[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
PROMOTING INTERNET ENTREPRENEURSHIP: SHOULD THE GOVERNMENT TAKE ANY
ACTION?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON REGULATORY REFORM
AND PAPERWORK REDUCTION
of the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC, APRIL 3, 2001
__________
Serial No. 107-3
__________
Printed for the use of the Committee on Small Business
U.S. GOVERNMENT PRINTING OFFICE
72-118 WASHINGTON : 2001
COMMITTEE ON SMALL BUSINESS
DONALD MANZULLO, Illinois, Chairman
LARRY COMBEST, Texas NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado JUANITA MILLENDER-McDONALD,
ROSCOE G. BARTLETT, Maryland California
FRANK A. LoBIONDO, New Jersey DANNY K. DAVIS, Illinois
SUE W. KELLY, New York WILLIAM PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio DONNA M. CHRISTIAN-CHRISTENSEN,
PHIL ENGLISH, Pennsylvania Virgin Islands
PATRICK J. TOOMEY, Pennsylvania ROBERT A. BRADY, Pennsylvania
JIM DeMINT, South Carolina TOM UDALL, New Mexico
JOHN THUNE, South Dakota STEPHANIE TUBBS JONES, Ohio
MIKE PENCE, Indiana CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey DAVID D. PHELPS, Illinois
DARRELL E. ISSA, California GRACE F. NAPOLITANO, California
SAM GRAVES, Missouri BRIAN BAIRD, Washington
EDWARD L. SCHROCK, Virginia MARK UDALL, Colorado
FELIX J. GRUCCI, Jr., New York JAMES P. LANGEVIN, Rhode Island
TODD W. AKIN, Missouri MIKE ROSS, Arizona
SHELLY MORRE CAPITO, West Virginia BRAD CARSON, Oklahoma
ANIBAL ACEVEDO-VILA, Puerto Rico
Phil Eskeland, Deputy Staff Director
Michael Day, Minority Staff Director
------
SUBCOMMITTEE ON REGULATORY REFORM AND OVERSIGHT
MIKE PENCE, Indiana, Chairman
LARRY COMBEST, Texas ROBERT BRADY, Pennsylvania
SUE KELLY, New York BILL PASCRELL, Jr., New Jersey
SAM GRAVES, Missouri CHARLES GONZALEZ, Texas
ROSCOE BARTLETT, Maryland DAVID D. PHELPS, Illinois
TODD AKIN, Missouri JAMES P. LANGEVIN, Rhode Island
PAT TOOMEY, Pennsylvania ANIBAL ACEVEDO-VILA, Puerto Rico
Meredith Matty, Professional Staff Member
C O N T E N T S
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Page
Hearing held on October 19, 1999................................. 1
WITNESSES
Clark, Joseph A., CEO, LocalWeb4U................................ 3
Mellinger, Doug, Chairman, National Commission on
Entrepreneurship............................................... 5
Engel, Josh, General Counsel, Bigstep.com........................ 7
Hughs, Ragan, Co-Owner, Capital Baby Rental...................... 8
Draluck, Jonathan D., Vice President Business Affairs & General
Counsel, iBasis, Inc........................................... 10
McCord, Rob, President & CEO, Eastern Technology Council......... 12
APPENDIX
Opening statements:
Pence, Hon. Mike............................................. 22
Brady, Hon. Robert........................................... 25
Prepared statements:
Clark, Joseph A.............................................. 26
Mellinger, Doug.............................................. 31
Engel, Josh.................................................. 40
Hughs, Reagan................................................ 44
Draluck, Jonathan D.......................................... 50
McCord, Rob.................................................. 56
PROMOTING INTERNET ENTREPRENEURSHIP: SHOULD THE GOVERNMENT TAKE ANY
ACTION?
----------
TUESDAY, APRIL 3, 2001.
House of Representatives,
Subcommittee on Regulatory Reform and
Oversight,
Committee on Small Business,
Washington, DC.
The subcommittee met, pursuant to call, 2:11 p.m. in Room
311 Cannon House Office Building, Hon. Mike Pence, [chairman of
the subcommittee] presiding.
Chairman Pence. The hearing of the Subcommittee on
Regulatory Reform and Oversight of the Committee on Small
Business will come to order.
Our hearing today is about the meteoric rise of Internet-
based economy and whether current federal government policies
help or hinder small businesses that seek to utilize the
Internet as a business strategy. Today's hearing will be the
first in a series of hearings that this subcommittee will hold
to examine the impact of federal regulatory policies on the
ability of small businesses to deploy new technologies, develop
new markets and generate economic growth.
The expansion of commerce on the Internet is simply
staggering, with numbers that are difficult to comprehend.
Internet traffic in 1996, a mere five years ago, but in
Internet time almost a generation ago, was doubling every 100
days. Even analysts could not comprehend the growth in usage of
the Internet. For example, in 1998, one report estimated that
retail transactions on the Internet would reach 7 billion by
the year 2000. Most analysts now believe that the estimate was
reached in 1998. Just this past Christmas, retail sales of
goods on the Internet reached $8.7 billion and the Bureau of
the Census estimates that Internet business to consumer retail
transactions hit the $20 billion mark in 2000. The use of the
Internet by consumers to purchase goods pales in comparisons to
estimates of business to business transactions on the Internet.
Some analysts predict the value of global transactions on the
Internet will exceed $6 trillion.
The growth in commerce and use of the Internet demonstrates
that it is the new central business district, the new Main
Street, if you will, and the new shopping mall. And just as
small businesses play a vital role in the central business
districts, on our Main Streets and in the shopping malls, they
also play a key role in the development of commerce on the
Internet.
Rather than hire a real estate agent and construction
contractor to build a new store, Capital Baby Rentals decided
to expand on the new American Main Street and sought the help
of another business, Bigstep.com.
However, the Internet is not just the new American business
district. Digital convergence enables the Internet to be the
next newspaper, the next telephone network and cable system. In
my district, LocalWeb4U provides information that individuals
currently receive from their local newspapers, broadcast
stations and telephone directories. However, because of the
ubiquity of the Internet, LocalWeb4U can provide that
information not just for Anderson, Indiana but for communities
throughout the United States. But we also have iBasis, a
company that provides voice over Internet Protocol telephony.
In other words, it uses the Internet to provide telephone
service and, unlike the telephone company, its customers are
not limited by geographic location.
No one can doubt that an Internet-based economy provides
significant opportunities for new small businesses, as well as
new ways to expand existing small businesses. In fact, three of
the businesses testifying here today simply would not exist and
did not exist prior to 1995 without the ubiquitous availability
of the Internet and the desire of Americans to log on.
