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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

without disturbing the present broader tax system for other

segments of the economy;

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.

It could also take the form of passive investment in small business investment

securities.

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.

Integration of the Corporate and Individual Taxes

Recent studies

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 Subchapters 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

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