Tax policy, venture capital, and entrepreneurship
The paper studies the effects of tax policy on entrepreneurship and venture capital activity. Entrepreneurs pursue a single high risk project each but have no own resources. Financiers provide equity finance. They must structure the entrepreneur's profit share and base salary to assure their incentives for full effort and committment to the project. The extent of risk-diversification is, thus, limited by the presence of moral hazard. The contract must also be sufficiently generous to attract entrepreneurs who might pursue alternative career options. In addition to providing equity finance, venture capitalists assist with valuable business advice to enhance survival rates. Within a general equilibrium framework with a traditional and an entrepreneurial sector, the paper investigates the effects of taxes on entrepreneurship and the equilibrium level of managerial advice. It considers differential wage and capital income taxes, a comprehensive income tax, incomplete loss offset, progressive income taxation as well as investment and output subsidies to the entrepreneurial sector.
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