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Press Briefing by S.B.A. Administrator Erskine Bowles

July 21, 1993

The Briefing Room

2:20 P.M. EDT

MR. BOWLES: Let me begin with just a brief opening remark. I've had the chance today to spend the day with the owners of a number of small businesses, both out in Maryland, and today we had a number of small business owners come for lunch here at the White House. And we spent a long time talking about the President's economic plan. And I think for the first time they really had a chance to really focus on the substance of it and not just on the rhetoric that they've been hearing from the politicians. And I think truly they found a plan that they could get behind, a plan that addresses the deficit, that creates capital for small businesses, that stimulates the growth of small businesses and therefore creates jobs.

I'll be happy to take any questions that you have.

Q: Why do you think there's so much hostility in the small business community? The people I've met have expressed great fear about the new program and where they'll land in it. And is there really going to be room for -- I mean, are the conferees going to go for something?

MR. BOWLES: Yes, I am confident that this is a plan that small business will be able to get behind. I think there's been so much conflict because of the rhetoric and because there hasn't been enough talk about the substance of the plan. We talked today about the economic plan and we really focused on basically three areas.

First of all, this plan reduces the cost of capital. By bringing the deficit down, you reduce interest rates and, therefore, you reduce the cost of capital, and that enables small businesses to go out and purchase equipment and create jobs. So that was one of the positive things we talked about in the plan today.

Two, we talked about increasing the availability of capital. Clearly, small businesses are still starved for capital. And one of the things this plan does is it really takes a pretty large step forward in creating capital for small business. It does it in a number of ways.

The first way that comes to mind clearly is the President's action to remove the unnecessary regulations and barriers that prevented banks from making character loans. That hasn't had as large an impact as we had hoped, but it is a step in the right direction.

The second thing, the community development banks will bring capital into the poor rural communities, into our inner cities and will help create capital for small business. Getting behind the SBA's $175-million extension also will help. That $175 million, Miss Thomas, turns into $3.2 billion worth of capital for small business, it creates or maintains 310,000 jobs, and generates $600 million in taxes. That's a $600-million return for an $175-million investment.

Q: But don't they fear the taxes? Isn't that the main crux of their --

MR. BOWLES: And we talked about that. We talked about taxes and we talked about it very candidly. Let's talk about, first, the good things that are going to happen, the stimulus package -- the things of expensing. That will be a big help for small business -- being able to increase your annual expenses from $10,000 to $25,000 for capital purchases. That will help small businesses go out and make capital expenditures that they couldn't make otherwise.

Second, reducing the capital gains tax for small businesses will be a very important matter. You're probably referring to the Subchapter S situation. We talked about that a lot today, and I'm telling you -- for small business, that's a bogus issue.

I come from a small business world. I started a small business, I told somebody earlier today I've met a Friday payroll on Monday, so I think I know what it is to run a small business. I was concerned when this Subchapter S issue came up, and so I went to the President, which is my role in the administration, to talk to him about it. And I asked him if we could take a look at it, and let's get some facts to see what kind of effect this will have on small business.

So we had the Treasury do some homework. These are facts. There are seven million taxpayers in this country who file their tax returns where their primary source of income comes from a trader business. That's partnerships, proprietorships, and Subchapter S corporations.

Now, of that seven million, 96 percent of them will not be affected one iota by the increase in the marginal tax rates from 31 to 35 percent. Four percent will. What's the average income of that four percent? Five hundred and sixty thousand dollars a year -- not normally what I think of as a small business.

And let's talk about the surtax. Who's going to be affected by that? Ninety-eight percent of all Subchapter S corporations are not going to be affected one iota by the surtax. What about the two percent? Who is in that two percent? The average income of the people in that two percent is over $1 million a year. And who's in that? Forty percent of them are lawyers, doctors, investment bankers, lobbyists and the like. Not hardly what I call small businesses.

Let's define what a Subchapter S corporation is. It's not necessarily a small business. Clearly, the information I gave you points to that. What it is is a company with just a few number of shareholders. You have to have less than 35 shareholders to be a Subchapter S corporation. You don't necessarily have to be a small business.

