The Labor Effects of R&D Tax Incentives: Evidence from VC-Backed Startups

Abstract

We examine whether VC-backed startups respond to R&D tax incentives by attempting to scale R&D activities through employment. We exploit a provision of the PATH Act of 2015, which allows qualified small businesses to offset payroll taxes with R&D tax credits, and show that marginally eligible startups increase their demand for R&D workers more than marginally ineligible startups after the PATH Act’s enactment in 2015. Marginally eligible startups not only ramp up recruiting of workers of higher quality, but also subsequently file more patents with new inventors. Our findings reveal that tax incentives can stimulate startup R&D activities through skilled labor recruitment.

Keywords: Venture capital-backed startups, entrepreneurship, R&D tax incentives, payroll tax credit, skilled labor

JEL Classification: D22, H25, H32, J23, J24, O32, O38