survival, but there was tax-motivated spending of buying something that we didn't need to reduce our profits or maybe we didn't need then. But the point here is to try to encourage people to leave money in a company without bad tax consequences so that company would be stronger, better able to hire people, and would be stable in the future, and we want to be make sure that the language of the bill reflects that. One question, we want to make sure that we don't have unintended consequences of this bill or unnecessary complexity. One of the things you mentioned, Mr. Horton, that got my attention is that there might be some reluctance to use these accounts because the tax rate may be lower in the first year than it is the fifth year when the money is taken out. Would it be your recommendation that it be taxed at the rate when it was put in, or is there some way that we can improve this so it is not a risk to the company to save capital? Mr. Horton. I think it would be beneficial to cap the amount of tax paid when the funds come out the SUSA account to the amount that would have been paid had the funds not gone into the SUSA account. That certainly creates a little bit of administrative complexity, but I think that is probably manageable. If the taxpayer were in the 15 percent bracket when the money goes into the account, and theyare in the 35 percent bracket when the money comes out of the account, they have deferred themselves into 20 percent of extra tax liability. Mr. DeMint. Well, that is a great point. Does any other panelist have any concerns about unintended consequences or unnecessary complexities in what we are trying to do? Ms. Kerrigan. No. I wouldn't--when we talk to a lot of our members about various things that we can do to fix the Tax Code to help small businesses, there is always the question, well, gee, shouldn't we--rather than further mucking up the system or making it more complex, shouldn't we just overhaul the entire system or do some type of simple flat tax? Since the Congress really hasn't come to any agreement of whether that should be done, what type of tax system we should have, we still think that there are things that have to be done. We can still do things to help small businesses. This is an immediate need, and the Congress needs to react in an immediate way and not let this whole debate over complexity and what type of system we are going to move to paralyze them in their efforts right now, because there are small businesses who need their help, in terms of looking at various parts of the Tax Code, whether it is estate tax relief, SUSA accounts, capital gains tax, whatever. Mr. DeMint. All right. Good. Mr. Chairman, I yield back. Chairman Pitts. Mr. Baird. Mr. Baird. Mr. Chairman, I neglected earlier to ask unanimous consent to introduce Mr. Nichols' letter into the record. Chairman Pitts. Without objection. [The information may be found in the appendix.] Mr. Baird. I have a couple of questions, and my good friend Mr. DeMint--it shows why we are working together on this-- precisely picked up on the question that you addressed, Mr. Horton, and my staff and I kicked that very issue around this morning, in fact, and it is something we might want to explore. One of the things that I want to pick up on a little bit is, as Mr. DeMint said, to me the issue is how do we provide an engine to the economy, not how do we proliferate small businesses. And there may be some small businesses that do not succeed perhaps through bad management, maybe they have a product that nobody wants, et cetera. But there will be a subset of businesses who are succeeding and are, in fact, generating revenue, and those maybe are more likely candidates of engines of job creation. The way I see this bill is it is targeted at precisely those businesses who are having early success, who have the potential to expand on that early success, if they can find a way to better manage and access their own capital, rather than spending themselves into a precarious debt position or lack of capital situation. So yes, I agree with the Ranking Member that there will be needs to help other businesses who are not profitable early on find capital, but part of what I am seeing here, and certainly what many business owners locally have told me, is that this empowers the successful business that is already demonstrated an achievement to be even more successful. Does that square with your experience and as you look at this bill, your thoughts about it? Mr. Pages. Yes, I think you have got it exactly right. Not all entrepreneurs are created equal is one way to look at it. There is a certain subset that we call high growth, and those are the companies that really generate most of the economic development, most of the net new jobs. You need a base of all sorts of small businesses for those types of entrepreneurs to prosper, but it is really a small subset of these companies that are the net creators of new jobs in this country. Again, the term I used in my testimony was ``gazelle'' firms, but it is really fast-growing, high-growth entrepreneurs is really what you need to encourage to foster local economic development and to create lots of new jobs and innovation and technology. So this is the subset you really want to focus on. Mr. Baird. Let me ask one other question. Mr. Nichols, from my district, raised an interesting question. He thought that this might be--the access to this opportunity might be a way to leverage more competitive loan rates. Any thoughts on that? It was a possible use that had not occurred to me, but it is intriguing. Any thoughts on that from you folks? Mr. Horton. Well, one thought, there is a provision in the bill that prevents the account