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

Abstract

We evaluate the impact of the PATH Act of 2015, which allowed some existing VC-backed startups to monetize their R&D tax credits against payroll taxes in the U.S. We show that marginally eligible startups increase their demand for R&D workers more than marginally ineligible startups after the PATH Act's enactment. These effects are stronger among startups that are financially constrained. Marginally eligible startups subsequently recruit workers with more education and experience and file more patents with new inventors. Our findings suggest payroll tax credits are effective in scaling startups and stimulating R&D activities through skilled labor recruitment.

Keywords: Venture capital, entrepreneurship, R&D tax credits, payroll tax credits, skilled labor, startup scaling

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