In an effort to inject $500 billion of badly needed capital into small business by 1985, a leading Wall Street firm yesterday proposed elimination of capital gains taxes on new investments for a limited period.

John C. Whitehead, senior partner of Goldman, Sachs & Co., told the Senate select committee on small business such a change in tax law would not only benefit fledgling enterprises but also would increase tax revenues. He reasonsed that many investors might be tempted to take their taxable profits out of investments in established corporations in exchange for a chance at making tax exempt profits for a couple of years on investments in riskier ventures.

When Sen. Lowell Weicker (R.-Conn.) objected that this concept was contrary to the administration's policy to tax unearned income more heavily and was likely to benefit wealthy individuals the most, Whitehead conceded this was the price to pay for helping small business.

The problem of capital formation confronting small business, which accounts for 55 percent of all private employment, was dramatically brought out during the hearing:

The number of stock offerings by companies with a net worth of less than $5 million dropped from 698 in 1969 to 29 in 1977, according to the Securities and Exchange Commission.

The number of unseasoned companies making their first public offering dropped from 633, or 62 percent of all the issues offered in 1972, to 42 companies, or 16 percent in 1976. Most of these, of course, were new small enterprises.

The number of of broker-dealer firms dropped from 4,500 in 1970 to 2,900 in 1978. Most of these were regional firms, the traditional suppliers of new capitals to small business. Major Wall Street houses, according to a staff survey, will not underwrite firms with less than $1 million in profits.

The number of individual stock holders has dropped 20 percent in six years as a result of poor market performance and increased taxation of capital rains. Institutions, which have been prevented from making "imprudent" investments with pension funds since 1974, no longer dare to invest in small, risky companies.

Dan W. Lufkin, who was a partner in one of the hottest Wall Street firms during the 1960s, Donaldson, Lufkin and Jenrette, proposed a variation on Whitehead's idea. Lufkin called for an investment credit of 25 percent of the amount invested in small business. The credit would only be allowed against new, first-time investment, up to a ceiling of $250,000.

However, special advantages to small business at the expense of big business were opposed by Alan Greenspan, former chairman of the Council of Economic Advisors. Apart from special tax treatment of dividends of preferred stock, Greenspan testified there was little that could be done for small business compared with improving the overall investment climate.

He argued that special advantages would be a "short-sighted policy" because discrimination against big business would threaten to undercut the most productive parts of the free enterprise system.And since small business depends to a large extent on subcontracts from big business, failure to improve economic conditions for all would adversely affect the little entrepreneur.

The solution for small business, he testified, lies in relieving economic uncertainty through a reduction of government regulation and by cutting the inflation rate. Unless the purchasing power of the dollar can be stablized, he warned of a massive run on the dollar by foreign holders, resulting in a rapid increase of interest rates around the world, and especially in this country.