Let's talk about, now that we've gone by that issue is it fair for even net four or two percent? If you're a shareholder in a Subchapter S corporation, and you want to take money out of that business, the maximum tax rate you're going to pay is 39.6 percent. And, Ms. Thomas, if you own a share of AT&T and, therefore, are an owner of that company, and you want to take money out of that company the same way that Subchapter S corporation owner wants to take money out of his business, you know what, AT&T is going to pay a 35 percent tax, you're going to pay a 40 percent tax. That's a 61 percent tax. The Subchapter S owner is still better off. He's paying a lower tax.

What if you want to leave the money in? That's the other side of the story. You can convert and become a C corporation and you never have to pay more. It is a bogus issue. It's not a small business issue. What it is is a rich person's issue.

Q: You talked about increasing expenses to $25,000, which is what the House passed. The Senate did not. Are you saying that you're confident that the House version will prevail?

MR. BOWLES: I can promise you that I'm going to spend every single day between now and when that final bill comes out, fighting for small business, trying to get that number at $25,000.

Q: If the administration is talking about raising revenue to pay for that sort of thing through a transportation tax, that is an issue that also affects small business. What did you hear today about that?

MR. BOWLES: Well, we did spend some time talking about the gas tax. We did spend some time talking about energy. And again, I think if you put it in a relative context and look at how much someone is going to have to pay in additional tax because of the energy tax, and you equate that to the savings you get if they just refinance their house, the savings is 10 to 20 times greater than the cost they'd have to pay on the little on the energy tax.

So, really, to me, that's not a big issue facing small business. Small business comes out way ahead of the game with this economic plan.

Q: But millions of small businesspeople don't seem to see it that way. They seem to be saying, well, thank you just the same, we'd rather not have the tax increases and keep your benefits -- your expensing and all that. Are they irrational?

MR. BOWLES: No, let me tell you what I've done. Okay? Because I've spent a lot of time talking to small businesses, okay? And I can tell you that they've been influenced by the rhetoric.

There was an interesting article in the Wall Street Journal the other day of a lady who was talking about how much she feared the Subchapter S taxes -- how much that would drive her taxes up. And as it turns out, after she found out what the substance of the bill was and found out she wouldn't pay a nickel more in taxes, she really felt like she'd been fooled.

What I'm telling you is when people understand what is in this bill, understand the substance of it, and the benefits it has for small business, they get behind it and they get behind it hard. Today, as an example, we had nine small business trade organizations come out in favor of the President's economic plan: The National Association For the Self-Employed, The National Small Business United, The American Electronics Association, The National Tool and Machinery Association, The Biotechnology Industry Association, The National Association of Women Business Owners, The National Venture Capital Association, The RV Parks and Campground Owners, The National Lumber and Building Materials Dealers Association. Nine trade organizations today came out and said there's a lot in this President's plan that's good for small business.

Yes, sir.

Q: Help me a little with the numbers of those who would be impacted by higher taxes. Seven million taxpayers, four percent -- is something like still 300,000 businesses of whom not all are lawyers and lobbyists.

MR. BOWLES: No, sir. Only about 40 percent of them are.

Q: So that means about 150,000 businesses would be impacted by higher taxes. How about the 12 or 13 who showed up today, where do they fall? On which side of the tax line? And what do they have to say about it?

MR. BOWLES: I would say roughly -- and, again, I'm guessing -- but some were affected and some were not, okay? And the principal thing that came out over and over again is they were so pleased that we finally have a President who is focused on deficit reduction, who is really serious about deficit reduction, bringing the deficit down. They've all benefitted by having lower interest costs. That's enabled them to create jobs, make capital expenditures, grow their businesses and hire people. So they are much more attuned to bringing down this deficit, and they're willing to participate in the sacrifice that all of us have to make.

Every single sector could be better off if we did everything we could, but we have inherited a terrible, massive federal deficit. And we have a President who is finally serious about bringing it down. And small business believes in that. They believe in bringing down this deficit.

Q: What happens if a small business grows big? Their taxes go up don't they?

MR. BOWLES: Well, they don't unless your income is above $10 million.

Q: Oh, they have to $10 million?

MR. BOWLES: Well, you know, at some point in time we all have to do something to bring this deficit down. We all have to pay our fair share.