from being pledged as collateral on a loan, and I think that if that were removed, then perhaps you are right, this could be used to secure a loan and get more favorable interest rates. My reading of the bill right now is that it is similar to an IRA where if you pledge it as collateral on a loan, then it is treated as distributed. Mr. Baird. What would be the pros and cons of that as you see it, Mr. Horton? Mr. Horton. Well, if you could use it as collateral, then you could leave it in the account, leave it in the corporate form and still get a loan with more favorable terms. If you leave it the way it is now you may see the money coming out of the accounts rather than staying in the accounts. Ms. Kerrigan. I was just thinking, it may not be something that could be pledged against a loan, but on the other hand, if you do have a SUSA account and depending upon the size of that account, and what money you have set aside as a business owner for future cash needs, I do think that planning says something about business management and the business itself in terms of how you are thinking ahead like financial planning, planning for future crises or what have you. So I don't know if it serves as a direct pledge, but more of an indicator that this business has its act together. It is thinking ahead, and it is using all the tools available to succeed in the future. Mr. Baird. So the lender will look at that, and even though they are not saying, we could directly access that capital to pay back the loan, they could say, here is a business that is planning ahead, that is not operating right on the margin, and that is a sense of security for a lender. Ms. Kerrigan. Yes, in terms of looking at that, but plus all the broader business practices as well. Mr. Horton. Even on a more basic level than that, it will show up on the company's balance sheet, which makes the balance sheet look more favorable to a lender. Mr. Baird. I want to just close by thanking you all. I know that Mr. DeMint and myself really do want this bill to help businesses. And, Mr. Horton, you apologized earlier for being so detailed and technical, but no apology necessary. I am sincerely grateful to you and each one of you for what I think are very insightful analyses. And I want to invite you, after you go home, going home on the airplane or whatever, and you may be saying, gosh, there are some ways to make this better. Mr. DeMint and I would be very open to your suggestions about how to improve it, if it has problems. We are not here to have anyone say what a great bill we have done, we are here to learn from you and, if it has problems, to improve those and make the bill even better. So I look forward to your interaction. Thank you, Mr. Chairman. Chairman Pitts. Thank you. Mr. LoBiondo. Mr. LoBiondo. No questions. Chairman Pitts. I think the other Members have gone. We will start the second round. Mr. DeMint. Mr. DeMint. I think in the interest of time and our panelists, really my questions have been answered, except to Mr. Baird's point. If there is anything else that has crossed your mind as a way to make this bill better, it is really draft legislation at this point. The hearing is one step on improving it. So any concerns you have, don't leave without expressing them, and if any of you have any thoughts on the way home, let us know, because in the next week or two we want to refine the language and finalize it. But you have really covered a broad spectrum and added a lot of encouragement and confirmation to us to move this bill through as one tool for new businesses to be successful. So thank you. Any other comments? Chairman Pitts. Ms. Millender-McDonald. Ms. Millender-McDonald. Mr. Chairman, I just want to emphasize that when you say success accounts or start-up businesses, you are really talking about successful businesses, you are not talking about fledgling businesses, because in a sense this bill will not really be a source of support for one who has not been in the black for 5 years or better, but rather those who have seen success as they have gone along. So this still does not address a small business that is not in the black, but rather successful businesses as they continue to thrive and pretty much offer new jobs, but the jobs aren't in areas where it is most needed. So while this will not be that panacea, I am just suggesting the bill is really for more or less successful small businesses or those that are thriving and not those that are fledgling. Chairman Pitts. Mr. DeMint. Mr. DeMint. Just to respond briefly, I think we all agree, it won't apply to all businesses, but it only does apply to new businesses, and perhaps the benefit will be to those that have a faster start. But it is not unusual for a business at any time to have a good year and then a very bad year, or to start out, as I did, with a contract that ended after the first year, to have significant profits in one year and then be out trying to borrow money the next year. It is just a bad system that discourages those companies in the first 5 years, if they do have a profitable year, to get all of the capital out of the company instead of trying to maintain some so that they can get through the next year. It would be very unusual for any new business to just start off and have five great profitable years, and if they do happen to have a good year or two, we would want them to reinvest and grow even faster. I think it will help the company that is making almost no money. If only you set aside $1,000 or $2000, if you are a solo practitioner and keep it in the business instead of as a salary, it does give you a little staying power. So I think the application will be, again, not totally inclusive, but I do