PREPARED STATEMENT OF:
CO-CHAIRMAN
NATIONAL SMALL PUBLIC
COMPANY LEADERSHIP COUNCIL
SUITE 240-269
MARIETTA, GEORGIA 30066
THE HOUSE FINANCIAL SERVICES
COMMITTEE
OVERSIGHT AND INVESTIGATIONS
SUBCOMMITTEE
9:30AM 2128 RAYBURN HOUSE
OFFICE BUILDING
JUNE 26, 2001
CONGRESSIONAL TESTIMONY ON SMALL BUSINESS CAPITAL FORMATION
I am testifying today as the Co-Chairman of the
National Small Public Company Leadership Council. The Leadership Council, based
in Washington, DC, seeks to educate and inform members of congress about the
economic contributions of small emerging growth companies.
The Leadership Council is committed to assisting
small business, both public and private, in capital formation issues. Our
initial goal was to provide a forum for small-cap public companies seeking
regulatory relief, we have since expanded our focus to address the overall
concerns for all small business owners. The Leadership Council has represented
the interests of small business to the securities regulators who govern our
industry and the policy makers in Washington, DC. The Leadership Council now
holds regularly scheduled meetings where small public company's, small business
owners, venture capitalists and members of the investment banking community
exchange ideas, voice opinions on pending legislation and become educated on
matters affecting our industry. As our organization grows, we hope to enhance
our contribution to regulatory and legislative matters.
While the largest public companies, banks and
brokerage firms have lobbied the Securities and Exchange Commission (SEC) to
adopt new laws and regulations. The small business owners of this country have
basically been ignored. The eighteen (18) year economic boom has over shadowed
the concerns of small businesses, which were the biggest driver of new jobs in
our country. Regulators and Politicians have either ignored the concerns of
small business or in many cases not aware of the
face. In the process, they are potentially
threatening the longest economic expansion in our country's history. The
Leadership Council urges that any new laws and regulations consider its impact
on the small business marketplace. The Leadership Council believes that
ignoring the issues that face small business could jeopardize our economy.
The evolution of our securities markets can be
characterized as having three distinctive phases of its development; creation,
regulation and deregulation.
The creation of our financial markets started with
the Buttonwood Agreement in May 1792 (named for a tree at 68 Wall Street under
which they traded) and ended with the crash of 1929. During this era we saw the
creation of The New York Stock Exchange, The Stock Ticker, Gold Rush of 1849,
Robber Barons and WWI.
The regulation phase of our financial markets
started with the crash of 1929 and ended May 1, 1975 ("May Day') when the
Securities and Exchange Commission (SEC) eliminated the fixed commissions
brokers were charging for all securities transactions. During this era we saw
the creation of the Securities and Exchange Commission (SEC), the adoption of
the Securities Exchange Act of 1934 (Exchange Act), Investment Company Act of
1940 (Investment Advisors Act), National Association of Securities Dealers
(NASD) and WWII. The deregulation phase of our financial markets started with
"May Day" 1975 and is ongoing.
Since 1975 we have seen the fall of Glass Steagall,
The National Securities Markets Improvement Act (NSMIA) signed into law, the
creation of the Internet, end of The Cold War, creation of the National Market
System, creation of the P.C. and the crash of 1987.
As we enter into the next phase of our securities
markets, globalization, many changes need to be made. First and foremost is the
modernization of our securities laws. In 1998, the most significant initiative
undertaken by the SEC since the 1933 "Securities Act" and the 1934
"Exchange Act" were signed into law. Dubbed 'The Aircraft Carrier",
due to its enormous size, would modernize the securities markets and overhaul
the 1933 and 1934 acts. Although, I doubt the "Aircraft Carrier"
would be passed into law in its current state, certain segments can be
implemented and some already have.
The dramatic expansion of our economy in the 1980's
and 1990's was that entrepreneurship flourished, due mainly to large firms
downsizing and reorganizing. Small business owners with some great new ideas
became the leaders of our "New Economy". Company's like Home Depot,
Intel, Microsoft, Oracle, Wal-Mart and Cisco Systems have created more economic
wealth then anytime in our history. What people forget to remember is that all
these companies were small businesses with a good idea. All of these companies
struggled during their inception with: capital, laws, regulations, hiring
qualified employees and employee benefits. They virtually clawed their way to
the top. Remember this was the era of big business and still is. Our goal is to
help small businesses lower these impediments and create an even greater
economic boom.