Q: So, what do they do if they just start from zero and then they grow and get big?

MR. BOWLES: Well, let me tell you one of the great things that's in the President's plan. If you start a small business under the President's plan and you hold the stock that you bought to start that business and you hold that stock for a five year period, then when you sell that stock you have a 50 percent reduction in the capital gains tax that you would ordinarily incur.

And that's a tremendous incentive for people whether they're individual investors or institutional investors to put capital into small businesses to help them create jobs and create employment opportunities. That's why the National Venture Capital Association has come out so strongly in favor of this plan because they think it's a good plan for small business.

Q: How much of the discussion today focused on the upcoming health care reform? And, was there much concern expressed by the businessmen about these current proposed tax increases coupled with the tax increases that one can expect with the health care reform?

MR. BOWLES: We talked about health care a lot. That's a subject that's on the mind of small business. And the reason it is is that if you look at the statistics, and those people weren't statistics these are real businesses we've been with today, but small business has probably experienced more suffering and pain from the skyrocketing escalating cost of health care insurance than any single sector of the economy.

Small businesses health care costs have increased at an annual rate of 20 to 50 percent every year over the last, you know, almost forever. Small businesses today pay 30 percent more for the same health insurance that large businesses do. And the rate of increase in the cost of health care insurance for small business is 50 percent higher than the rate of increase for large businesses.

And, so, unfortunately the smaller your business is the more disproportionate your cost is. And small businesses have tried on their own every single thing we can do to hold down the cost of health care. You know, gosh, we've tried switching programs; we've tried managed care; we've tried cost-sharing; we've tried self insurance; we've tried reducing benefits; we've tried passing on more costs to our employees. Nothing works. The cost of health insurance continues to rise.

Now, 75 percent of small businesses provide some form percent of small businesses provide some form of health insurance to their employees. And they've experienced just skyrocketing costs. And the 25 percent that don't, they can't even go out and hire somebody because they can't compete with somebody who offers health care benefits.

So small business probably has more at stake in bringing down the cost of health care than any other single sector. And so we spend a lot of time talking about how we're going to bring that cost down and the importance of doing it. They're very much behind it. Lots of people think, as you just kind of indicated in your question that if, in fact, you had a payroll tax that paid for health insurance, that it would be an additional tax. One of the people there brought that up. It's not. What it would be, it would be in lieu of what you're currently paying.

Q: But a number of small businesses now don't even offer health care.

MR. BOWLES: And in most cases, actually 75 percent of small businesses do offer health care. Now, the kinds of things that I've been fighting for as we talk about health care, and talk about what the solutions are -- one of the things that people are most concerned about are mandates. Clearly, each of you in this room know that no decision has been made yet. But if mandates were part of a solution that people talked about, the kinds of things that I talked about that would be helpful to small business, would be scaling them in over a long period of time as we bring the cost of health care down; two, going with something other than a cadillac plan, but really a plan that people can afford; three, making sure that the employees pay part of the cost so no one -- so everyone has incentives to hold the cost down; four, to make sure you had a rainy day plan like they have out in Hawaii to cover that person who just flat can't afford it; five, that you have some kind of combination with worker's comp, which really has been going out of the roof; and, six, 100 percent deduction for the cost of health insurance for the self-employed.

I think if you had some kind of combination of that, you'd see a plan that small business would be behind, and be behind 100 percent.

Thank you.

Q: You obviously can't make that savings argument for that 25 percent of the businesses who don't provide any kind of health insurance now. And I don't know what the number is, but I guess percentage-wise, it may not amount to much, but it amounts to quite a few businesses.

MR. BOWLES: I think maybe -- but again, I think if we had a program similar to the one that I just described, it would be a program that not only small businesses that don't have health care insurance could afford, but it would stop that cost shifting to the small businesses that are now paying it, and it would bring down their costs. So I think it would be --

Q: You're telling them the benefits will accrue to them in some way?

MR. BOWLES: I believe it would.

Thank you very much.

THE PRESS: Thank you.

END2:35 P.M. EDT

William J. Clinton, Press Briefing by S.B.A. Administrator Erskine Bowles Online by Gerhard Peters and John T. Woolley, The American Presidency Project

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