Investor Tax Credits and Entrepreneurship: Evidence from U.S. States
124 Pages Posted: 8 May 2020 Last revised: 9 Aug 2022
Date Written: August 8, 2022
Abstract Angel investor tax credits are used globally to spur high-growth entrepreneurship. Exploiting their staggered implementation in 31 U.S. states, we find that they increase angel investment yet have no significant impact on entrepreneurial activity. Two mechanisms explain these results: Crowding out of alternative financing and low sensitivity of professional investors to tax credits. With a large-scale survey and a stylized model, we show that low responsiveness among professional angels may reflect the fat-tailed return distributions that characterize high-growth startups. The results contrast with evidence that direct subsidies to firms have positive effects, raising concerns about promoting entrepreneurship with investor subsidies.
Keywords: entrepreneurship, investor tax credit, angel financing, government subsidy
JEL Classification: E24, G24, H71, L26
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