think it would help the solo entrepreneur as well as the companies that start off fast and then have a bad year somewhere in those first 5 years. Thank you. Chairman Pitts. Thank you. Mr. Baird. Mr. Baird. I would like to echo what Mr. DeMint said. I appreciate your concern. I actually see this bill as having great potential to help women and minority start-ups. You needn't have a profitable 5 consecutive years. At any point where you experience profit, you can use that profit to put into a SUSA account, and the model I would have that I think would benefit greatly minorities and women entrepreneurs would be, for example, the very small corner grocery store that you see people with their--the mom is in there, the dad is in there, the kids are in there. They are starting from 5:00, and they are working until 10:00 at night, and they are purposefully starting small, and they are being tremendously frugal, and they are taking those savings and they are putting them aside. They have been successful right from the get-go because they have started within their means. They are working tremendously hard, they are putting sweat equity into it, but they are also willing to forego the short-term profit so that they can later expand. So for 3 or 4 consecutive years, they could keep their operation relatively small, put a lot of sweat equity into it, take this money, set it into a SUSA account, and then after 4 years expand, and that is when they draw on the SUSA account, because they have saved the personal money to expand versus every year being right on the margin. Or let's say you have a woman working a business out of her home. She has a little office, she has not a lot of expenses, but she does generate a profit. She sets those aside in a SUSA account. After 3 or 4 years it has built to the point she can establish an office outside the home. I see plenty of applications, if people are frugal and successful early on, to use this, and I think it has a lot of potential for women and minority-owned businesses. Chairman Pitts. Would any of the witnesses like to comment on that? Mr. Pages. I would just simply offer that if there is a company that is growing on an aggressive growth path and profits in the first 5 years is probably going to quickly grow too big to access the accounts, and I think the accounts should not be designed for that type of company. I think Congressman DeMint has the right picture of this. The typical account user will likely have ups and downs in the first 5 years of existence and is really much more tenuous than the really fast- growth company that kind of just gets hot right from the start. That is not our vision of where this legislation would apply. Chairman Pitts. Ms. Kerrigan. Ms. Kerrigan. I would agree with everything Congressman Baird said. I would like to change the assumption here to the fact that women-owned businesses in this country are tremendously successful, so I think we need to think about this more in a positive way in terms of how it will impact many women-owned small businesses. There is a huge success story here in terms of female-owned firms and women-owned businesses, the amount of economic growth that they are responsible for in job creation, and all that other good stuff. And looking at the growth, the phenomena of women-owned businesses and also the growth of many minority- owned businesses, you have to assume with that growth and their success that there is going to be a portion of those businesses who will benefit from this. But I again would like to add, do we need to be doing more for small businesses beyond this? The answer is absolutely yes. There are obstacles and government-imposed burdens and a lot of things at the local level, I think, that are hurting their chances for success and survival. Someone who considers themselves a fledgling business in their first year and may not make a profit, perhaps this is something good in their second year or third year that they can benefit from. So anyway, I am just reaffirming or supporting the comments of the Congressman. Chairman Pitts. Thank you. Mr. Horton. Mr. Horton. One thing I wanted to point out, the term ``small business'' is very broad. It is true that this bill would not help businesses that are losing money, but let us not forget that, at least with most of my clients, that some of them have an idea, and they are trying to start this big business, and they are willing to lose money for years and years and years trying to get it going, but most of them are men and women who want to open five restaurants in a town or five auto repair shops. They may be able to stand losing money in year 1 and possibly year 2, but if they are not making money after that, they are going to give it up, because they need this to earn a living. So I think under the tent of small businesses, there are a lot of different businesses, and I don't want us to forget about the men and women who are starting businesses to provide them with money to eat, not necessarily just to come up with a good idea that may make them rich. Chairman Pitts. All right. Are there any other questions? Any closing comments from anyone? If not, this has been an excellent, excellent hearing. We thank you for your very informative testimony. We will keep the record open for 5 legislative days for anything you would like to add. Chairman Pitts. Mr. Pages, you have a couple of reports that you would like to make a part of the record. [The information may be found in the appendix.] Chairman Pitts. If there is nothing else, the Subcommittee hearing is adjourned. Thank you. Ms. Kerrigan. Thank you. Mr. Pages. Thank you. Mr. Horton. Thank you. 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