Working Paper: NBER ID: w26486
Authors: Sabrina T. Howell; Filippo Mezzanotti
Abstract: A central issue in public finance is the tradeoff between maintaining tax revenues and using the tax code to incentivize particular economic activities. One important dimension of this tradeoff is whether incentive policies are used in practice as policymakers intend. This paper examines one particular tax program that many U.S. states use to stimulate entrepreneurship. Specifically, angel tax credits subsidize wealthy individuals’ investments in startups. This paper finds that these programs have no measurable effect on local entrepreneurial activity or beneficiary company outcomes, despite increasing some measures of angel activity. This appears to reflect the programs failing to screen out financially unconstrained firms and often being used for tax arbitrage. Over 90 percent of beneficiary companies fall into at least one of three categories: a corporate insider received a tax credit; the company previously raised external equity; or the company is not in a high-growth sector. Notably, at least 33 percent of beneficiary companies include an investor receiving a tax credit who is an executive at the company.
Keywords: angel investor tax credits; entrepreneurship; public finance; economic activity
JEL Codes: G00; G18; G24; G38; O30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| angel tax credits (H31) | angel deals (Y70) |
| angel tax credits (H31) | unique investors (G24) |
| angel tax credits (H31) | employment at young firms (L26) |
| angel tax credits (H31) | number of small firms (L25) |
| beneficiary companies (G23) | success (Y60) |
| beneficiary companies (after controlling for previous financing) (G32) | success (Y60) |
| angel tax credits (H31) | having at least 25 employees in the second year (L26) |