Investor Tax Credits and Entrepreneurship: Evidence from U.S. States
115 Pages Posted: 31 Aug 2020 Last revised: 30 Apr 2023
There are 2 versions of this paper
Investor Tax Credits and Entrepreneurship: Evidence from U.S. States
Date Written: August 2020
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.
Suggested Citation: Suggested Citation