- October 1, 2020
- Posted by: matt
- Category: Blog
Tax incentives for investors serve as one of our primary tools to incentivize investment in startups and in other types of desirable economic development activities. Examples include tax credits for angel investors, enterprise zones, and the Trump Administration’s signature Opportunity Zones program. A number of recent studies suggest that we might want to take a deeper look at how these incentives work and whether they really do the job. Here’s a rundown:
- In August, the White House released a glowing report on the Opportunity Zone program, arguing that it has sparked $52 billion in new investment in distressed communities across the US. A number of reserachers have questioned these numbers, arguing that the White House claims are wildly overstated. In addition, many analysts question whether the investments are truly triggering investments that would not have happened “but for” the Opportunity Zone incentive. At this point, a fair assessment would be as follows: many investors are benefitting from the program, but the jury is still out on whether Opportunity Zones are an effective tool for revitalizing distressed areas.
- An August 2020 National Bureau of Economic Research (NBER) working paper examined the impact of angel investor tax credits, which are now available in 31 US states. The researchers find that the credits generate an increase an angel investing, but have little impact on local startup activity. The authors suggest that direct subsidies to firms may be a more effective strategy.
- A July 2020 NBER working paper, by Harvard Josh Lerner and Ramana Nanda, takes a deep dive into the role of venture capital in driving US innovation. The article is more about raising questions than offering final conclusions. Yet, the authors worry that VC investing has become so technically focused and specialized that its broader impacts on promoting innovation and technological change may be limited.
A few negative studies should not directly prompt a policy change, but they should push us to do more research and analysis to ensure that incentives actually produce the outcomes we seek in terms of more and better jobs and better places to live, work, and play. We need a more robust innovation policy in this country, but let’s do our best to do it right!