Before Congress takes further action to promote expansion
of commerce on the Internet or hinder its unbridled growth, it
behooves us to understand this new stream of commerce, the
problems they face and whether they currently perceive
government policies to help or hinder their operation and
growth.
The panelists here today will explain how businesses is
done on the Internet, how they as small businesses discovered
unserved or under served niches to expand their businesses and
how this new technology will continue to open new opportunities
for the pioneering small businesses. Finally, the panelists
will highlight any issues of concern about existing federal
policies or changes in federal policies that may help or hinder
their businesses. Congress will then have the information it
needs to rationally make decisions and ensure federal
legislative and regulatory policies are partners in helping
small businesses take advantage of this new stream of commerce
and not act as a dam to its potential.
Before turning to the ranking member, the distinguished
gentleman from Pennsylvania, I would like to take a few moments
to mention the superb work done by my predecessor, the
gentlewoman from New York, Sue Kelly, who chaired this
subcommittee in the last Congress. She demonstrated leadership
in this subcommittee in doing oversight of the regulatory
problems facing small businesses and she persevered in finally
getting the Truth in Regulating Act passed. Her understanding
of the regulatory problems faced by small businesses is second
to none in this Congress and, as the new chairman of this
subcommittee, I hope to follow in her footsteps.
The ranking member not being in attendance, we will
recognize our first speaker for the afternoon who is with a
company known as LocalWeb4U and his name is Joe Clark, who is
recognized for five minutes.
[Mr. Pence's statement may be found in appendix.]
STATEMENT OF JOSEPH CLARK, CHIEF EXECUTIVE OFFICER, LOCAL
WEB4U, ANDERSON, IN
Mr. Clark. Thank you, Mr. Chairman. It is a huge honor to
be able to be here and I greatly appreciate you extending us
that privilege. LocalWeb4U was founded on the belief that
people need to be heard and to be found, especially on the
Internet. LocalWeb4U was established to give individuals,
businesses, non-profit organizations the ability to state their
opinion, give dates for events, even brag about their
children's accomplishments within a local community.
The sad news is economies of scale have reduced local
content providers such as newspapers and radio stations for
two-thirds of America so that their voices cannot be heard, the
Internet having a virtually unlimited amount of space. It lets
you get out into every community of every size without the cost
of raw goods and capital expenditure matter.
LocalWeb4U was blessed to create a concept in November of
1999, the peak of the Internet days. It incorporated two days
before the largest Nasdaq record reporting in terms of the
market. We came to market in a wonderful time and were placed
to deal with this economy.
As a certified financial planner, I have looked at my
clients who often talk about their new 201(k) versus the 401(k)
and they literally feel that they have been cut in half. As a
result, LocalWeb4U has had the trials and tribulations and had
to tick through periods of time of slow capital infusion.
As all good businesses should, we have listened to the
market and we have been forced to go more from a conceptual
build up period of time to an immediate let-us-produce-net-
revenue type of company. We have changed with the times and I
am proud today to tell you that we are here intact and with a
strong vision.
There is much talk about the new economy versus the old
economy. And, in my opinion, I think you need to understand
that the whole world is really changing with new innovations
and new technologies.
There is no company that really has a stronghold, whether
they are an old company or a new company, on this marketplace.
Not Oldsmobile, not Sunbeam, not even Yahoo!. As an example,
there were 200 companies in 1920 that produced automobiles, 23
alone in Anderson, Indiana, my hometown. In 1930, we were down
to three, Studebaker barely holding on.
During this phase of the economy, the same one that we are
in today, there is a mighty shake-out and a race for
leadership. This change in corporate profitability and
survivability during these economic times forces us to address
the taxation of our business economy for one simple reason. The
largest barrier to entry for our business was not a failing
business model, it was not a mistake in assumptions, but it was
a lack of capital. The best way to get capital is to inspire
investment.
I believe it is imperative that we create a method so that
investors do not pay taxes on growth. As long as the money that
they have stays in the market for the development of companies,
whether they be new companies or old companies trying to re-
tool to stay alive in this great economy. We must give intra-
stage investors support in the investment process, not
obstacles that they need to overcome. And I realize to some of
the people in this room that a 20 percent tax does not seem
like a lot of money, but let me remind the committee that a 25
percent reduction in the stock market is titled as a crash.
Mr. Chairman, the only way for people to get money out of
one company and to invest in another company is to go through
their own little economic crash. I think people forget that
regardless of which party you represent, people are scared to
death of taxes. That is represented by the fact that 70 percent
of all money in qualified plans, in IRAs, stays in the plan
until age 70 and a half when the government forces them to pull
it out. People cannot bear the loss of their net worth on
paper. They cannot bear their own little economic crash.
I dare to wonder how many people would have left the money
in some of these high flying Internet stocks last year with
several hundred return in one year and not diversified if they
had not been trapped by the psychology of the tax code. If
people take money out of the market to spend on themselves, if
we must tax them, tax them then, but do not stop investors from
supporting companies that have the ability to do what it is
they need to do.
I think it would be much easier for Congress, it would be
much easier for American citizens, if our tax basis was taxed
only when all the money left the market. We would not have to
deal with the 3 billion shares trading every day and people
trying to determine what basis was and it would spur investment
based on the company's merits of that day. Do not punish
investors and make them stay with their original decision if
the market offers a better opportunity.
I do not feel it is the government's place to make sure my
business works and survives, but I do look at it this way: I
feel it is my best interests to protect my customers, the
people that provide my living and buy my product. Investors are
one of the IRS's best customers because even if they get it
wrong once or twice, they end up staying with it and truly
enhance government revenues.
Entrepreneurs live and die by the willingness of investors
to bet on their success. Do your best as legislators to
encourage investment, to encourage new innovation and to
encourage willing compliance to the tax code.
Thank you for this wonderful opportunity. May you be filled
with wisdom and God's inspiration to lead our country into the
best economic time in history.
Thank you.
[Mr. Clark's statement may be found in appendix.]
Chairman Pence. Thank you, Mr. Clark. An excellent
presentation.
The next witness to testify is Mr. Douglas Mellinger, who
is chairman of the National Commission on Entrepreneurship in
Washington, D.C.
Mr. Mellinger, you are recognized for five minutes.
STATEMENT OF DOUGLAS MELLINGER, CHAIRMAN, NATIONAL COMMISSION
ON ENTREPRENEURSHIP, WASHINGTON, DC
Mr. Mellinger. Thank you, Mr. Chairman. Thank you for
inviting me to testify today. As you said, I am chairman of the
National Commission on Entrepreneurship, an organization whose
charter is to help government policymakers at the federal,
state and local level better understand the needs and interests
of entrepreneurs and to elucidate a set of public policies that
support a strong entrepreneurial economy.