Now is the time for small businesses to be heard.
For the last 200 years congress has focused on big business. The laws and
regulations passed over the last two century's were result of the size, power,
capital and lobbying that big business had on our economy.
The results of small business on the economy speak
for themselves, according to the SBA office of Advocacy Findings:
small business with fewer than 500 workers employ
53% of the private non farm work force contribute 47% of all sales in the
country
responsible for 51 % of the private gross domestic
product
over the 1990-1995 period, small firms with fewer
than 500 employees created
76% of net new jobs
60% of new firms begin at home
number of business tax returns filed in the U.S. has
increased 73% since 1982 to
24.8 million in 1998 - more than 99°lo were filed by
firms defined as small under
size standards set by the SBA
about 21 million Americans -17% of all U.S.
non-agricultural workers - are
engaged in some entrepreneurial activity
micro-business with 1-4 employees generated 60.2% of
the net new jobs over
1994-1998
Small business now controls the power and size of
our economy and the 8BA'S numbers prove this. What they lack are capital and
lobbying, both of which are being addressed today.
The Leadership Council believes greater access to
the capital markets is needed to fund the growth engine of our economy, which
is small business. I am proposing ten (10) initiatives to help both small
public and private company's compete in our global economy. It is the job of
congress to recognize the issues relevant to small business and when creating
new laws and regulations to take into account the economic impact of these
actions.
The life blood of any business is capital. It gives
businesses the ability to grow and sustain economic or industry downturns.
Although, the Government has created an efficient market mechanism to raise
capital, it still needs tinkering from time to time. With the dramatic growth
of small business in our country we need a more efficient way to raise needed
capital. The current laws and regulations, which allow companies to raise
capital, were created in the early 1930's and have been periodically amended.
The problem with many of these laws is they were created with large company's
in mind, they do not take into account the cost benefit impact of a small
business abiding by these securities laws.
The U.S. capital markets are one of the most
efficient markets for raising capital, but they could be improved. Unlike our
global competitors, the U.S. markets rely on an informed retail investing
public. These investors are the lifeblood of our capital markets. These
investors come in various stages of a company's capital raising requirements.
It is the U.S. investor that funds the economic vitality of our great nation.
The SEC segregates the U.S. investor into two classes, accredited and
non-accredited. The standards set by the Securities and Exchange Commission
(SEC) for accredited investor (high net worth) are; liquid assets of at least
$1 million, or an annual income of $200,000 for individuals, $300,000 for
couples. By this definition, there are some five million accredited investors
in the United States. Of the 51 million Americans that own individual stocks
(as opposed to owning shares in mutual funds) 46 million would be classified as
non-accredited.
All company's at one time or another were classified
as small businesses. All company's need capital to implement their business
plans. How company's raise this capital and at what stage of their development,
dictate the type of investor they can use and the cost of that capital.
In 1982 the government created Rule 504 'he Seed
Capital Exemption" for small businesses. Its intent was to create a tool
for small company's both public and private to raise equity without huge costs
and minimum government regulation. As Rule 504 proliferated up thru the
mid-1990's, fraud crept into this form of offering. In 1998 the SEC enforcement
arm trying to eliminate a scheme known as "Pump and Dump" amended
Rule 504 to eliminate this abuse. When the SEC amended Rule 504 and the NASD
amended its listing requirements, it quite possibly may have eliminated a whole
generation of future S&P 500 components. By trying to eliminate the fraud
of a few it threw the baby out with the bath water. The NASD delisted over 3000
companies off the bulletin board, over 50% of its components. Whether Rule 504
could be amended again might be a moot point. The SEC and the press have
created such a negative stigma, relating Rule 504 to fraud, that it might never
be used again. Instead, my proposal would be to create a new Rule 509 offering
exemption. It incorporates all the positives in Rule 504, 505 and 506
exemptions with the modernization of our financial markets and actually
increases investor protection issues.
