I didn’t see much local discussion of the Wall Street Journal article that came out on March 19th called “On Angels’ Wings” (sub). This article talked about proposed legislation, being led by Earl Pomeroy (D, North Dakota) and Don Manzullo (R, Illinois) and is being supported by the Kaufmann Foundation but has the Angel Capital Association staying “neutral”. This seems to come up each year in some form or another.
The Access to Capital for Entrepreneurs Act proposes to give a 25% tax credit on the front end to accredited investors. As great as this sounds, there are some possible unintended consequences. Some have argued that it will get investors to do less due diligence and invest in worse companies. Screw that – it’s survival of the fittest. If you’re gonna make dumb investments just because you can offset the risk with a 25% tax credit, you’re still throwing away a bunch of money. You’ll learn, or really you should know better already. Others say the government should just stay out of trying to influence how people invest their money. I generally agree with that and think the free market should be able to sort things out.
But this sure sounds good for entrepreneurs and angel investors on the face of it. I’m just wondering what everyone else thinks. Let me know. I need more data.
I’m totally with you on the “encourages less DD and causes more bad investments.” Totallly screw that. The market handles that one quite well already.
We (especially Colorado) needs anything that can help speed up the process and/or encourage high tech investment.
Yup, with you again on “operating at 2 levels”. At one level, I’m tired of govt manipulation of tax breaks to “steer” the economy. A reason why a “flat tax” will just never happen. A flat tax will last 3 nanoseconds or until the next congressional session… whichever comes first.
That being said, since a flat tax ain’t gonna happen, and being the selfish jerk that I am, put the taxes where it doesn’t affect me (cigarettes) and put the breaks where i do: tech investment.
Talking through both sides of his mouth,
Jim
One person wrote about it: Me!
You are right in your early thinking. In addition, I think it’s going to lead to a rapid expansion of angel clubs, networks, etc. I also think a lot of formerly non-profits will realize they can get funding for a new enterprise by becoming for-profit startups and getting angel investments.
Too bad there’s no easy way to link to the actual bit of proposed legislation. Soon!
Scott – I did read your post on it initially. And yes, I tried to find this on LgDb to link to – that would have been cool.
There are many other countries (Ireland included :wink:) that have ‘goverment’ funded schemes to encourage startups.
Several also have ‘goverment’ mentors/helpers 2 help with this due dilgence process and ensure that most of these startups go on the right track.
Not a slam-dunk but better than giving away free money.
I’ll be writting more about these in mu blog (likely just IRL and UK)
Lal
Another way to frame the discussion would be around the shifting of investment risk. If I correctly understand the proposed legislation a portion of the angel’s investment risk would shift from the angel to federal legislators and budget makers. Federal entities might be “betting” that if they take the risk of lower tax revenue on the front end, higher tax revenue will occur in the future as marginal economic growth increases. The belief being that more new companies would cause a net increase, from employment and value creation, in future taxable economic growth.
One issue in my mind is whether or not we want politicians and bureaucrats placing this “bet”. I contend an unencumbered free capital market allocates financial capital much more efficiently than politicians. Start-up investment decisions are already marginally impacted by investment income taxation. If an investor is fortunate to realize investment income, it may be taxed as dividends or capital gains. The size and timing of these taxes, on the margin, impact investment decisions.
I would be more supportive of the front end tax credit as a mechanism to spur an increase in company formation activity if all of the back end taxes were reduced first. Eliminate taxation of dividends and capital gains first. If after five or ten years we still believe there is room for improvement, then try a tax credit on the front end.
Lastly, the federal tax code already has special, favorable tax treatment for capital gains from investments in Qualified Small Businesses. I would suggest improving this existing program, as opposed to adding another layer of complexity to the tax code.