Capital Gains Tax, Venture Capital, and Innovation in Start-ups
68 Pages Posted: 27 Nov 2017 Last revised: 7 May 2019
Date Written: May 1, 2019
We examine the effect of staggered changes in state-level capital gains tax rates on Venture Capital (VC)-backed start-ups and show that an increase in tax rates reduces patent quantity and quality. The results are consistent with a reduction in VC incentives to provide effort: VC-level tax increases lead to incrementally lower patent production by start-ups located out-of-state, and not linked by a direct flight to the VC investor. We also find evidence of a change in entrepreneurs' incentives: after a tax increase, entrepreneurs decrease innovation risk, and stay invested for longer (the lock-in effect).
Keywords: Real innovation, Capital gains tax, Entrepreneurship, Venture capital
JEL Classification: G24, H25, L26, O31
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