Highlights of a new Rule 509 would include:
link Rule 509 with the qualified small business
stock exemption under tax code 1202 and 1045 issuer must maintain a website
with current news & financials can be offered thru advertising, intemet and
mail using a similar NASAA model investor exemption approach offered to both
public & private companies maximum offering 12 months $10 million - minimum
offering $2 million audited financials yearly (private) audited balance sheets
quarterly (private) publicly traded company's on national exchange would comply
with reporting guidelines must use a NASD member underwriter maximum underwriter
compensation is 15% must escrow proceeds until minimum contingency is met
minimum revenue, assets etc. to use the exemption used for company's below $50
million in assets term sheet used for all investors prospectus/memorandum
delivery required electronic annual meetings road shows on line can use an
unlimited number of accredited investors, up to 35 non-accredited with
financial sophistication or pre-existing relationship or unlimited number of
semi accredited investor - net worth of $500,000 or annual income of $100,000
per natural entity or $150,000 married and can invest up to $25,000 with the
issuer every 12 months but can not exceed 10% of their net worth per year.
minimum hold of six (6) months before they can be registered if using a
convertible debenture or preferred issue cannot use if there is not a floor on
the convertible price and it can not exceed 20% or more dilution of the shares
outstanding unless any offering which dilutes the outstanding stock by more
than 20% needs shareholder approval
The Leadership Council believes an efficient capital
instrument can be created on existing laws or can be amended to give small
businesses cost effective capital with the public adequately protected.
Investors whose "short" stocks are
despised by many company's because they profit from a company's misfortune and
plunging market capitalization. Shorting a stock means borrowing shares to
sell, then "covering" the loan by buying the company's stock on the
open market.
Illegal short selling occurs in three categories.
First, where investors and broker-dealers heavily
invested in a short position of an issuer, will disseminate false, negative
information to drive the stock price lower, then covering their position.
Short-sellers can use the news media or a more cost effective approach, the
Internet.
Second, when short sellers ambitions concern a
hostile takeover it will grossly exaggerate or falsely spread negative
information to drive down the price of the target company. This allows the
takeover company to accumulate cheap shares.
Third, when "toxic convertible" investors
short shares to drive down the conversion price of their note. By driving the
share price down before the conversion date occurs, the investor receives more
shares of common stock than if the market had been allowed to trade freely.
These investors are in effect hedging their position.
It is "naked" shorts that the SEC should
focus on. A "naked" short is selling a stock short without ensuring
that the stock can be borrowed or otherwise provided for by settlement date,
also known as an affirmative determination. The NASD prohibits
"naked" short sales. In order to short a stock, your broker-dealer
needs to locate stock before they can loan it to you. If they can't find any
stock to loan, you can't short it. It sounds good in theory, but when a company
has enormous short interest, sometimes the amount of shorts outnumbers the
shares on the publicly traded float.
How can this be- The reason is "naked"
short selling. Someone is shorting the stock without first locating it.
Market-makers and foreign institutions are usually the cause of this situation.
I have listed some possible solutions to these abuses: same "uptick"
rules should apply to all stock exchanges (bulletin board, small cap) as a
requirement to make a short sale broker-dealers should be required to meet the
same coverage requirements for "naked" shorts as applied to investors
and 100% haircut on such shorts should be enforced against violations a mechanism
needs to be implemented to track short selling shorting of bulletin board,
NASDAQ small cap and NMS stocks below certain price ranges should be prohibited
shorting of all stock within ten (10) business days after effectiveness of an I
PO should be prohibited the identity or organizations holding 5% or more of the
outstanding shares or 10% of the public or float, of an issuer would be
required to file a new 13S with the SEC. Those that have beneficial ownership
must file a 13-D, why not make those holding substantial short positions report
also. once a broker "locates" stock he can not use it again, ex.,
Banks must maintain certain reserve requirements, set thresholds for the
broker-dealers.
Generally, short sellers make an invaluable
contribution to the market, by stabilizing the market in extreme over-bought
and over-sold situations. It is when fraud i5 the short sellers main ambition,
usually involving small cap securities, that damage our financial markets.
The SEC and NASD haven't taken the necessary steps to
correct this situation. There are now cases where companies are contacting
their shareholders to cell their brokers and have their shares taken out of
street name so the broker-dealer can's lend them to the short sellers. There
are even cases of shareholders banding together to fend off the short sellers.
Having shareholder's band together and companies
encouraging their shareholder's to request their stock certificates, can not be
good for our capital markets. The abuses occur most of the time, in the small
cap markets where small businesses go for their capital. If the public loses
faith in these markets, the ability to raise much needed capital for small
business will be jeopardized.
A company’s stock price should have no bearing on
listing requirement. When a company’s stock price approaches or drops below
minimum listing requirements it actually fosters fraud and unethical practices.
