'Isn't Anybody Back There Listening?'
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Republican senator Robert Bennett of Utah is one of the few people in Congress who can speak from personal experience on the subject of growth companies and job generation. We first met Bennett in 1991 at our annual Inc. 500 conference. At the time, he was chief executive of Franklin International Institute (now called Franklin Quest), a Salt Lake City- based company that publishes day planners and holds time-management seminars. Bennett had taken charge of the business in 1984, while it was still in its infancy. When he left in 1991, it was doing about $82 million in sales and employing roughly 700 people.
I ran into him last fall in Salt Lake City, where he was engaged in a hotly contested Republican primary for the Senate seat vacated by former astronaut Jake Garn. Bennett won and went on to defeat Democratic nominee Wayne Owens. I recently had lunch with Bennett in Washington, D.C. When I asked him how his first months in office were going, he gave me a copy of a speech he had delivered to the Senate.* * *
The only former Inc. 500 CEO in the U.S. Senate tells Congress what it is doing wrong
By Senator Robert Bennett (R-Utah)
Excerpts from a speech delivered on the floor of the U.S. Senate, as recorded in the Congressional Record of Wednesday, July 14, 1993 (edited).* * *
Senator Bennett: Madam President, I rise today for several reasons. One, it's an anniversary; I've been in the Senate roughly six months, and I think that perhaps at this time I might make a review of the first six months of my career here. Two, because during the recess I had a question asked me that I think summarizes the first six months, and the two come together, and I'd like to talk about that for a bit.
I was with a small-business man who was telling me about his various problems, asking if there was any relief for some of them, and then he summarized it, after we'd had our conversation, with this question. He said, "Senator, isn't there anybody back there that listens? Isn't there anybody back there that pays any attention to what we're trying to say?"...I ask his question rhetorically as I give my review of what I've seen this body do in the six months I've been here.
I came here as a small-business man. My career has been in business. I ran as a small-business man, and I promised the people of Utah I would represent small business; so that's the perspective I have. And this is what I've seen in the last six months:
Small business has received the highest possible rhetorical praise in the six months that I've been here. Starting with President Clinton and going through virtually every member of this body, everybody is in love with small business, if you listen to what people have to say. At the same time, legislatively, small business has received a serious beating, and the net result, in my view, has been the slowing of job growth just as we are going into the time when job growth is just what we need....
There are three areas in my view where small business has received the legislative beating I'm talking about....
The first one: regulation. Excessive regulation destroys jobs. And in the six months I've been here, I've seen this body pass excessive regulation on small business. Very specifically, the Family Leave Act, which puts a regulatory burden on small business. We all know the arguments and the details. I want to put a face on it.
A few weeks ago I was at a breakfast, seated next to a small-business woman, and we got talking, and I said, "What kind of business are you in?" And she told me. And I said, "How big is it?"
She looked at me and said, "Senator, we are at 49 and holding." In other words, "We have 49 employees, and we will not hire the 50th, because as soon as we have that extra employee, the 50th, we qualify for the regulation that you people passed in the Family Leave Act. If we didn't have the regulatory overhang that comes with 50 employees, I could hire an additional 5, 7, or 10 people. I could do it tomorrow. But I'm not going to. We are 49 and holding. I know a lot of businesses in the same circumstance."
The question I ask here: Do we know how many businesses are in the category of "49 and holding," that is, deliberately restricting their growth in order to avoid the kind of regulatory overburden this body has passed? The answer is, No, we don't have the statistics. But I suggest, I firmly believe, that there are a number of jobs not being created by people like this woman who says, "Forty-nine and holding." The real cost of excessive regulation is the loss of potential jobs....
The second area where I think small business has taken a beating is excessive taxation. Excessive taxation destroys jobs. We're talking now again about what's been done in this body in the last six months, when we have seen adoption of the president's proposal with respect to what he calls the "millionaire surtax." Well, the surtax, we're told, will hit only the rich. It will hit only those who earn $250,000. Those people who made money in the excess of the '80s now have to pay it back. I've heard that kind of rhetoric here on the floor. Well, who are the rich? Who are these people who made all this money in the 1980s? Donald Trump? Michael Jordan? Bill Gates? Well, undoubtedly those people will have to pay more. But the fact is that of those tax returns filed in the bracket that qualifies as the rich under the definition of this administration, 80% are filed by S corporations, sole proprietorships, or partnerships -- in other words, small business. Two hundred fifty thousand dollars a year is a lot of money for an individual. Two hundred fifty thousand dollars a year is not a lot of money for a business. It is a business on the edge. And yet, 80% of those people who will see their taxes increased in that circumstance are filing as businesses, not as individuals. This is one of the areas...of greatest misunderstanding....I had a fellow senator say to me, "Well, if they're S corporations and they want to get out of it, why don't they just incorporate?" Many don't realize S corporations are corporations. They have already incorporated, and they've made the S selection rather than the C selection because they need the money to grow, and the S selection makes it possible for them not to pay taxes twice on their dividends and their earnings, the way General Motors stockholders pay taxes twice. Partnerships, sole proprietors, S corporations -- they file 80% of the tax returns in the bracket the government considers rich....