Over the past few years, we have brought together some of
America's top entrepreneurs as commissioners and have gone out
across the country to talk to thousands of entrepreneurs and
policymakers. We have learned from our research and interviews
the opportunities and issues that face entrepreneurs related to
infrastructure needs and policy implications. My testimony
today reflects some of the highlights of the work that we have
done.
While the media likes to write ``dotcom, dotgone,'' the
fact is that Internet technologies are revolutionizing how we
communicate and transact business. We will look back 20 years
from now and realize that we are just now beginning to see the
radical change that this technology will have on everybody's
lives, both personally and professionally.
Let me give a little bit of my background. I started my
first entrepreneurial activities in my early teens before I
knew there was such a word as entrepreneur. My first real
company was started in college at Syracuse University, which
was where I learned the meaning of the word entrepreneur and
realized how critical people such as myself were to the economy
and to the communities in which we operated.
When I was 25, I started my first technology firm, which I
had started with $12,000 in 1989, and built its sales to $85
million in 1998 with about 800 employees. When I started PRT,
the venture capital industry was tiny as compared to today.
Banks did not want to provide funding and the SBA was of little
use due to its focus on small business rather than on
entrepreneurship. I was creating a software services business
which had as its main assets intellectual capital ratherthan a
manufacturing or retail business with hard assets. We struggled with
financing and growth of the business for many years and were fortunate
six years later to attract venture capital to fuel our growth.
Today, I am a partner in Interactive Capital, which helps
early stage companies and Internet-enabled companies get
founded, funded and go through the issues of hiring management
teams and accelerating their sales. My two partners and I have
been involved with more than 40 companies in our careers and
have raised more than $400 million in investment capital to
fuel these companies. I live all the issues that you are
looking at today, including investment and regulatory
infrastructure, labor, globalization, and hope that through my
personal experiences and my commission I can give some insight.
Some entrepreneurs think that the government should just
get out of the way, but I think it is very naive and
reactionary since they often feel they are all alone with the
world on their shoulders. I believe that the government plays a
crucial role and can be a positive player or it can be a
hindrance, depending on the actions it takes.
I hope that you and your fellow policymakers take the time
to understand entrepreneurship, as well as small business, and
what the differences are. Before enacting legislation take a
moment to understand the impact on entrepreneurs and their
companies.
I will focus on a couple of the areas today. The first is
human capital. In my experiences are in talking to my
colleagues, I know that finding the right employee is the most
difficult task. For many Internet entrepreneurs, finding
talented engineers is an overriding concern. We also see that
finding strong management teams and entry level employees is
just as hard. Today, it is a little bit easier than it was
three to six months ago, but certainly my belief is that over
the next big of years we are going to have as strong an issue
in finding people as we have in the past.
There are couple of the areas that I think need to focus
on. The first and foremost is that we are not graduating enough
science and engineering graduates in the United States today.
The K-12 education system is certainly a problem. We need
computer literate employees with strong analytical abilities
and competencies in the three Rs. We also need employees who
understand the free enterprise system. More universities should
be offering entrepreneurship programs. And, most importantly,
from a technology standpoint, one of our limitations today is
getting the engineering talent and for that, we are looking
overseas more and more.
Investment capital is a second major issue. Today, the
venture capitalists, the large ones, have become very large and
there is a gap which I think needs to be addressed between the
angel capital at the small end and the large venture
capitalists.
Another area of focus is the communications infrastructure.
There is not enough broadband access across this country and
the costs are sometimes prohibitive.
Regulations, as we look at both H1B filings, business
formation, compliance, capital raising and others is a big
issue.
Intellectual property, being able to protect the ideas that
we have is critical.
And, finally, as we look at Internet taxation, the impact
of lifting the moratorium has to be studied.
Finally, a couple of specific recommendations that I have.
First, devise incentives that will encourage more students,
especially women and minorities, to major in science and
engineering. Secondly, explore changing our immigration system
to take into account the education and training of our
immigrants, rather than focusing primarily on family
relationships. And we should also be looking at the student
visas and allowing graduates to stay in. Finally, explore
options such as enhancing the effectiveness of Section 1202 of
the IRS code providing preferential capital gains treatment for
individual investments in emerging start-up companies, relaxing
the restrictions on the Investment Company Act to allow
formation of more professionally managed funds, and, finally,
allowing a small portion of 401(k) funds to be invested in
venture funds targeted to the capital gap.
Thank you very much.
[Mr. Mellinger's statement may be found in appendix.]
Chairman Pence. Thank you, Mr. Mellinger.
The chair now recognizes Mr. Joshua Engel, who is general
counsel for BigStep.Com and comes to us from San Francisco,
California.
STATEMENT OF JOSHUA ENGEL, GENERAL COUNSEL, BIGSTEP.COM, SAN
FRANCISCO, CA
Mr. Engel. Good afternoon. First of all, thank you very
much for inviting BigStep to testify today on behalf of our
customers. Our customers are small businesses from around the
country.
We at BigStep recognize, as I am sure all the members of
this committee do as well, that small businesses are a critical
piece of the business ecosystem. They are the nucleus of
virtually all corporate geneses. They fill local and
specialized places around the globe and often fill critical
gaps in rural communities through their focus on services. In
fact, this coveted role in our national fabric is recognized by
reputation. Fully 85 percent of all Americans recognize small
businesses as a positive influence on American life. We also
share that belief.
In July of 1998, BigStep was founded with a simple premise.
We wanted to help level the playing field for small businesses
using the Internet. We wanted to give them power and tools to
compete with the big boys on line: websites, e-mail, marketing
tools and e-commerce tools.
Today, nearly three years later, we are succeeding. With
over 300,000 members, BigStep is helping small businesses do on
line what they do best off line: build businesses based on
unique products and services, building meaningful, personal
relationships with customers and providing enhanced value.
While we are proud to serve the small businesses, we cannot
support them alone in their success. As the power of the
Internet and broadband access and universally acceptable e-
commerce becomes a reality, these businesses that fuel our
economy will need greater advocates.
There are two particular areas of concern where we believe
small businesses can benefit from your support. First, is
taxes. We have already heard mention of that day. By their very
nature, small businesses are challenged with juggling several
duties, making time their most precious commodity. The
complexity of small business taxation, particularly for home-
based businesses, is challenging enough. What we hear over and
over again from our 300,000 members is that on-line commerce
tax management is a huge challenge.
Just handling sales taxes today over the Internet is
extraordinarily complex. If the tax moratorium were lifted and
electronic commerce were conceptually opened and new taxation
at all levels of government, small businesses will spend an
enormous amount of time trying to figure out how much tax they
owe and to whom do they pay it.
