on small business), and by the Small Business Administration (to analyze its size standards and other problems of small business).

Balanced revenue effect Any tax reform proposal granting incentives to a segment of the economy will necessarily have a negative impact on the

public revenue.

programs.

The reform program recommended would shift to the private sector much of the funding now provided by the government for small business assistance This would be accomplished by the new Small Business Enterprise Bond (SBE Bond), created as an integral part of the tax deferral system. The reduction of current government expenditures should go far to offset the costs in tax revenue of the recommended tax relief.

To the extent that this creates a negative impact on the public revenue, the study concludes that:

o The effect will eventually be positive since viable small
businesses will generate additional taxes;

o If there is a negative effect, financial integrity and
peace-of-mind brought to a major segment of our population
by facilitating its current and future financial strength
is justification enough for adopting the proposals.

SUMMARY OF TAX PROBLEMS OF SMALL BUSINESS

(Discussed in Chapter 2)

The analysis of the taxing system revealed that as it relates

to the establishment, operation and economic health of small

business it:

DISCRIMINATES IN FAVOR OF BIG BUSINES BECAUSE

IT DOES NOT PERMIT SMALL BUSINESS TO RETAIN

OR ACCUMULATE CAPITAL NECESSARY FOR ITS:

CREATES A BIAS AGAINST SMALL BUSINESS BECAUSE
OF THE DIFFICULTIES ENCOUNTERED IN UNDERSTANDING
AND COMPLYING WITH ITS COMPLEXITIES, SUCH BIAS
BEING COMPOUNDED BY THE:

• Multiplicity of taxes at the federal, state
and local levels;

• Difficulty of estimating income and paying
taxes in advance;

• Lack of educational opportunities in the
area of taxation;

Expense and inadequacy of professional tax
assistance.

DOES NOT RESPOND TO THE NEED OF SMALL BUSINESS FOR
LONG-TERM AND EQUITY CAPITAL FOR EXPANSION BECAUSE
IT LACKS:

Incentives to attract private investment capital to this segment of the economy;

An effective investment vehicle for accumulating the capital when attracted.

COMPOUNDS DIFFICULTIES ENCOUNTERED BY THE OPERATOR
OF A SMALL BUSINESS IN PROVIDING FOR HIS RETIRE-
MENT SECURITY. BECAUSE EXISTING RETIREMENT PLAN
OPPORTUNITIES:

• Are not responsive to his special needs;

• Place unwarranted emphasis on the legal form
of business organization;

• Contain complexities making compliance difficult
and expensive.

COMPOUNDS THE BURDEN PLACED UPON THE FAMILY OF A
DECEASED SMALL BUSINESS OPERATOR BY INEQUITABLE
IMPOSITION OF THE ESTATE TAX

DISCOURAGES SMALL BUSINESS INDEPENDENCE BECAUSE IT:

• Penalizes the sale of a business to independent
operators but encourages mergers with larger
enterprises;

• Discourages sale by large enterprises of portions
of their business operations to independent enter-
prises.

The analysis of the tax system further revealed that it lacks
an effective mechanism for isolating and analyzing the problems
of small business in the absence of:

AN ADEQUATE DEFINITION OF SMALL BUSINESS FOR PURPOSES
OF PROVIDING INCENTIVES, REMOVING BIASES AND SIMPLI-
FYING THE LAW;

A FORMAL PROCEDURE FOR ANALYSIS OF THE IMPACT OF
EXISTING TAX PROVISIONS ON THE ESTABLISHMENT AND
OPERATION OF SMALL BUSINESSES.

Finally, the study revealed that the recurring general political, economic, and philosophical objections to tax reform are particularly troublesome when the reform is intended to benefit small business, and that the legislative process is not structured to implement small business tax reform.

SUMMARY OF RECOMMENDATIONS

To facilitate the implementation of the recommendations in

this report and to provide a framework for analyzing the impact of taxation on small business:

IT IS RECOMMENDED that tax definitions of small business be established which recognize and accomodate the special problems of both the smallest of business enterprises and medium sized enterprises. This would be accomplished by:

CREATION OF A NEW TAXPAYING ENTITY CALLED A "SMALL
BUSINESS ENTERPRISE" (SBE), DEFINED IN TERMS OF
THE NUMBER AND NATURE OF ITS EQUITY OWNERS, ITS
CAPITALIZATION, AND ITS GROSS PROFIT. THE SBE WOULD
BE TAXED IN A MANNER SIMILAR TO AN UNINCORPORATED
BUSINESS, BUT WOULD HAVE SOME TAX CHARACTERISTICS
OF A CORPORATION. THE LEGAL FORM OF ORGANIZATION
WOULD BE IGNORED; (Chapters 4 and 5)