Now about half of all small businesses pay taxes either as Subchapter S corporations or as sole proprietorships. And they pay at the same rate as unmarried individuals. Consequently, outfits earning more than $115,000 -- think of that in terms of a business now: a small auto-repair shop, a family farm -- outfits earning more than $115,000, the level at which individuals become "the rich" in the administration's eyes, will likely see their marginal tax rates rising from 31% to 36%. And on earnings over $250,000, to 39.6%. Their ability to fund growth out of their earnings will shrink proportionately....
I've talked about excessive regulation killing job growth. I've talked about excessive taxation killing job growth. What's left? I said there were three areas where people didn't fully understand the impact on small business. Three proposals that have passed this body in the six months I've been here that have hurt job growth.
Well, the third one has to do with the availability of capital for small business. And we're talking about the increase in the capital-gains tax rate passed in this body....
Some years ago my brother-in-law came to me with an idea. He was in his fifties and had been laid off from a big corporation. If you will, he was prototypical of the kind of thing that's going on in the economy right now every day. The big corporation was downsizing; there had been a change in direction, all of the other reasons. But he was on the street, and because of his age he was not hirable. He was looking at really difficult times. But he had an idea. He had an idea, and he also had a house. And in the real estate boom of the '70s, he had pretty good equity in his house. He said, "I want to start a business. And I'm willing to take out a second mortgage on my house and raise money for the down payment on the business. Will you help me?"
I said, "Yes, I'll be happy to help you."
He went to an investor and asked him for some money. The investor said, "I'll be happy to match the amount you're putting up as the result of mortgaging your house."
That was enough to get the business started. It was not enough to lease the equipment we needed to make the business go. That's when my brother-in-law came to me. I put a mortgage on my house to guarantee the equipment that had to be leased.
It's one of these success stories. We came out with that business. We got it started. We sold the stock to the venture capitalists for a dollar a share. A few years later the business was valued at $30 a share. We had made it. The great American success story repeated once again. I was able to get the lien off my house and pledged it for a down payment on another business I was involved in.
The venture capitalist came to us and said, "Well, we've had the ride in this business. It's been really good. I've gone from $1 a share to $30 a share. The time has come for me to get my money out and put it in something else. And I've got a venture right here that I think I can make a 25%-a-year return on. With your business now, the main growth is over; it's going to flatten out a little. It will increase only at about 10% a year. I want my money out of the 10%-a-year deal and into a 25%-a-year deal."
We said, "Fine, we can find people who will buy your stock and be satisfied with the 10% return because the risk is now pretty well over. We've gotten over the hump. But let us explain to you what you're doing." We said, "With the present capital-gains-tax rates, by the time you've paid capital-gains tax at the federal level and your state-tax burden, you're not going to have $100,000." For the sake of keeping the numbers simple, let's say he put in about $3,000 and it grew to $100,000 as the stock went from $1 to $30. "You now have equity of $100,000. You're not going to have $100,000 after you pay your capital-gains tax if you take the money out of our business. You're going to have $65,000, because you're going to pay 28% to the feds, and you're going to pay 7% to the state, and you're going to end up with $65,000.
"Now, you say our venture will continue to earn 10% a year, and the new venture will earn 25%. Here are the numbers: The first year (we have not compounded these) on $100,000, your investment with us would go up to $110,000. The first year, $65,000 at 25% would go to $81,250, and so on. At the end of four years if you sit here, your investment will be worth $140,000. If you invest in the new venture, even at a 25% return for four years you're at only $130,000. You can't afford to take your money out of our business and put it into somebody else's, even though we could find someone willing to invest in our business because of our track record."
What have we done in this body? We have increased the capital-gains-tax rate, so that now he couldn't get even $65,000 out of that business if he tried. Things would have changed dramatically if President Bush's proposal to lower the federal capital-gains-tax rate to 15% had passed. Under those circumstances, the $100,000 at 10% numbers stay the same. But if he had gone, now that he had $80,000 left over instead of $65,000 after he had paid his capital-gains tax, and put it in the same new venture, at the end of four years he would have $160,000 instead of $140,000, and you can see how it goes up.
It is a lack of understanding of the impact of the capital-gains-tax rate that has caused this body to increase the capital-gains-tax rate and lock up investment capital in existing businesses, starving the new businesses from the opportunity to get the capital they need. A higher capital-gains-tax rate passed in this body will add to the credit crunch for small business.
As a summary, in the six months I've been in the Senate, I have watched this body increase, not cut, the regulatory burden on small business and thereby discourage job creation. In the six months I've been in the Senate, I have watched this body increase, not cut, the tax burden on small business and thus discourage job creation. In the six months I've been in the Senate, I've watched this body increase, not cut, the pressures on investment capital and thus discourage job creation....
In the six months I've been here, I've seen us do in the three key areas that I've described -- regulation, taxation, and capital formation -- great damage to the portion of the economy that has proved its track record in job creation. For that reason, I think the only way out is for us to repeal or reject the work of the Senate for the last six months and see if we can't start all over again.* * *
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