This is time that would be much better spent running their
small businesses.
As you mentioned in your opening statement, access to
technology is also an incredibly important issue. Most analysts
agree that an internet presence and tools to communicate with
customers via the Internet are critical to business success.
One very interesting fact is this. The research firm IDC
has found that businesses without any kind of Internet presence
average--and this is small businesses up to 100--average 1.74
million in total revenue per year. That number increases to
2.07 million for small businesses with some kind of Internet
presence and that number jumps to 2.15 million per year for
small businesses with at least a home page. So I think the
message there is clear that the Internet can work for small
businesses.
Indeed, every member of Congress has both e-mail and a
website and nearly 100 percent of the Fortune 1000 have
websites and they have broadband access.
As recently as last month, the research firm IDB found that
over 20 million small businesses do not even have websites.
This disparity in access and deployment often has as much to do
with a lack of time and resources as it does to access to the
offering. However, access that is affected by regulatory
controls does have a real impact on small business
capabilities.
In particular, broadband access is a crucial hurdle for
small business success on line. As I mentioned earlier, time is
the most precious resource to a small business. Using
applications like BigStep, with transaction tools and other e-
business management services, these things become incredibly
valuable when used over broadband connections. With high speed
lines, small businesses can truly compete with the large
corporations who have had this access for years and continue to
provide over 50 percent of Americans their jobs.
Finally, small businesses need a friend. They do not have
organizations like the ITAA as a support system. If we are
indeed moving toward an economic slowdown, we need to show
small businesses that we understand their integral role in
today's economy. We need to help them flourish and not be
stifled by the perplexity involved with more taxation or lack
of access to technology.
Thank you very much.
[Mr. Engel's statement may be found in appendix.]
Chairman Pence. Thank you, Mr. Engel.
The chair recognizes Ragan Hughs, who is co-owner of
Capital Baby Rental in Falls Church, Virginia, for five
minutes.
STATEMENT OF RAGAN HUGHS, CO-OWNER, CAPITAL BABY RENTAL, FALLS
CHURCH, VA
Ms. Hughs. Thank you very much, Mr. Chairman. I would like
to express my gratitude for being invited to speak. I am not a
large company, I am actually a small business owner, so I am
speaking to you from the people would be most directly affected
by action of the committee.
Mr. Engel told you about the two areas of concern to the
small business market. As a small business owner doing business
both on and off the Internet, the issues of equal access to the
Internet and to new Internet technologies as well as the
moratorium on Internet taxation are extremely important to me
and my businesses.
As you said, I am a co-owner of Capital Baby Rental, which
is a baby equipment rental company meeting the needs of
business and leisure travelers to the Washington, D.C. area. My
experience with Capital Baby Rental demonstrates the importance
of equal access to the Internet and to new Internet technology.
The company itself is a brick and mortar business. We make
physical deliveries and pickups of our equipment at the
customer's location. However, the Internet is extremely
important to the success of our business. Approximately 80
percent of our customers come to us via our website. Since most
people making a trip use the Internet in some form or fashion
for research and planning, our Internet presence is absolutely
critical to us to reach international and domestic consumers
traveling to the D.C. area with small children before they
absolutely arrive to get them in that planning stage.
To use traditional methods of advertising to reach
potential customers would be absolutely outrageously expensive
and completely prohibitive. Using the Internet, however, we
have been able to expand our reach considerably for very little
cost. Using services like BigStep which are free to the
Internet consumer, it is amazing what you can do.
Having an informational website where a potential customer
can learn about Capital Baby Rentals, who we are, what we do,
what services we provide, what costs are going to be incurred,
has become a major part of our marketing plan. Without our
website, we would be limited to serving the needs of local
residents and last minute travelers and true success just would
not be possible.
I also operate ThePartyBug.com which I wholly own, which is
a party supplies company that is solely an Internet-based
business. ThePartyBug.com markets, promotes and sells all of
its products on line. The most important issue to us without
question is the issue of Internet taxation, the state
imposition and collection of sales and use taxes on e-commerce
transactions.
Currently, when an on-line sale takes place, we collect
sales tax when the items are being shipped to the state in
which we have a physical location. Therefore, we are taxed
exactly the same, no different, no more, no less, than a brick
and mortar store. If a small business owner were operating on
the Internet also had to collect and report sales tax for
several other states and localities, it would make it almost
impossible for them to do business. Should the moratorium be
lifted, the confusion that would ensue would be outrageous.
By nature, Internet transactions actually take place in
several different locations. For example, a web business'
physical location may be in D.C., but the site is hosted in
California, the traffic from that site is routed to several
different servers in several different states, the consumer is
located in Nebraska. Which state has the right to impose its
taxes? Are several or, even worse, all of these states, going
to be permitted to impose sales taxes on this one transaction?
If this is the case, e-commerce will soon become a thing of the
past. Merchants who either cannot or will not keep up with the
different regulations will close their Internet businesses.
Further, consumers who do not want to pay the excessive taxes
would most likely choose to shop only at brick and mortar
stores.
I feel that the current e-commerce taxation is much more
than sufficient.
The Internet has opened up several doors for up and coming
entrepreneurs like myself and as we move to the next phase of
the Internet age, I would like to hold onto the hope that the
World Wide Web will continue to make business easier, not more
complicated.
Thank you very much.
Chairman Pence. The chair also will recognize Jonathan
Draluck, who is Vice President for Legal Affairs of iBasis and
comes to us today from Burlington, Massachusetts, recognized
for five minutes. Thank you.
STATEMENT OF JONATHAN DRALUCK, VICE PRESIDENT FOR LEGAL
AFFAIRS, iBASIS, BURLINGTON, MA
Mr. Draluck. Thank you, Mr. Chairman, for the invitation to
address the issue that this subcommittee has correctly
identified as critical to the success of Internet-based
businesses, that is, an environment free from legal barriers.
My name is Jonathan Draluck. I represent iBasis. It is a
company that has succeeded in large part due to Congress'
resolve to keep businesses that provide Internet-based services
as free as possible from burdensome regulatory oversight.
Please allow me to share with you briefly what iBasis is
and what we hope to become. Our core business is wholesale
Internet telephone service. We carry the long haul portion of
international telephone calls over the public Internet. We
provide this service to over 100 telephone carriers around the
world, including nearly all of the big U.S. long distance
carriers that you are familiar with.
We began our operations in a basement in suburban Boston
three years ago. We now carry millions of ordinary phone
traffic minutes every day, using more than 426 Internet
telephony facilities in 46 countries. And, today, if you dial
an international long distance call using your regular long
distance carrier, the odds are up to one and three that for any
of 15 countries you may be trying to reach, including China and
Russia, that your call is being carried by iBasis.
