Capital Gains Tax, Venture Capital, and Innovation in Start-ups
Review of Finance, Forthcoming
60 Pages Posted: 27 Nov 2017 Last revised: 7 Jun 2023
Date Written: November 13, 2019
Abstract
We examine the effect of staggered changes in the state-level capital gains tax on venture capital (VC)-backed start-ups and show that an increase in the tax rate of VC firms reduces the quantity and quality of patents by the start-ups. The results are consistent with a reduction in VC firms' incentives to provide effort: increases in the capital gains tax for VC firms lead to incrementally lower innovation exchanges between start-ups in the VC firm's portfolio. VC firms also decrease the level of investment in start-ups and the size of their portfolio as well as increase the number of start-ups that they write off.
Keywords: Innovation, Capital Gains Tax, Venture Capital, Entrepreneurship
JEL Classification: G24, H25, L26, O31
Suggested Citation: Suggested Citation