By imposing an artificial guideline in a free market mechanism, it forces
management of public companies to take swift dramatic steps to correct the
situation. If a companies stock price is nearing or drops below its listing
requirements it is usually because of market conditions, economic conditions,
industry conditions, or failure of its business model, of which three of them
are out of management's control.
A company’s management has limited options to keep
itself from being de-listed. It could create artificial demand by issuing press
releases, hiring promoters or reverse split its stock. All of these efforts are
usually offset or exceeded by the short-sellers.
Once a company is de-listed the ability to raise
capital becomes virtually impossible. If a company is successful raising
capital at this point, the costs of this capital are usually I enormous. The
reason is if a company is de-listed its volume tends to decrease because i many
institutions and market makers will participate in national exchange listed
securities only.
The NASD, SEC and State Regulators have numerous
laws and regulations already approved to deal with the SEC's main concern about
low-priced securities (k Stocks"). All the exchanges cant' minimum listing
requirements, of which stogy one component used for continuation. All exchanges
have provisions for min own as "Penny ~k price is only #mum revenue,
earnings, assets, shareholders, market capitalization, etc., or combinations
off these factors. These are the provisions management should focus on, not
stock price. Common stock market wisdom says, "Implement your business
plan a price will take care of itself'.
"Toxic Convertibles" or another well known
name "Death Spiral Convertibles" have exploded over the last five (5)
years. In 1995, a total of thirty-six (36) "toxic convertibles" raised
$274 million, according to private equity tracker direct placement.com. In
2000, 220 toxic convertibles were completed, accounting for $3.2 billion of the
$18.3 overall (PIPE) industry. Private Investment in Public Equity (PIPE) deals
have become a major source of capital for public companies. PIPE deals have a
place in our market, but it is' their offspring the "toxic
convertible's" that need to be regulated. In simple terms, a "toxic
convertible" is a private placement that enables the investors to convert
their securities at a discount to the current market price, usually with no
floor or as to how low the conversion can go.
It is the long-term common stock investor that gets
burned by these PIPE deals. A study done by Pierre Hillion, showed an investor
who buys the common stock of an issuer loses, on average, 34% of his investment
one year after a "toxic convertible" is issued. The study done from
1995-1998, is remarkable because their sample coincides with one of the
strongest bull markets in history. In 2000, there were 220 "toxic
convertibles" done, only five (5) were at a higher price then before the
deal.
It is obvious the common stock investor is getting
burned by these convertibles. The State of Wisconsin Investment Board has
threatened to sue any of its portfolio companies that get involved with (PIPE)
transactions.
Possible Remedies: a floorless convertible investor
cannot hedge its position, short its position require convertible holders to
file a new 13S filing, if the conversion is greater than 5% of the outstanding
shares or 10% of the float. Eliminate completely require floors eliminate
variable or rest provisions
Out of the top 10 funds that invest in (PIPE)
transactions, the number one fund over the last 12 months returned a whopping +599.88%
and the number 10 fund returned +185.72%.
If the SEC can't find a way to enforce these
convertibles, my advise to investors, "Don't invest in the company, invest
with the funds." A 599% return in a year isn't too shabby.
The evolution of technology has expanded rapidly
into our financial markets. Moore's Law (computer processing speeds will double
every eighteen (18) months) has crept into the financial markets, but has
negative impact on investors. Rule 144 relates to the period an investor must
hold onto a security before it can be sold. Current laws require a minimum of
one (1) year for non-affiliates of the company and two (2) years for
affiliates. Roughly 40% of the S&P 500 is made up of technology companies.
The problem is, technology changes so rapidly that holders of stock in these
hi-tech issuers become obsolete before they can sell them. By lowering the
holding periods from one (1) year to six (6) months for non-affiliates and two
(2) year to one (1) year for affiliates, we will give the investor ample
opportunity to exit his investment. This will cause both positive and negative
consequences.
On the positive side, the lock-in effect of all the
private placements done to date will create increased government tax receipts
at ordinary income tax rates not at capital gains tax rates. Although being
taxed at higher rates might be viewed as a negative, it is better than losing
your entire investment and using it for tax losses. Another benefit would be
the trillions of dollars that could be used to re-invest in new ventures.
Another benefit is the cost.