Our global network operates using Internet protocols which,
like the Internet itself, are more efficient, versatile and
scalable than the transport offered by traditional networks.
Because of this, we are uniquely well suited to provide
innovative web-based voice applications over our network. For
instance, our Speech Solutions business based in Northern
Virginia developed speech-driven applications that are
available to anyone with a phone. Some of you may have already
used a speech-recognition application such as that employed by
major U.S. airlines. The service enables customers to dial in
to a number and using spoken command make a flight reservation
without ever using a touch tone.
Think of speaking into your mobile phone anywhere in the
world and having the answer you seek spoken back to you, but
never speaking to a person. That is the potential of the iBasis
network.
The Internet's open protocols offer a lot more. We take for
granted the use of the Internet. We all log on and surf, but if
you think about it, there are only 300 million PCs in the
world, that as compared with 2 billion telephones. So the idea
is to leverage the phone and leverage the power of the
Internet. For instance, unified communications which we offer
lets you hear and respond with your voice to your e-mail or
your voice mail from any phone. We also see a world in which
ordinary Internet content is accessible over the phone with
what we call Global Spoken Web. It is a worldwide
infrastructure of interconnected voice enabled websites that
respond to spoken requests.
Finally, we offer our global IP voice infrastructure as an
incubator for other small developers for new applications we
can barely imagine now. In this way, we hope to bridge the
digital divide by becoming an Internet access device and
developing applications for it that are navigated by human
voice.
A key driver in these kinds of applications is
deregulation. On the U.S. front, therefore, iBasis urges the
U.S. Government to maintain its current hands-off policy to
regulating the Internet. In other words, let us keep the status
quo and I will tell you the three issues that we are following.
First is international settlement regimes, which
historically have maintained a balance of payments for
terminating international telephone traffic between any two
countries. The international settlement regime is rapidly
becoming a relic of the monopoly era on competitive routes,
though some countries that continue to have monopolies are
persisting in imposing some form of settlements on
international Internet traffic.
So iBasis encourages Congress to send a signal that it
opposes such efforts by some foreign regulators. The absence of
such charges has resulted in dramatic increase in international
long distance traffic and a commensurate decrease in rates and
has benefitted consumers worldwide.
Second, unlike in the U.S., where Internet services are not
subject to licensing or tariffing requirements, some foreign
governments erect obstacles to market entry. We attempt and are
often successful in negotiating with the regulatory organ in
these countries, but in some cases, countries impose all sorts
of obstacles that prove insurmountable.
There are also significant delays and obstacles in getting
local telephone numbering resources and international codes for
signalling and set up. The U.S. Government and in particular
Departments of State and Commerce have been an enormous source
of support. They have carried our torch and that of others at
the ITU, which is an international organization laden with
monopolist regulators who still do not see the benefits of
competition, innovation and technological change.
We are concerned about access charges for the same reason
in this country because it requires higher communication
services costs for consumers and it is a subsidy that is a
relic of the traditional telephone network era.
We are hoping to deliver the new, more dynamic flexible and
efficient voice services of the 21st century all over the
world. We are giving a voice to the Internet, but we need this
committee's voice to speak together with ours to help maintain
the deregulatory momentum that preserves our invaluable freedom
to innovate.
Thank you very much for your time and for your efforts on
behalf of small business.
[Mr. Draluck's statement may be found in appendix.]
Chairman Pence. Thank you, Mr. Draluck.
The chair as our last witness recognizes Mr. Robert McCord,
President and CEO of Eastern Technology Council, and I do so on
behalf of the ranking minority member, who was detained but who
I know would want you to feel very welcome as a fellow citizen
of Philadelphia. I bring greetings on behalf of the Honorable
Robert Brady and welcome Mr. McCord of Eastern Technology
Counsel in Philadelphia for five minutes of testimony.
STATEMENT OF ROBERT McCORD, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, EASTERN TECHNOLOGY COUNCIL
Mr. McCord. Thanks so much. It is a real pleasure to get to
be here and an honor to meet you and spend time with you. With
the chair's permission, of course, I would like to submit my
written testimony as my official testimony and just speak
extemporaneously and be open for questions.
As you noted, I have the pleasure of serving as president
and CEO of the Eastern Technology Council which has 1300 member
companies, dues paying member companies, many of which are
venture capital firms and many of which are technology oriented
leaders nationally. I am also joined today by my colleague
Donna Gentile O'Donnell, who is a strong civil, political and
business leader in her own right and is the managing director
of our Philadelphia office.
I am out in the suburbs in what is called the Route 202
Corridor, recently labeled as one of the three hot new areas
nationally to develop tech companies. And Donna, in addition to
heading up all of our city-based activities and a close
colleague and a close friend of your colleague, she also heads
up all of our bio-pharma activities and one of the things that
I would very much like to emphasize is that much of the
Internet-oriented wealth creation that will flow into America
over the next few years will have to do with the convergence of
biotechnology, the pharmaceutical industry and the IT industry.
Indeed, if Donna is successful in the development of
various projects related to the human genome project and also
specifically in recruiting the Wellcome Trust, the largest
single funder of human genome research in the world to have
some sort of an operations in North American, specifically in
the United States, that single project is likely to mint more
Internet-oriented wealth creation than any 50 publicly traded
Internet companies are today. That is a matter of scale.
And then, of course, you also are able to create real human
progress in a lot of these cases, thanks to leadership from the
pharmaceutical sector. So I hope you will recognize that
convergence and invite your direct questions to Donna or to me
and, of course, we are informally available to you because we
are a hop, skip and a jump away. We can commute down here by
train.
Informally, I would just want to highlight for you, first
of all, I would want to associate us with the remarks made
across the table here. I believe that Ms. Hughs made a terrific
point, that there is serious peril out there if we do over-
regulate, over-tax, complicate the lives of a lot of these
really inspiring early stage company entrepreneurs like her.
There is a real hazard here. It is not the go-go, late
1990s any more. It is harder to get these companies started and
funded and it is very important that we not hurt these
companies, indeed, that we look for ways to help them.
Furthermore, Mr. Mellinger's remarks were a great sort of
laundry list of specific actions that I hope this subcommittee
will embrace and we would be eager to help. And in terms of the
spirit of things going on, I think you have a reputation as
somebody who is likely to emerge as a young leader in Congress,
I would hope to highlight for you that in terms of the new, new
economy, it is a time for reconsideration, it is a time for
activism, and it is also time for immigration.
In terms of reconsideration, in general, the era of hype is
out. Hype is out and margins and profitability are in. Part of
what that creates, candidly, is opportunity for leaders from
regions like yours and mine. Companies with many more mature
companies and lower cost factors.
