Many states have jumped on the concept of tax credits for angel investors as a way to funnel cash to startup businesses, revive moribund economies and put people back to work.
Ohio, for example, in 1996 implemented a program in which angel investors who put money in approved companies are eligible for a tax credit of up to 25 percent of the amount they invest, with a maximum of $250,000 per investment per company eligible for the credit. Investors and companies that have benefited from the tax credit gush about it.
But Jeff Cornwall, director of the Center for Entrepreneurship at Belmont University, isn’t buying the line about job growth. In a point-counterpoint column for The Wall Street Journal, Cornwall says angel investment tax credits don’t deliver on their promise.
“When I talk with people who conduct research in entrepreneurial finance and in public policy, no one can offer me a single shred of evidence that angel investment tax credits have any impact on job growth,” Cornwall wrote.
The problem, according to Cornwall, is that so few businesses ever receive angel investment that tax credits to angel investors simply won’t have a significant impact on employment. Of course there are examples of angel-funded companies that went on to hire scores of employees (biomarker test company Cleveland HeartLab comes to mind), but they aren’t widespread enough to make much of a dent in overall employment numbers.
About half of the states in the nation offer angel investor tax credits, the Journal reported.
Supporters of angel tax credits will no doubt find what they’re looking for from David Weaver, founder of Michigan’s Great Lakes Angels, who points to Wisconsin’s experience with the credits. The state says that 930 full-time jobs have been created by 125 companies that received investments through the state’s angel investor tax credit.
Instead of offering angel tax credits, Cornwall recommends cutting tax rates. He refers to a study that showed a reduction in the marginal personal income tax rate at the federal level makes entrepreneurs more likely to start businesses.
But Cornwall’s tax-cutting prescription is questionable.
Christina Romer, former chairman of President Obama’s Council of Economic Advisers, recently wrote that there’s no historic correlation between lower federal marginal income tax rates and economic growth. “Perhaps it’s time to reform tax policy based on facts, not worn-out assumptions,” Romer said. She wrote in a recent New York Times editorial:
If you can find a consistent relationship between these fluctuations and sustained economic performance, you’re more creative than I am. Growth was indeed slower in the 1970s than in the ’60s, and tax rates were higher in the ’70s. But growth was stronger in the 1990s than in the 2000s, despite noticeably higher rates in the ’90s.
In my experience "tax credits" are indeed worthless. The focus is in the wrong place. The investor thinks about the immediate reward and less about the investment. What is better, but rarely part of tax policy, is the ability to deduct investment losses from ordinary income. That results in better investment decisions, would increase the money available, and would indeed contribute to growth.
Dr Romer is correct if she means that tax rates are not the only variable that supports economic expansion or the creation of new companies. However, marginal rates are important both for the aggregation of wealth that becomes seed investment capital and the lowering of the risk adjusted rate of return required by investors in start up companies. Given Dr. Romer's history at the Obama administration, Iit is surprising that one would look for productive insights i her commentary on this subject.