Reasons cited by small employers for not offering a
retirement plan-Employees prefer wages and/or other benefits (19 percent);
revenue is too uncertain to commit to sponsoring a retirement plan (18
percent); a large portion of workers are seasonal, part time, or high turnover
(15 percent); it costs too much to set up and administer (12 percent); required
company contributions are too expensive (10 percent); the business is too new
(6 percent); and too many government regulations (4 percent). Nonsponsors' lack
of familiarity with different retirement plans-Nonsponsors may be unaware of
all the plan options available to them as small businesses. Many report that
they have "never heard" of the following plan types: simplified
employee pensions (SEP) (52 percent); traditional pension or defined benefit
plans (capital for these issuers would be reduced dramatically because the
investor could become liquid at a faster rate. The shorter the holding period,
the lower the discount.
On the negative side, this greater liquidity could
induce fraud and issuers would have a greater amount of free trading stock
hitting the markets.
SMALL BUSINESS IRA (SBIRA)
According to the Employee Benefit Research Institute
(EBRI), less than one-fourth of workers at businesses employing fewer than 100
workers participate in a retirement plan. According to the most recent data
available from the US Department of Labor, 79% of fulltime employees in medium
and large size firms are covered by an employment-based retirement plan,
compared with 46% in small firms.
According to the 2001 Small Employer Retirement
Survey (SERS) sponsored by the
(EBRI):
percent); savings incentive match plan for employees
(SIMPLE) plans, which were created by Congress specifically for small employers
(34 percent); deferred profit sharing plans (23 percent); and 401 (k) plans (2
percent). Motivators cited to sponsor a retirement plan-An increase in the
business' profits (44 percent of nonsponsors); a plan with low administrative
costs that required no employer contributions (35 percent); business tax
credits for starting a plan (23 percent); a plan that could be tailored to the
unique needs of their business (23 percent); a plan with reduced administrative
requirements (18 percent); availability of easy-to-understand information (19
percent); allowing key executives to accumulate more in retirement plan (16
percent); demand from employees (15 percent); repeal of top-heavy rules (10
percent); a plan that could be set up and administered completely over the
Internet (7 percent); and lengthening of vesting requirements (7 percent).
What is interesting about this study, The Government
can address certain issues and modify or create new plans to deal with small
business owners concerns.
Certain issues that small employers cite for not
offering a plan, cannot be addressed by congress such as: employees prefer
wages (19°/a), workers are seasonal/part-time (15%) and the business is too new
(6%). If you add these up (40%) of small business owners you will never get to
sponsor a plan.
Committing to a retirement plan (18%), costs to
administer (12%) required contributions (10%) and Government regulations (4%),
this amounts to (44%) of small business owners concerns for not offering a
plan. Congress could help implement changes to help with these issues.
Lack of familiarity with different retirement plan
options can be accomplished with more education.
All of the motivators Congress can address.
Now that we know why small business owners do not
offer a plan, what can we do-
401(k) is a perfect instrument for small business if
the costs, administration and top heavy requirements were lowered or
eliminated.
SEP/SIMPLE/IRA are perfect instruments for small
business if the requirement for mandatory contributions and top heavy
requirements were eliminated.
My proposal, The Small Business IRA, (SBIRA) takes
the best benefits of 401(k)'s, SEP's, SIMPLE's and IRA's and combines them into
a simple, cost effective instrument for small business owners.
(SBIRA) Highlights: no mandatory contributions, like
the 401 (k) but can offer voluntary matching contributions a simplified tax
form, example form 5500 eliminate top heavy restrictions offers up to $10,000
per year for all owners and employees ease of use, little education needed to
administer the plan I am sure congress can draft a retirement vehicle that
small business can embrace.
SMALL BUSINESS HEALTH INSURANCE PROGRAM (SBHIP)
The Health Insurance Association of America (HIAA)
has developed a package of proposals that are intended to address the growing
number of Americans who lack health coverage. Employee benefits are a small
business owners biggest expense. Lack of healthcare coverage for its employees,
puts the employer as a major disadvantage in hiring from the labor pool roughly
70% of the small business owners do not offer healthcare benefits to their
employees. Cost is really the only benefactor. I support three parts of (HIAA)
proposal:
Small employer tax credit for health insurance
premiums 40% credit for employers with fewer than 10 employees 25% credit for
employers with 10-25 employees 15% credit for employers with 26-50 employees
Allow employee contributions for health insurance to be excluded from taxable
income (even if not made through a section 125 cafeteria plan). Allow
individuals to deduct the cost of health insurance premiums (including allowing
the self-employed to fully deduct the cost of health insurance premiums immediately)
(HIAA) Estimates: About 71 million people would be eligible for the tax credit,
either through their employer or the employer of their family head, 20 million
of whom are currently uninsured. We estimate that as a result of this credit
between 2.6 and 4.1 million uninsured will gain coverage as a result of the tax
subsidy at a cost in revenue expenditures of between $23.8 and $29.3 billion
annually. Exclusions from taxable income for employee contributions to employer
coverage. About 750,000 and 1.2 million individuals would gain coverage as a
result of this proposal, at an annual cost in revenue expenditures of between
$6.4 and $7.4 billion.
