In the whole range of government-business relations, nothing gives rise to more complaints than the federal income tax. Given every person's desire to hold on to what is his, it probably defies human ingenuity to devise a truly lovable tax. But the federal corporate income tax hurts small business in ways that are unnecessary:

• The law is so complex that unless small business retains the services of knowledgeable -- and expensive -- lawyers or accountants, not merely for preparing returns but also for every step in planning, unnecessary taxes will be incurred and opportunities to save overlooked.

• The tax is collected at times when it frequently diverts funds from the growth and financial support a small business needs in its starting phases.

Dissatisfaction with the income tax law is not new, as evidenced by the continual tinkering with its provisions. But there is a growing sense that tinkering is not enough. Thus we have various proposals, such as a flat-rate tax or a value-added tax, to name a couple, which might be both simpler and more helpful to the growth of the economy.

I believe that as far as small business is concerned, the basic source of the problem is that small companies are subject to exactly the same rules and regulations as the corporate giants. In computing depreciation, bad-debt reserves, recapture of investment credit, and every other aspect of the corporate income tax, the corner garage must deal with the same complexities as General Motors Corp. The complexities may be justified for GM in order to prevent huge revenue losses. But for the corner garage, this elaborate game is simply not worth the candle.

What is needed is a new and separate tax for small business -- a tax that is simple to understand, thus facilitating planning, and easy to comply with and administer. Further, it should be a tax that can be paid at times when it will not unduly burden the growth of the business. What kind of tax might accomplish this?

I propose a "cash flow" income tax.

The basic concept of such a tax is simple enough: All cash receipts are income, all expenditures are deductions. If during any year receipts exceed expenditures, there is a positive cash flow and a tax is due. If, on the other hand, the money spent equals or exceeds receipts, no tax is owed. The important point is that the nature of the receipt or expenditure does not matter. Therefore, all the distinctions of the present income tax law, such as that between "ordinary" and "capital," or that between interest and dividends, become irrelevant. If the business kept all its cash in a single bank account, all it would have to do to determine its tax liability would be to look at the balance at the beginning of the year and at the end. If tlne account had not grown, no tax would be due.

It may be asked whether this would not lead to tax avoidance, since a business could eliminate tax in any year simply by paying more salary or dividends to its owner-employees or by investing in more inventory or equipment. The answer is "Yes, but so what?" The owner-employees will have to pay income tax on tlne salary and dividends they receive, and that one tax on the income of the business should be enough. And if the desire to avoid the cash-flow tax encourages purchases of inventory and equipment, that is just the kind of incentive to economic growth the tax law should provide. We can count on the self-interest of the small businessman not to make economically unjustifiable expenditures for inventory or equipment.

To understand a little better what contribution a cash-flow income tax might make to both simplification and better economics, it may be helpful to compare it briefly with the income tax.

The income tax generally measures income on either the cash basis or the accrual basis. The accrual basis is required for all businesses that have inventory. (In this way they are prevented from deducting the cost of the inventory until it is sold.) The cash basis is simpler than the accrual basis, because it avoids such intricacies as LIFO (last-in, first-out) and FIFO (first-in, first-out) valuation of the inventory, bad-debt reserves, and the like. Nevertheless, it contains many complexities a cash-flow tax would eliminate.

For example, when a cash-basis taxpayer receives a payment, he may be required to classify it according to whether it is income or a return of capital -- for instance, a repayment of a loan, or interest on the loan. Also, because of the distinction between capital gain and ordinary income, the sale of a machine used in a business may require classification even by a cash-basis taxpayer into three different parts: return of basis, which is not taxable; recapture of depreciation, which is taxable as ordinary income; and the excess of the proceeds over the foregoing, which is classified as capital gain. Under a cash-flow approach, none of these distinctions matters. Money in is income, whatever the source.

The same holds true on the expenditure side. The present tax law asks if payment is interest and therefore deductible, or a dividend and nondeductible. Answering this question involves reference to many factors that indicate, somewhat uncertainly at best, whether money made available to the corporation by investors should be classified as debt or equity. Again the present law asks even of a cash-basis taxpayer: Does the asset that you have bought with your expenditure have a limited life so that it can be "expensed," or does it have a longer life so that its cost cannot be deducted from current income but must be recovered over its anticipated useful life through the depreciation deduction? If the answer is capitalization and depreciation, then the taxpayer must decide what the anticipated useful life is, what the probable salvage vnlue is, and what type of depreciation deduction is best.

The cash-flow tax does not take into account what the nature of an expenditure may be. Dividends and interest, loan repayments and stock redemptions, current expenditures and the cost of capital items are all deductible. The elimination of these complexities is such an enormous proposition that we might well go back to the one-page return with which the income tax began about 70 years ago.

Won't the cash-flow tax involve its own definitions and complexities? Probably yes, but to so much smaller a degree than the present income tax that the difference is not one of degree but one of kind. Thus "cash" will have to be defined to include such items as marketable securities and other passive investments, so that a business with a cash surplus at the end of the year cannot avoid tax by investing it in shares of AT&T. Further, a business may wish to spend some of the money it has received not immediately but rather over a period extending longer than the current year. This cash should not give rise to tax and, therefore, the law would have to provide a reserve for future business needs. Finally, if the tax treatment for small business is more favorable than for large, some may be tempted to divide existing large businesses into several parts. Therefore, rules would have to be established under which corporations under common ownership would be aggregated.

Each of these points involves some complexity. But each of these issues already exists under current law. We already have provisions dealing with passive investments, reserves for reasonable business needs, and the aggregation of corporations under common ownership. So while in these three areas some definitions would be needed even for a cashflow tax, this merely involves continuation of present rules. In all other areas the complexities would be eliminated.

While simplicity is the greatest merit of the cash-flow tax, its economic benefits should not be overlooked. These derive from the fact that the tax is better attuned to ability to pay. The payment of taxes requires not income but money; and so it is money that, generally speaking, determines ability to pay. An income tax taxes a profitable business even though it has invested all of its funds in the business; a cash-flow tax waits until cash is available and so does not interfere with expansion plans. The present law permits deductions on the basis of borrowed money by permitting depreciation deductions long before any money is actually invested by the owner, and therefore opens the door to abusive tax shelters. The cash-flow tax looks to the cash situation of the borrower. When the borrower's ability to pay tax is reduced by the need to pay off the debt incurred to buy the property, then tax relief is given.

One last question should be answered: What will the conversion to the cashflow tax cost the Treasury? In the first place, as just noted with respect to tax shelters, the cash-flow tax does not mean tax reduction for all, only for those who spend their money in the conduct of their business. In the second place, the impact of the cash-flow tax will depend on how we define the small business corporation that would be entitled to compute its tax liability on the cash-flow basis. The statistics indicate that the line could be drawn generously without risking any substantial loss in revenue. Roughly 2.6 million corporate income tax returns are filed each year. Of these, 1.4 million, or more than half, are filed by corporations having less than $100,000 in assets. These corporations as a group produce less than 1% of the total corporate income tax collection. Therefore, even if the cash-flow tax exempted these corporations entirely, which it would not do, the revenue loss would not be significant. Indeed, exempting these small corporations frorn the income tax would permit the Internal Revenue Service to concentrate on the top 0.1% of all corporations that now account for slightly more than half of all eorporate tax revenue. As a result, total tax collections might well increase.

To finish where I began: Small business cannot hope to have the relief frora the complexities and burdens of the present income tax by tinkering with what we now have, by patching once again thricepatched patches. What it must do is persuade Congress and the Administration to make a new beginning, to have a system appropriate to the financial and administrative ability of small business. A cash-flow tax fills the bill.