Scope of This Study A fundamental obstacle to the determination of the impact of taxation on small business is the difficulty of assembling 57 Similar problems are encountered by the Small Business Administration in establishing a data base for definition and analysis of small businesses 58 pursuant to its congressionally mandated programs. A primary concern of this study is to develop a tax system which will provide a data base to facilitate future tax impact studies. It is necessary to resort to secondary sources of information to analyze small business tax impact. A review of such materials reveals that certain tax problems are perceived on a recurring basis as being particularly troublesome to small business. It is therefore possible to draw some meaningful conclusions about the general impact on taxation on small business and to isolate some of the resulting areas of particular concern. Foreign Law The legal and tax structures of twenty-two countries were analyzed to determine how they approach the economic and tax problems of small business. A summary of the findings of this segment of the study is in Chapter 3. 57/ 58 1976 Annual Report, U.S. Small Business Adminsitration, Volume 2, p. 26 "What is a Small Business," Part II of The Study of Small Business, Office of Advocacy, U.S. Small Business Administration, June 3, 1977 Hearings and Reports Testimony in hearings before Congressional committees was analysed in detail. This review included all hearings concerning the tax problems of small business before the Select Committees on Small Business of the Senate and House of Representatives, relevant hearings before the Senate Finance Committee and the House Committee on Ways and Means, and certain hearings before other Congressional committees on specific issues. Reports of the House Committee on Ways and Means and the Senate Finance Committee concerning all existing small business tax provisions were analyzed in detail to determine the Congressional intent for passage of those provisions. St. Louis Task Force - On January 12, 1977, an ad-hoc task force was established to investigate the tax problems of small business in the Eastern District of Missouri. The task force consisted of leaders in the financial, professional and small business communities in the St. Louis area, and was chaired by former Congressman William L. Hungate. The ad-hoc committee was established to provide "grass roots" input for the national study of the impact of taxation on small business pursuant to P.L. 94-305, Section 202 (4). Accordingly, the project officer in charge of this study was present to participate in the deliberations of the task force. Tax questionnaires were sent to more than 8,000 small businesses in the Eastern Missouri District, and more than 800 responses were received. The questionnaire asked the small businesses to rate the importance of certain specific proposals for tax reform, to answer questions regarding what tax problems were most troublesome on a recurring basis and what measures might be taken to solve them, and to provide certain information concerning their size and business activity. Some of the conclusions and recommendations in this report are supported by the results of that survey. Professional Literature Journal articles and other professional literature was reviewed on subjects concerning the existing federal tax system and proposals for its reform. Most of these articles were from leading legal and accounting journals, but relevant material in general interest publications was also reviewed. Interviews Officials of appropriate government agencies, congressional committees, and professional legal and accounting organizations were interviewed and consulted as the study developed. Professional Review The conclusions and recommendations in this report were reviewed by tax specialists both in and out of government to determine their technical practicality and appropriateness in the context of sound overall tax policy. These specialists included attorneys, accountants, bankers, and specialists in estate planning, pension plans, etc. 14 CHAPTER 2 THE TAX PROBLEMS OF SMALL BUSINESS Despite the lack of precise and thorough statistical information, the primary tax problems of small business are easy to identify. Review of the literature on the subject reveals recurring themes in complaints by small businesspersons, legislators and tax professionals. In view of the enormous demands of the government for revenue and the technical and political complexity of tax policy, solutions to the tax problems of small business are much more difficult than their identification. This is due largely to the absence of an effective tax mechanism, such as a separate small business tax entity, to provide tax relief to small business without disturbing the existing system for other taxpayers and causing inordinate drains on the government's revenue. Further, the recurring general political, economic, and philosophical objections to tax reform are particularly troublesome when the reform is intended to benefit small business. Finally, the legislative process is not structured to implement small business tax reform. The recurring tax problems of small business generally can be placed into one of five categories. The study has revealed that the tax system makes it difficult for small businessperson to: Retain capital in his business for its operating needs and O Obtain necessary long-term and equity capital; Maintain the independence of his business as a viable economic entity; and Provide financial security for himself and his family. The persistence of these tax ills is painfully apparent upon examination of the report of the Senate Select Committee on Small Business summarizing the findings of the monumental nationwide small business tax 1 hearings conducted in 1957. These hearings, the most extensive of their effort. kind ever conducted, were initiated by the Committee, then under the chairmanship of Senator John Sparkman of Alabama, long an effective champion of the small business There has been little change in small business tax complaints during the twenty years since the hearings. In some instances, the problems are more pressing today than they were then. To emphasize the inadequacy of subsequently attempted solutions to the problems, the discussion in this chapter quotes extensively from that 1958 Senate Small Business Committee report. It is hoped that an awareness of the relevance of that twenty-year-old report to the present small business tax situation will demonstrate forcefully the urgent need for small business tax reform before these chronic tax ills become terminal. Retention of Capital in the Business The 1958 Senate Small Business Committee report discussed the impact of taxation on the retention of capital in the business as follows: "Historically, the usual manner of financing growth of |