Deductibility of premiums for individual purchasers
including the self-employed would cover between 1.5 and 3.5 million individuals
could gain coverage through the individual market. Costs to the Federal
government would be between $7.8 and $8.7 billion in lost income tax annually.
There are 42 million Americans that are uninsured.
Although, the proposals I listed would only eliminate 4.8 - 8.8 million
uninsured and cost $38.0 - $45.4 billion to the government, it would help small
business owners become more competitive in the labor pool.
QUALIFIED SMALL BUSINESS STOCK (QSBS)
(Internal Revenue Code 1202 and 1045)
Small Business Capital Formation received a massive
windfall when the Revenue Reconciliation Act of 1993 was passed. The act gives
limited exclusion for non-corporate taxpayers for 50% of any gain from the sale
of "Qualified Small Business Stock" held for more than five (5)
years.
In 1993 the maximum federal income tax applicable to
capital gains was 28%, so a 50% reduction lowered it to 14%. When congress
passed the Taxpayer Relief Act of 1997 and lowered the Federal Tax Rate from
28% to 20% it did not include a reduction in qualified small business stock, so
it currently stands at 14%.
My proposal is to first lower the five year rate
down to 10%, where it should have gone after the Taxpayer Relief Act of 1997
was passed. Second, if the taxpayer continues to roll the gains into other
qualified small business issuers at lower capital gains rates. I propose for
every year after the initial five year holding period that the tax rate drops 1
% per year for ten (10) years. After ten (10) more years in the program the
taxpayers capital gains rate would be zero on any gains rolled over for fifteen
(15) consecutive years. My rationale is simple risk versus reward. Every time
the taxpayer rolls into another qualified small business issuer, the odds of
success diminish rapidly. Venture capitalists are successful two (2) out of
every ten (10) investments are. The better V.C.'s might average three (3)
successes out ten (10). The taxpayer has only a 20% chance of success on his
first investment based on professional V.C. numbers. Odds are the taxpayer will
have even lower odds of success. Reason, a professional venture capitalist
spends 300 hours per investment idea in due diligence. I doubt the average
accredited investor is spending this much time per investment. The laws of
diminishing returns are against the taxpayer, but for their risk we should
reward them with lower capital gains rates.
Third, (QSBS) should apply to all companies not just
certain industry's.
Fourth, get rid of C corporation only clause and
open it up to sub-chapter S corporations, limited liability corporations and
partnerships.
Fifth, eliminate AMT Tax provisions.
Sixth, increase roll-over period to 180 days from
the current 60 days.
Seventh, eliminate the maximum gain provision
completely.
Although, this is one of small businesses best
capital formation tools to attract investor, nobody can use it in it's present
form. According to the 2001 budget, only $40 million in tax expenditures were
declared. Clear evidence, this is a tax break nobody can use.
"To Spend or Save" that is the question.
Under our current tax code, we reward the consumer who takes the money they
earn and spends it. If they spend instead of save their wages they are rewarded
with lower taxes. On average, the consumer may pay 5% sales tax to buy a new
T.V. but if they invests it into General Electric, the manufacturer of the
T.V., and sells it for a capital gain, the investor gets taxed at 20%. If the
investor sells it under one (1) year they are taxed at their ordinary tax rate,
which could be as high as 39.6%. To spend (5% taxation) or save (39.6%
taxation) no wonder the household savings rate (percent of disposable income)
for our country is lower than most developed nations, averaging below 4% for
the last decade.
No one has yet to convince me that a capital gains
tax benefits our economy. In fact, I have never read any article, seen any
research or heard anyone say capital gains tax benefits our economy. Why-
Because it doesn't. If you do believe that capital gains tax benefits the
economy then what you are saying is that the 20% tax the investor is getting
penalized for being right would be better spent by the U.S. Government, not the
investor.