Companies that do have bricks and not just clicks to offer
because you are going to get much more mature business leaders
looking to use the Internet to lower costs or increase revenues
and if it does not do one of those two things, they are not
interested in it. It is not the Internet for its own sake.
The era of sort of 24-year-old with little more than an
ego, a business plan and a tricycle being heavily funded is
going away. And that will create tons of opportunities for low-
cost platforms that show open affection for these early stage
entrepreneurs especially if they bolt into more mature
companies.
Secondly, I mentioned activism by intent. While we want to
be very careful about regulation and preserving an era of
deregulation, and I had the great honor of working for a
variety of members of Congress who were avid about
deregulation, including of the aviation industry and the
trucking industry and so on, I was honored to get to work a bit
for Bob Walker in a bipartisan setting when I was staff
director of the Congressional Clearinghouse on the Future and
Bob Walker, a conservative Republican, was very good at
highlighting the need to have real activism at the federal
level on behalf of science and technology, that this is one of
those areas where you have a massive, if you will, externality,
an external good is created.
And with funds drying up for what we call pre-product, pre-
revenue companies, having federal and local governments take a
look at ways to play here with relatively small but very
meaningful amounts of money could be huge. In Pennsylvania, we
have the Ben Franklin Partnership that was created by Governor
Thornburg. There are tons of other examples.
And, finally, on immigration, we do hope that you will help
us get more aggressive on the H1B visas. It is one reason that
I was hoping to speak with our great leader from Philadelphia
because in particular leaders who are close to labor I believe
should be brought to think more creatively about this.
We have had tens upon tens of millions immigrate from
Central Europe, Eastern Europe, Ireland, Great Britain in the
19th and 20th century to be an aggressive importer of
brilliant, talented, skilled labor. It could make a big
difference in the early 21st century.
Chairman Pence. Thank you, Mr. McCord.
[Mr. McCord's statement may be found in appendix.]
Chairman Pence. I want to thank the panel for a very
exceptional and informative presentation. I will recognize him
in a moment, but I do want to acknowledge the presence of my
colleague and a genuine young leader in the U.S. Congress, Mr.
Toomey from Pennsylvania, who I will recognize in a moment to
participate in questions.
We appreciate you being here.
Also a subcommittee chairman on the Small Business
Committee.
A few questions, if I may. There have been several common
denominator themes that I have heard from the witnesses and I
want to get a sense from each of you about the role and the
threat of Internet taxation. I think Ms. Hughs raised that
issue in the most practical way.
But before that, Mr. Clark, you in your presentation talked
about creating incentives to investment. You as not only a
constituent of mine, but a successful entrepreneur, attracting
investment capital. Others have talked about attracting
investment capital.
As this committee moves foreword and makes an effort
particularly to promote incentives for investment, I wondered
if you might give more detail to the idea that you introduced
of having a similar profusion in the new technologies area that
we have that allows people to roll over their capital gains on
the sale of a house toward the purchase of a new home. Is that
what you were referring to? And briefly describe how we would
do that in Internet investment.
Mr. Clark. Very similar. And it is not--I do not think you
should necessarily have to limit it just to the Internet side.
And he mentioned the 1232. Section 1045 of the tax code is
there that allows you if you have a qualified business interest
stock, it has to be a qualified interest, which means you had
to currently have purchased it at the very beginning stages,
something that momsand pops and certainly those of us in
Indiana are rarely eligible to participate because of other securities
rules and regulations, rarely do we ever get to see them.
We need to figure out a way to allow the average American
investor the opportunity to help build companies, whether they
are old companies that are trying to re-tool to become part of
this new economy as they watch the manufacturing jobs leave, or
whether it is new companies that are coming along, where people
want to invest. We need to give them ways to encourage it and
when you look in a market and you realize you are going to lose
25 percent of your wealth when you count estate taxes, it is
very difficult to sell, to go from one company to another.
And I believe that there are--very similar to the stock
exchange on section 1031 as we transfer property there is no
limitation there to the amount of money that you can have
little or big. And it would be a very easy process.
As a financial planner, the most trying time I see all year
long in my client's face is not just having to pay Uncle Sam on
April 15th, but it is sitting down with years and years of tax
returns and trying to figure out really what their tax basis
is. They try to be honest. They try to do the right thing. Many
of them are in my church. And it is a challenging day.
I have to believe with trading 3 billion shares of stock
every single day on the United States markets that it is
tedious and expensive for the IRS.
Senator John Breaux from Louisiana pointed out that 90
percent of the money that comes from federal estate tax is used
to operate the system. I have never heard the percentage quoted
for capital gains tax, but I have to believe it is a very
expensive process for the IRS to really mandate and watch.
If we could figure out how to let people put money in, they
would have to keep track of it one time, and allow them to go
and invest in companies big and small that are right for that
time and right for that economy and have the merits and
deserving of the investment without regard to taxation, I think
you would see a lot of the littler investors able to help
promote companies like my own.
Chairman Pence. Mr. Mellinger, you talked about devising
incentives during your testimony. What specific incentives
would you like to see this committee promote to encourage
investment capital in high technology?
Mr. Mellinger. Well, there are a couple of things I think
that could be looked at. One, from a standpoint of individuals
investing, is the change in ERISA regulations, specifically the
prudent man rule, which enabled public pension funds to invest
a portion of their money in risk capital.
And really the result of that, which I do not think was the
main intention at the time that the legislation was enacted,
was what we know of today as the venture capital industry.
While it was a small, small industry before that, the amount of
public pension funds that came into the venture industry was
enormous.
As we look at it today, one of the biggest pools of money
is out there is the 401(k) fund. A lot of people would love to
be able to invest in private companies but do not have the
ability to today, I think looking at enabling some small
portion of 401(k) assets to be allocated towards riskier
investments is something that would be a very interesting area
and create a whole new class of capital that could come in to
the market.
And I would hope that that would be looking at more than
the capital gap. Because right now, one of the biggest problems
we face as we help young companies is the first couple hundred
thousand dollars that might be invested in a company while
funds coming from the angels, friends, families, and people
like that is great, but it is harder today than ever to raise
these funds because of what has happened in the public market.
So, as Joe said, we should be able to give people more
incentives around this capital gains issue and be able to, as
we talked about, to provide the Section 1202 preferential
capital gains treatment for individual investments. We very
much support looking at both these ideas.
The last issue I would raise, and I do not have a specific
recommendation on how to do it, but we should support the
people that have organized loosely--some more officially, but
into these angel networks.
I think we need to encourage people to invest. The biggest
thing that we have found with the National Commission that has
been troublesome is looking at a map of the United States and
seeing where all the venture capital has been invested and then
taking that next step which is where all the angel capital has
been invested. And then very much match each other, more then
two-thirds of all venture capital that has gone into five
states in the United States.
