The Daily Alaska Empire

SMALL BUSINESS
Much time and ingenuity has been spent on the problem of how to provide new capital for small business; too little has been spent, perhaps, on the question of making it possible for small business to create capital through the retention of earnings.
Businesses grow in part by attracting outside capital, in part from earnings that are "plowed back." In years gone by, the primary source of funds for small enterprises was individual investors, where the requirement was for long-term capital. The high level to which individual income taxes have risen in recent years, however, has produced a situation in which the possible return on such investments, when measured against the risk involved, is totally inadequate. But businesses that grow do not grow entirely by attracting outside capital. They also grow through the creation of their own capital, and this is especially true in the case of small business enterprises.
Domestic Commerce, a publication of the United States Department of Commerce, recently published an interesting and realistic discussion of this question of small business financing by J. C. Dockeray of the Finance and Tax Division, Office of Small Business. The typical small business enterprise, Mr. Dockeray noted, is unincorporated, and hence the proprietors are subject, not to the corporation tax, but to the steeply graduated individual income tax. Another handicap under which small business and especially the young enterprise operates is widely fluctuating earnings.
"A satisfactory method of averaging income for tax purposes must be developed," this writer observed, "if businesses with fluctuating characteristics are to be on a comparable tax basis with businesses whose incomes are stable."
Correction of this difficulty would require an amendment to the revenue laws granting individuals engaged in business the privilege of carrying forward losses or averaging them out by some other method.
To these tax obstacles which make capital creation for small business a major problem must be added another, in cases where such enterprises are incorporated. That is the spirit of the revenue laws as reflected in Section 102, which places the responsibility upon such companies to show why they have not paid out most of their earnings in dividends.