Economic growth depends on quantities of capital and
labor and the productivity of these factors. Economic growth cannot occur
unless productivity improves, quantities of capital and labor increases or
both. Investment capital is critical for the economy. High capital gains tax
rates lower the return on investment, thus increasing the cost of capital and
depressing overall investment in the economy. Consequentially, a capital gains
tax reduction would lower the cost of capital and stimulate investment.
Increasing capital formation would be felt throughout the economy in the form
of increased jobs, better standards of living and higher wages.
Since the end of The Cold War, which lasted some 45
years, the U.S. has been reaping the rewards of victory. New global markets in
which to sell our goods and services.
it is not a coincidence that our ten (10) year bull
market traces back to the fall of the Berlin Wall. America's new enemy is
global competitiveness for its goods and services. The U.S. Capital gains rate
exceeds that of any industrialized nation except the U.K. and Australia,
however these nations index for inflation. Now the U.S. must compete globally
for capital. Higher capital gains tax rates puts U.S. industry at a competitive
disadvantage for capital. Almost every industrialized nation experiences higher
savings, investment and productivity growth rates compared with the United
States. We need to eliminate or reduce our capital gains tax rate to stay
competitive in the new global economy.
I think Federal Reserve Chairman Alan Greenspan said
it best in his testimony before the U.S. Senate Banking Committee on February
25, 1997: 'The point I made at the budget committee was that if the capital
gains tax was eliminated, that we would presumably over time see increased
economic growth which would raise revenues for the personal and corporate taxes
as well as the other taxes we have. The critical issue about the capital gains
tax is not its revenue-raising capacity. I think it is a very poor tax for that
purpose. Indeed its major impact is to impede entrepreneurial activity and
capital formation. While all, taxes impede economic growth to one extent or
another, the capital gains tax is at the far end of the scale. I argue that the
appropriate capital gains tax rate was zero.
How do we help small business capital formation-
Eliminate or reduce the capital gains tax. Here are some reform initiatives:
Eliminate the capital gains tax altogether. Many of
our global competitors have no capital gains tax.
Index for inflation, if we can't lower the capital
gains tax rate, at least we could index it for inflation. We index every other
government program to inflation.
Capital Gains Tax
ordinary income tax rate
Eliminate capital gains taxes for those securities
that have a market capitalization below $250 million dollars. A bill introduced
in the House of Representative Jim Greenwood would accomplish much of this.
Reduce capital gains tax - any reduction would benefit small business. Two
capital gain tax reduction proposals have already been submitted, S.66, a broadbased
capital gains proposal introduced by Senators Hatch, Lieberman, Grassley and
Breaux, which provides for a 50% exclusion for individuals and a 25% corporate
capital gains tax rate and H.R. 14, introduced by Representatives Drier, Hall,
McCarthy, English and Moran which provide for a 14% marginal rate for
individuals and 28% rate for corporations among other provisions would help
small business capital formation. Rollovers - Have a program similar to the
housing rollover where if you hold the asset a predetermined number of years,
say 5 years, you can continue to rollover the capital into another investment
without incurring capital gains taxes until such time you decide to cash out,
as long as you reinvest the assets within 120 days. $500,000 lifetime capital
gains credit - Have a program similar to the Housing Program, where you get up
to $500,000 in capital gains excluded from tax during the lifetime of an
individual. It wouldn't cover property, collectibles etc., but it would include
stocks, bonds, mutual funds etc. Holding period incentives - A program where
the longer you hold an asset the lower the capital gains.
Example: Holding
Period
0 - 1 year
20% capital gains tax
15% " "
10%
5%
0%
"
1 - 2 years
2 - 3 years
3 - 4 years
4 - 5 years
5 + years
These are only a few ways to reduce the tax burden
on the money we have already been taxed on.
GUARANTEED COLLEGE EDUCATION PROGRAM (GCEP)
To increase productivity and stimulate economic
activity, businesses need a qualified educated work force. Due mainly to the
lack of capital, small business is at a severe disadvantage when it needs to
hire employees. Large companies have the necessary capital and employee
benefits to hire the best educated from the labor pool. Those employees not
taken by the large employers are generally what small businesses have to work
with. What is disturbing is that large companies cannot even find enough
qualified employees to hire. A case in point, the uproar in HB-1 visas. The
visas allow foreign workers to fill job vacancies in our country. The number of
visas allotted for 2000 was 115,000 and we reached this number in six (6)
months. The high-tech industry is scrambling to get congress to raise the
number of visas north of 200,000 annually to fill their employment needs. If
Silicon Valley gets its way, that is 200,000 jobs lost by U.S. citizens a year.