Investments are not being shared equally across this
country. What has happened is that successful companies that
have cashed out through either selling the companies or IPOs,
and have become angel investors. Lo and behold, they are right
in the areas where those first companies started. And so we see
more concentration happening over time, not something that is
spreading out. And I think that the more we can do to encourage
people across the country to invest and build companies the
better.
Chairman Pence. Mr. Engel, you talked about the mission of
your company was to level the playing field for small
businesses and I commend you for that. In the public policy
realm, are there specific instances where in the high tech area
you think we in Congress and on this committee could pursue
that goal?
Mr. Engel. Absolutely. In fact, I will stick to the two
points that I raised in my statement. The first is anything you
can do to keep the tax system as simple as possible for small
businesses like Ragan the better. Again, if the moratorium is
lifted in October, who knows what may come out of that as local
and state jurisdictions from around the country start to say,
hey, I want a piece of the pie, too? And the second is an
overall point of increasing just access to technology,
broadband especially, the services such as BigStep but there
are a ton of others out there that can help a small business
actually level the playing field and really that was our
mission. Big businesses have money, they have staff and they a
lot of time have technical expertise. They will have a whole IT
department just to get themselves up on the web.
Ragan does that all herself. So a broadband access helps
her do those things and to get on the web and really establish
her Internet presence in order to help her business.
So I will stick with those two and anything that this
committee can do, that would be great.
Chairman Pence. Thank you.
Ms. Hughs, you focused on Internet taxation at a very
practical level. If the moratorium was lifted, do you believe
that the Capital Baby Rental could survive? Would you have the
capability of complying with the wide range of taxes or would
you see that as a threat to your business survival?
Ms. Hughs. Well, I think that was what was interesting
about me being selected to come before you today. Since I have
two different businesses that do totally different things with
the Internet, a business like Capital Baby Rentals is not going
to be affected by the taxation moratorium unless there are new
taxes that are going to be imposed on Internet access because
we are not actually selling anything on the Internet; it is
just an informational site where peoplecan find out and then
call us, fax us, e-mail us to set up a reservation. The transaction
does not occur over the Internet.
But for businesses like ThePartyBug, it would just
devastate it. It is very difficult for a small business owner
who is wearing a million and fifty different hats to be an
expert in everything. We do not have a general counsel and an
IT department and we have to do all these things by ourselves,
so that is a barrier right there. And if more tax regulations
were imposed upon us, it would just be completely prohibitive
to most small business owners doing business on the Internet to
continue doing that.
In addition to the fact that I just basically do not think
it is fair. I hear brick and mortar saying, oh, well, you guys
get so many breaks, but it is actually not true. For instance,
I am in D.C. and if somebody has to have something shipped to
the District, I collect the sales tax on that and then I report
that to the District of Columbia.
So I am not doing any different than the Gap down the
street, so I do not feel that we should have to be double taxed
or consumers should have to be penalized because they want to
purchase something over the Internet when it is a huge
convenience, saves time, allows access to things that people
with disabilities and what not cannot access going to regular
stores sometimes. So I do not think that that would be very
good at all.
Chairman Pence. Mr. Draluck, your business is very
fascinating to me and represents one of those new uses of the
Internet in terms of communications technology. The
international settlement regimes that are in place now, do you
believe that they need to be modified, set aside? I understand
from your testimony that they are a barrier, but what do you
see that this Congress and this committee should do to address
that somewhat antiquated means of distributing resources in the
telephone business?
Mr. Draluck. It is a prime example of a system of subsidies
that really affects innovation and development in every telecom
sector, both locally and internationally. On the one hand, a
pitch about taking one's small business international which
iBasis has done, and that is that the kind of forward thinking
discussion that is taking place here today does not occur in
many of the countries that iBasis serves and, as a result, we
are faced with all sorts of obstacles.
The settlements in particular, many countries that have
signed the WTO have simply dropped settlement charges. Many
lesser developed countries that might have one monopoly carrier
see settlement charges as an enormous source of revenue because
when calls are terminated into the country they collect.
Now, one way that iBasis has worked to get around this
actually to work with monopolist carriers. That allows
regulators in the distant countries to get a taste of what
technological innovation can bring to consumers in that country
and understand--or let us say begin to understand how the
competitive force operates.
So our strong position is that this committee and Congress
overall recognize that these kinds of issues over which you are
grappling are issues in their infancy overseas and the FCC has
taken a big stand to disallow carriers in this country from
paying settlement charges over a certain amount and that rate
is constantly coming down and it is almost a fiction that they
are strangled, but being disallowed to pay those fees because
there is a balance of payments, it forces other countries to
reduce the collection.
So if we can get the message internationally that that kind
of subsidy that is not market driven will not lead to
development, then that would be quite an important message and
we are grateful for that.
Chairman Pence. I am going to come back to Mr. McCord
before I close, but I do want to acknowledge and recognize for
any questions he might have the gentleman from Pennsylvania, my
colleague, Mr. Toomey.
Mr. Toomey. Thank you, Chairman. I would like to start by
saluting you for having this hearing. I for one think that the
development and, probably more precisely, the deployment of new
technologies, to put it very broadly, has been the great
driving force behind the growth in productivity and the boom in
our economy over recent years. And I think it is not a
coincidence that as a general matter the technology sectors, if
you will, of our economy have tended to be the least regulated
and the most successful and innovative at the same time. I
think there is a good reason for that.
I have just really one area that I would like to discuss a
little bit in particular with Mr. Clark, if I could. In your
testimony, you pointed out a couple of things. One is the well
known fact that the capital gains tax has a tendency to lock
investments in in ways that are not necessarily rational for
the investor otherwise, not as productive for the economy as
they could be if investors were not locked in, and you point
out that that kind of mentality that is a creation of the tax
code could in fact contribute to things like excessive share
prices when there is a run up and perhaps contributed to the
speculative bubble that we saw recently.
But you make an interesting point also, and I think you are
talking about a capital gains tax, although perhaps you would
broaden that to include other multiple layers of taxation on
savings like the double taxation of dividend income, for
instance, but you make the point that the capital gains tax in
particular hinders the capital formation for new companies and
I think that is an important observation. And while for new
companies and for some others there might be a strong case to
be made for allowing people to roll into other investments, I
prefer abolition of the capital gains tax all together.
Mr. Clark. Amen.
Mr. Toomey. It is just simply an irrational tax. But could
you explain a little bit more how you would foresee a greater
opportunity to build capital in new companies, in start-up, in
inherently more risky ventures in the absence of a capital
gains tax, if you believe that would be the case?
