Dilution vs. Risk Taking: Capital Gains Taxation and Entrepreneurship

Eduardo Azevedo, Florian Scheuer, Kent Smetters and Min Yang

No 12275, CESifo Working Paper Series from CESifo

Abstract: Recent proposals to tax unrealized capital gains or wealth have sparked a debate about their impact on entrepreneurship. We show that accrual-based taxation creates two opposing effects: successful founders face greater dilution from advance tax payments, whereas unsuccessful founders receive tax credits that effectively provide insurance. Using comprehensive new data on U.S. venture capital deals, we find that founder returns remain extremely skewed, with 84% receiving zero exit value while the top 2% capture 80% of total value. Moving from current realization-based to accrual-based taxation would reduce founder ownership at exit by 25% on average but would also increase the fraction receiving positive payoffs from 16% to 47% when tax credits are refunded. Embedding these distributions in a dynamic career choice model, we find that founders with no or moderate risk aversion prefer the current realization-based tax system, while more risk-averse founders prefer accrual-based taxation. We estimate that a 2% annual wealth tax has a similar impact on dilution as taxing unrealized capital gains, but produces no risk-sharing benefits due to the absence of tax credits in case of down rounds.

Keywords: capital gains tax; wealth tax; venture capital; entrepreneurship; dilution (search for similar items in EconPapers)
JEL-codes: G3 H2 J3 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-lma
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.ifo.de/DocDL/cesifo1_wp12275.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12275

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().