The objective of the guaranteed college education
program (GCEP) is to provide college education to every citizen bom in the U.S.
starting January 1, 2002. The national interests of the USA both economically
and socially are served by a better educated citizenry and workforce. Post
secondary educational needs will increase growth in importance as dramatic
technological changes occur. The U.S. workforce will be at a competitive
disadvantage in the world without continuing education and enhanced
sophistication in the workplace. Additionally, social relations in the U.S.
will suffer as the disparity on wealth becomes increasingly proportional to
those with advanced knowledge that is not available to all Americans.
The theory behind GCEP is post secondary education
must be made possible for every American. GCEP will provide targeted money to
students who are willing and able to continue their education. The program will
enable children to pay for their own educational costs respective of family or
social circumstances. If a child wants to attend college, that child will have
means to attend.
GCEP starts when a child is born in the U.S. and
receives a social security number. The Federal Government will then purchase an
average of $10,000 worth of U.S. Government Treasury Strips in the child's name
and social security number. The funds will be put into an escrow account and
will mature around the child's 18d' birthday. Upon the child's receipt of a
High School Diploma or equivalent (GED) and accepted into an accredited
institution, the child will receive a swipe card from the Social Security
Administration to be used for tuition, books, fees and other pertinent
educational costs directly from their account. The child will have until their
35°' birthday to use the entire amount of their funds for educational pursuits
or the remaining money will revert to the Social Security Trust Fund or pay
down the National Debt. The $10,000 initial deposit will mature to roughly
$30,000. According to preliminary research regarding cost of state colleges in
the year 2020, $30,000 is projected to provide four (4) years of state college
education.
Intended Outcomes:
Pell Grants est. 2001
Student Loans est. 2001
Other Programs est. 2001
Funding:
a large influx of students into colleges
post-secondary education would become a growth industry increase in High School
diplomas with each child knowing that money will be available to go to college
a possible way to break some cycles of poverty through educational advancement
could use GCEP money for advanced degrees; such as masters degree, a different
undergraduate, technical degree or a doctoral program consolidation of multiple
post secondary education programs thus saving overall administrative costs
through economies of scale - example: Pell grants, Perkins loans, etc. starting
in the year 2020, all higher educational programs could be eliminated used in
conjunction with existing scholarship programs such as Hope. If a child loses
their scholarship could remain in school using GCEP.
Initial outlay of $40 billion a year. 4.0 million
children bom in the U.S. every year multiplied by an average of $10,000. As of
1996, 81.5% of dependent 18-24 year olds had graduated High School and 58.9%
had at least some college experience, according to higher education analysts at
The University of Iowa. Using 1996 data, $40 billion x 81.5% x 58.9% _ $19.2
billion actual cost of program in 1996 dollars assuming they attend all four
years of college.
$9.1
49.0
+ 3.4
Total Federal Program est. 2001
GCEP Program
Billion savings to government per year starting in
2020
$61.5 - 19.2
$42.3
could take $500 of the child tax credit roughly $20
billion/year to pay for program defaults on student loans are running at $25
billion/year, which is costing the taxpayer. There are numerous open issues
such as: The Social Security Administration's infrastructure, re-engineering
and support able to administer the GCEP, whether the government can even do
this, whether the funding should be wholly financed, jointly financed through a
partnership with private industry or as a sponsored private corporation.
Using 1991 data as an example of wage differences;
college graduates earned $23.42/hr., some college $15.46/hr., High School
graduates $13.28/hr. and High School drop-outs $9.79/hr., it is apparent that
even a little additional education results in much higher standard of living,
increased federal tax receipts and a better labor pool. In conclusion, changing
a child's mindset at a very early age (I can go to college) might help break
some generations of family socio-economic circles prevalent in the lower income
groups. The elimination of dozens of federal programs and cost savings to the
government. Basically what the government is doing is expanding K-12 to K-16. I
think our nation's greatest resource, human capital, is worth $40 billion a
year.
The Leadership Council recommends establishing a
small business task force to evaluate proposed, existing and pending laws and
regulations that affect small business.
The Leadership Council is willing to take an active role in establishing this task force and will work with regulators, market practitioners, issuers and investors to make recommendations that address the interests of the small business community.