INTRODUCTION During the past twenty years, many proposals have been advanced for tax changes to provide relief for small business. Some of these proposals have been incorporated into the law. This study of the impact of taxation on small business has concluded that while the prior proposals have been of great help, they have been piecemeal efforts. As such they have been unable to correct the overall debilitating effect of the present tax system on small business. A new and fresh approach is necessary. The study concluded that: o The unique tax problems of small business require solution o The solution to the tax problems of small business therefore require a definition of small business as a separate, identifiable taxable entity. The study revealed that the resolution of the major tax problems facing small business would also resolve the fundamental economic problem facing it. This is the problem of developing economically viable small businesses making them an attractive investment alternative for private savings. The small business tax reform program recommended would enable small business viability by: o Stimulating internal growth of small enterprises as a result of permitting greater retention of earnings for use in the enterprise or similar small enterprises; o Producing the necessary capital, without using additional government funds, to provide federal management assistance and educational opportunities. Many proposals of the past are incorporated into the recommended reform program. Some prior proposals have been rejected. The recommended program goes further, however, by establishing a separate small business tax entity which is defined in terms of its economic characteristics and takes into account the realities faced by the small businessperson. Within this framework, other recommendations specifically address the unique tax problems of this economic sector. Thus, it is possible, without creating havoc with the present revenue system, to provide comprehensive small business tax reform, and at the same time to substantially simplify the tax law specifically pertaining to the sector. No previous tax reform proposal has successfully achieved four objectives which would result from implementation of the recommended program. Specifically, the proposed program would: o Increase the attractiveness of the small business sector as an investment alternative by permitting deferral of tax on most types of income resulting from private savings committed to the sector; o Facilitate capital formation for small businesses by integrating the corporate and individual taxes; o Establish a complete data base for analysis of the impact of taxation on small business, and for other non-tax analysis purposes; o Achieve an overall balanced impact on the public revenue. Deferral of Tax Integrated into this reform program is a mechanism for attracting private capital into the small business sector. Such investment could take the form of the establishment of new small businesses. securities. It could also take the form of passive investment in small business investment Using several variations of a technique well known in the tax law, the interlocking recommendations provide complete tax deferral for most types of income from small business investments if the income remains invested in the small business sector. Tax is triggered when the income is permanently withdrawn from the sector. Such withdrawal can take many forms including payment of salaries, interest, dividends or sales of small business investments. Recent studies Integration of the Corporate and Individual Taxes have indicated that the double taxation of corporate income tends to discourage capital formation. This is particularly troublesome because it aggravates other problems faced by small business in the attempt to attract long term and equity capital. The recommended tax reform program would achieve tax integration for virtually all small businesses. This would be accomplished by the creation of the separate tax entity for the small business enterprise, and the amendment of Subchapter S to make it more workable. Data Base The need for a data base for analysis of small business problems is well recognized. The creation of the separate Small Business Enterprise tax entity results in a complete data base. It would be easy to summarize the information from the special tax returns filed by such enterprises for use by the Treasury (to evaluate the impact of taxation |