DEFINITION OF A MEDIUM BUSINESS ENTERPRISE (MBE) AS
ANY ENTERPRISE QUALIFYING FOR FINANCIAL ASSISTANCE BY
THE SMALL BUSINESS ADMINISTRATION. THIS DEFINITION
WOULD NOT CREATE A NEW TAXPAYING ENTITY, BUT WOULD
SERVE TO LIMIT CERTAIN TAX BENEFITS TO ENTERPRISES
WITHIN THE SIZE CRITERIA. (Chapter 6)

To remove the discrimination against small business resulting from erosion by taxation of earnings otherwise available for

reinvestment:

IT IS RECOMMENDED that the tax law be amended to:

ALLOW A NEW GOVERNMENT SECURITY, CALLED AN "SBE BOND"
TO SERVE AS A VEHICLE FOR ACCUMULATION OF TAX-DEFERRED
EARNINGS, INVESTMENT IN SMALL BUSINESS BY PRIVATE IN-
VESTORS AND SPIN-OFF OF CERTAIN SMALL BUSINESS OPERA-
TIONS BY LARGER ENTERPRISES; (Chapter 7)

ALLOW A LIMITED DEDUCTION TO AN SBE EQUITY OWNER

FOR EARNINGS REINVESTED IN THE BUSINESS: (Chapter 7)

ALLOW A SPECIAL SBE INVESTMENT CREDIT FOR WORKING
CAPITAL ITEMS; (Chapter 7)

ALLOW SBE EQUITY OWNERS AN UNLIMITED NET OPERATING
LOSS CARRYFORWARD; (Chapter 7)

SIMPLIFY LIFO INVENTORY ACCOUNTING RULES FOR SBES;
(Chapter 7)

ALLOW MORE LIBERAL DEPRECIATION DEDUCTIONS FOR SBES; (Chapter 7)

EXEMPT SBES FROM DEPRECIATION RECAPTURE PROVISIONS;
(Chapter 7)

O ALLOW DEFERRAL OF TAX ON GAIN FROM SALE OF BUSINESS
PROPERTY BY AN SBE IF THE PROCEEDS ARE REINVESTED IN
OTHER QUALIFYING PROPERTY; (Chapter 7)

ALLOW A DEDUCTION FOR AMORTIZATION OF INTANGIBLE
ASSETS PURCHASED BY SBES AND MBES; (Chapter 7)

LIBERALIZE THE DEDUCTION FOR AMORTIZATION OF ORGANI-
ZATION EXPENSES FOR SBES AND MBES; (Chapter 7)

ALLOW REVERSE INCOME AVERAGING FOR EQUITY OWNERS OF
SBES. (Chapter 10)

To help remove the bias against small business created by com

plexity of the tax system:

IT IS RECOMMENDED that:

A COMPREHENSIVE STUDY BE INITIATED TO ANALYZE THE
PROBLEMS CAUSED BY THE MULTIPLICITY OF FEDERAL,
STATE AND LOCAL TAXES;

(Chapter 8)

GUIDELINES BE ESTABLISHED TO DETERMINE EMPLOYEE
STATUS FOR PAYROLL TAX PURPOSES; (Chapter 8)

QUICK REFUNDS BE MADE OF OVERPAYMENTS OF ESTIMATED
TAXES WITHIN 45 DAYS OF APPLICATION; (Chapter 8)

TAX EDUCATION BE PROVIDED TO OPERATORS OF SMALL
BUSINESSES WITHIN THE MANAGEMENT ASSISTANCE PROGRAM
OF THE SMALL BUSINESS ADMINSITRATION; (Chapter 8)
COSTS OF SUCCESSFULLY CHALLENGING THE GOVERNMENT IN
A TAX DISPUTE BE REFUNDED; (Chapter 8)

SBE EQUITY OWNERS BE CLASSIFIED AS SELF-EMPLOYED FOR
PURPOSES OF THE SELF EMPLOYMENT TAX; (Chapter 8)

THE NEW SBE TAX PROVISION BE ARRANGED IN ONE CHAPTER
OR SUBCHAPTER OF THE INTERNAL REVENUE CODE. (Chapter 8)

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