Capital formation with particular reference to venture capital

201 Pages·010.536 MB·English

by  Zidnak, Pete

CAPITAL FORMATION WITH PARTICULAR REFERENCE TO
VENTURE CAPITAL
A Thesis
Presented to
the Faculty of the Department of Economics
University of Southern California
In Partial Fulfillment
of the Requirements for the Degree
Master of Arts
by
Pete Zidnak
June 19^0
UMI Number: EP44702
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This thesis, written by
........... PETE_ZIDNAK...........
under the guidance of h%.iS.... Faculty Committee,
and approved by all its members, has been
presented to and accepted by the Council on
Graduate Study and Research in partial fu lfill­
ment of the requirements for the degree of
MASTER OP ARTS
Date.
Faculty Committee
.
Gtwirman
-
To
My Wife
TABLE OP CONTENTS
CHAPTER PAGE
I. INTRODUCTION............................... 1
The problem............. 2
The purpose and scope of the thesis . . . . . I4.
Sources of data................. £
Organization of the thesis................ 6
II. CAPITAL FORMATION ................... 11
Significance of capital formation . 12
What is capital formation? .......... ll}.
Capital formation and types of economic
systems . .............. . . . . . . . . . l6
Capital formation and savings .............. 19
Source of capital ......... 21
The necessity for capital formation. . . . . 2I4.
Conclusion........... 26
III. VENTURE CAPITAL— THE LIFEBLOOD OF A DYNAMIC
ECONOMY ......... 2?
Nature of venture capital 28
Equity capital versus debt financing . . . . 29
Dearth of equity capital.................. 314-
Conclusion ................ . . . . . . . . 39
IV. RETAINED EARNINGS AND DEPRECIATION . . . . . . 1{.0
Retained earnings........................ I4.0
V
CHAPTER PAGE
Depreciation . . . . . . . . . . . . . . . . 10
Proposals for depreciation policy reform . . Ij.8
Conclusion ............ . . . . . . . . . . 52
V. TAXATION IN GENERAL AND VENTURE CAPITAL . . . . 511-
Conclusion ............... 6l
VI. CAPITAL GAINS TAXATION AND VENTURE CAPITAL . . 63
Past provisions regarding capital gains . . . 6ij.
Present treatment of capital gains and
losses ............................... 6>Ij_
Revenue from capital gains taxation ......... 6?
Effects of capital gains taxation on
venture capital . . . . . . ............ • 67
Proposals for reform of the capital gains
tax structure . . . . . . . . 73
Conclusion............................... 78
VII. SECTION 102 AND THE FORMATION OF EQUITY
CAPITAL................................... 79
The provisions of Section 102. . . . . . . . 79
Effects of Section 1 0 2 .................... 81
Proposals for the reform of Section 102 . . . 83
Conclusion............... ................ 8lj.
VIII. DOUBLE TAXATION AND VENTURE CAPITAL
FORMATION.................................. 86
Nature of double taxation .......... 86
Vi
CHAPTER PAGE
Effects of double taxation . ............ 87
Proposals for reform............. . . . • 9^
Conclusion................................ 95
IX. THE CORPORATE INCOME TAX AND VENTURE CAPITAL . 97
The ttbasisw for corporate taxes . . . . . . . 97
The provisions of the corporate income
tax law . . . . . . . . ........ . . . . . 100
The receipts from corporate income taxes . . 101
The effects of corporate income taxes . . . . 103
Proposals for reform................. 106
Conclusion ......... 110
X. PERSONAL INCOME TAXATION AND VENTURE
CAPITAL FORMATION.......................... Ill
Provisions of present personal income tax . . 112
Effects of personal income taxation . . . . . 113
Reforms ............. 119
Conclusion . . . . . . . . . . . . . . . . . 12i{.
XI. OTHER FACTORS AFFECTING VENTURE CAPITAL . . . . 125
Fear and uncertainty........... 125
Lack of knowledge.......................... 132
Stockholder relations and managerial
policies......... 136
Conclusion................... 139
XII. INSTITUTIONAL FUNDS AND VENTURE CAPITAL . . . . lip.
vii
CHAPTER PAGE
Life insurance companies. . . . . . . . . . lljlj.
Investment trusts . . . . . . . . . . . . . . 150
Conclusion • • . • ......... ............. 156
XIII. GOVERNMENT AND ITS INFLUENCE UPON EQUITY
CAPITAL FORMATION . . . ..................... 158
Governmental lending ............... 158
Governmental spending ....................... l6l
Government and business.................. 163
Conclusion................. ........... 166
XIV. SUMMARY AND CONCLUSIONS.......................... l6?
Summary of findings...................... 169
Recommendations .................. 175
Conclusion . . . . . . . . . . . . ......... 178
BIBLIOGRAPHY......................................... 180
LIST OP TABLES
TABLE PAGE
I. Capital Formation in Relation to Gross
National Product . .................. 1?
II. Sources of Corporate Investment Funds,
19^6-191^9............................... 30
III. Estimated Taxes on Capital Gains and
Losses of Individuals, 1 9 3 5 - 1 9 . . . . . . 68
IV. Corporate Income Tax Liability and Dividend
Payments ....................... 102
V. Spending Units Owning Various Types of
Assets, Early 19^-9 . . . . . . . . . . . . . 115
VI. Federal Individual Income Tax Receipts . . . . 122
VII. Reasons For and Against Holding Various
Assets, Early 19^9 . . . . . . . . . . . . . 130
VIII. Distribution of Assets - U. S. Life Insurance
Companies 11\$
CHAPTER I
INTRODUCTION
Progress and prosperity are two important factors in
the phenomenal growth of the United States as a nation and
in the achievements which have resulted in a high standard
of living. Without these two factors, the economy of the
United States would be unable to produce the results which
have proven so beneficial to the country as a whole— In
fact, to all civilization.
It Is not denied that progress and prosperity in the
United States were possible because of the great natural
resources, the tremendous energy of the people, and the more
or less equal opportunities prevalent in our democratic
country. However, one faetor stands out above them all— the
vigor of enterprise with all Its incentives, opportunities,
genius, and innovations. It was this vigor of enterprise
that made America, that created wealth for the masses, and
that raised many large populations from the neolithic stage
of civilization. Moreover, this dynamic factor promises
incalculable benefits for the future. On the other hand,
if this tremendously productive force is crippled, the
mighty advance will stopj1
1 Carl Snyder, Capitalism the Creator (New York:
The Macmillan Company, I9I4.O), pp. 93-97.