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Financing Entrepreneurship through the Tax Code: Angel Investor Tax Credits

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  • Sabrina T. Howell
  • Filippo Mezzanotti

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.

Suggested Citation

  • Sabrina T. Howell & Filippo Mezzanotti, 2019. "Financing Entrepreneurship through the Tax Code: Angel Investor Tax Credits," NBER Working Papers 26486, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26486
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    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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