Financing Entrepreneurship through the Tax Code: Angel Investor Tax Credits

Sabrina T. Howell and Filippo Mezzanotti

No 26486, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A central issue in public finance is the tradeoff between maintaining tax revenues and using the tax code to incentivize particular economic activities. One important dimension of this tradeoff is whether incentive policies are used in practice as policymakers intend. This paper examines one particular tax program that many U.S. states use to stimulate entrepreneurship. Specifically, angel tax credits subsidize wealthy individuals’ investments in startups. This paper finds that these programs have no measurable effect on local entrepreneurial activity or beneficiary company outcomes, despite increasing some measures of angel activity. This appears to reflect the programs failing to screen out financially unconstrained firms and often being used for tax arbitrage. Over 90 percent of beneficiary companies fall into at least one of three categories: a corporate insider received a tax credit; the company previously raised external equity; or the company is not in a high-growth sector. Notably, at least 33 percent of beneficiary companies include an investor receiving a tax credit who is an executive at the company.

JEL-codes: G0 G18 G24 G38 O3 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-cfn, nep-ent, nep-pbe and nep-pub
Note: CF PR
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Citations: View citations in EconPapers (5)

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