Many analysts believe that a flat business tax would significantly benefit small businesses. The Armey-Shelby flat tax plan would apply the same tax rate to both businesses and individuals -- replacing 600 different tax forms with two, each the size of a postcard.

To calculate taxable income, a business would simply take gross revenue from sales and subtract allowable costs, defined as: purchases of goods, services and materials; wages, salaries and pensions; and purchase of capital equipment, structures and land. The resulting taxable income would then be taxed at a rate of 17 percent.

The flat tax would reduce the cost to business of complying with the tax code by 94 percent -- from $150.6 billion per year to $9.4 billion, according to the Tax Foundation. Small businesses would especially benefit from lower compliance costs, because they now bear a compliance burden that is disproportionate to their size or tax liability.

In 1992, for example, corporations with assets of $1 million or less paid a minimum of $724 in compliance costs for every $100 they paid in income tax -- or $28.6 billion as a group for $3.9 billion in income taxes.

In addition to reducing tax compliance costs, a flat tax would benefit small businesses in other ways:

• All capital purchases would be immediately expensed, lowering the first-year tax cost of new investments.

• Capital purchases could be carried forward to reduce or eliminate a tax liability in future years.

• The Alternative Minimum Tax would be repealed -- along with the additional records businesses must keep to determine if they are subject to it.

• It eliminates the estate tax -- which is responsible for the breakup of many small family-owned business and the destruction of jobs.

• It eliminates the capital gains tax, thereby lowering the cost of capital and increasing the rate of return to investors.

Finally, small businesses would also benefit from the improved economy analysts foresee under a flat tax: lower interest rates, perhaps 25 percent lower, and an increased rate of economic growth.

Source: Scott Moody, "The Flat Tax and Small Business," Issue Analysis No. 26, April 19, 1996, Citizens for a Sound Economy Foundation, 1250 H Street, NW, Suite 700, Washington, DC 20005, (202) 783-3870. For Text