Mr. Clark. Sure. I think there are two things that we have
to understand and one is that we have left an economy, what we
call the extension of maturity phase, where there is no
question that the companies that have strong loyalty, the GMs,
the Fords, the Chryslers, they are not going out of business
and so you can tax at will and it is not a matter of somebody
pulling their money out of GM to go to another company or not.
When you go back to the entrepreneurial phase or the shake-
out, you have people literally trapped. I mean, literally.
Psychologically, they are trapped when they look at seeing how
much of their wealth is going to leave if they go into another
company.
I think it would be very, very simple to develop a method,
if you will, to say, okay, this is the amount of money that we
have that we have put in, whether it be on a monthly basis or
whether it be in lump sums, over a period of time, this is the
amount of money that we have invested in the United States
stock market in these particular type of companies.
And I do not believe even though we are here for the
Internet today, I do not think it is just Internet. I think it
is about companies that are really trying to use new
technologies and new innovations that are really trying to
drive our country to the next level, that are trying to take
our economy where it has to be. And you figure out how to
define what those companies are andlabel them as such and they
can go freely from one company's investment to another without having
to have any regard to a capital gains tax until they take the money out
to go spend, to buy a Harley-Davidson or do something else that fuels
the economy.
Mr. Toomey. Mr. McCord, I would be happy to hear your
thoughts on this, but I wanted to just respond briefly.
My reservation about creating a category of investments is
that we then bias investors in favor of those at the exclusion
of others and I question--well, I do not question, I doubt
strongly whether the government has the wisdom to know which
ones the economy----
Mr. Clark. I agree. I have the same problem with the
government investing the Social Security money that way because
we are picking out some companies versus others.
Mr. Toomey. Right.
Mr. Clark. And so I agree. I am with you. Abolish the
capital gains tax all together. I am telling you, the next
level of my company, to get to the next step, I need $1.4
million and if you change the capital gains rules, I can have
it in two days. And if you do not, I get to go back home and go
through the same struggle that I did to raise the first million
and a half.
Mr. Toomey. Thanks.
Mr. McCord? Did you have something?
Mr. McCord. Yes. First of all, it is a great honor finally
to meet you in person. Even though you served your share of
time at the Evil Empire of Harvard Business school, if I
remember correctly.
Mr. Toomey. Undergrad.
Mr. McCord. Oh, okay. Well, then we have that in common. I
am a Wharton partisan.
I did want to be responsive on this and also echo the
401(k) idea which I think is a brilliant one and I had not
heard before. Having staff members of Congress, you know, you
always do kind of mine for the gold of actual new ideas.
Just trying to be responsive a little bit here, I think a
blended average of what the two of you are talking about,
without pretending that I am an expert in the Byzantine ways of
the tax code, might be the most productive. Otherwise, you run
into a watch out what you wish for, you may get it.
If you eliminate the inheritance tax and then you have a
bunch of--you know, you are self-made, you made a lot of money,
now you are a public servant. Your kids did not make a lot of
money, they inherit it tax-free because you paid taxes on it.
Okay. Now, they put it in the stock market. Now, they have a
smart dad, he went to Harvard, et cetera, they get 11 percent a
year on it. They may never in their lives pay a dollar in taxes
if there is no capital gains tax cut.
Now, I just want you to ponder that for a second.
Conversely, the next time we are trying to float a bond for
Lehigh Valley to have fat pipes so that the less affluent can
get the same level of service as Alargco, we have no tax tool
whatsoever because tax-free is meaningless if we have no
capital gains.
Conversely, if you have patient treatment where you say if
all you are doing is moving your money from one field to
another but keeping it in the equity markets, you are not out
there buying SUVs or, you know, third homes or whatever. That
is a big deal. And I do think in general we have problems with
the capital gains tax cut.
To your point, I mean, you have probably read about
Safeguard and some of those fiascos. A lot of that stuff, a lot
of the margin purchasing that was done, was done specifically
to avoid capital gains tax cuts because they figured their cost
of capital was 7 percent instead of 40 percent.
So I understand these are challenging problems, but in a
hierarchy, at the same moment that you are going after the
inheritance tax, I would say something that you might want more
promptly to put on your to do list to allow on a voluntary
basis the small fry who are with 401(k) plans to allow them the
freedom to put up to 1 percent of their 401(k), because the
vast majority of people moving towards retirement are not part
of these SURS, PSRS, CALPERS. We are speaking in code, but
these are the largest pension fund funders because they are
state-run pension funds.
If you allowed the average 401(k) for the average risk
affectionate true entrepreneur to say, hey, heck, I will put 1
percent into private equity funds, you would really turbo
charge a lot of the venture money out there and I think have a
big net benefit in a very timely fashion because there is a
fright--I mean, all respect to angel groups aside, those tend
to be a long run for a short throw.
You get 20 rich guys sitting around Lehigh, they get
together because they want to get together with other rich
guys, they kick tires for a few weeks and then they squawk to
put 10 grand into a company. A 401(k), now, that is a real
turbo charger.
So just trying to parse this out and give you a flavor for
what you might want to put on your to do list, I wanted to be
responsive in real time to your thought.
Mr. Toomey. Thank you.
I will yield the balance of my time, Mr. Chairman.
Chairman Pence. Thank you, Mr. Toomey. Thank you again for
participating in the hearing as a leader in the Congress on
economic issues and as a subcommittee chairman. You have
greatly enhanced the value of this hearing. I know we and the
witnesses appreciate your participation.
Let me just close, if I may, by thanking each one of you. I
can expect that testifying before a congressional hearing is a
harrowing experience. Many of you traveled far distances to be
here and may well have enjoyed a sleepless night last night
thinking about your presentation.
Let me say that you were none worse for the wear today,
that each of your presentations were not only eloquent and well
executed, but, as I hope you could tell from my questions and
Mr. Toomey's questions, quite well informative and very helpful
to us as we begin this process of really using this
subcommittee as a driving force for small business
entrepreneurism and policies in Congress that will promote
that.
Let me close by saying as someone who built my own small
business starting in my basement of my home and working in the
communications area that I am a bit envious of each one of you.
Now sitting in the stolid chambers of Congress, I some days
pine for the rugged world of entrepreneurism and I hope each
one of you know that this chair admires you as the new Edisons,
the new Fords, and as genuine pioneers in an economy that our
children and grand children will know nothing different than.
Each one of you are the first ones into the wilderness,
really paving a way for what I think is the real key to the
United States of America remaining the dominant force on the
world economic scene.
So I congratulate you for your courage. I congratulate you
for your testimony and I thank you for being here today.
With that, this hearing is adjourned.
[Whereupon, at 3:17 p.m., the Subcommittee was adjourned.]
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