Financing Ventures

Sánchez, Juan M.; Han, Pengfei; Greenwood, Jeremy

doi:10.20955/wp.2017.035

2017

DOI: 10.20955/wp.2017.035

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Financing Ventures

Juan M. Sánchez

Pengfei Han

Jeremy Greenwood

Abstract: The relationship between venture capital and growth is examined using an endogenous growth model incorporating dynamic contracts between entrepreneurs and venture capitalists. At each stage of …nancing, venture capitalists evaluate the viability of startups. If viable, VCs provide funding for the next stage. The success of a project depends on the amount of funding. The model is confronted with stylized facts about venture capital; viz., the average cash-on-cash multiple and statistics by funding round concern… Show more

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“…2 In 2018, the prediction was mostly correct, as noted in Barro (2019). 3 Greenwood, Han, and Sánchez (2018).…”

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confidence: 99%

Tax Cuts, Venture Capital, and Long-Term Growth

Sánchez¹

2019

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T he effect of lower taxation on growth was a central argument in favor of the Tax Cuts and Jobs Act of 2017. Barro and Furman (2018) predicted that the act would boost gross domestic product (GDP) by 1.1 percentage points per year in 2018 and in 2019 2 but that most of the boost will disappear quickly, decreasing to only 0.2 percentage points annually after 10 years. In this essay, I argue that data on innovation and activities funded by venture-capital (VC) show the permanent impact of tax cuts on growth-given that the tax cuts remain. Most of the analysis will draw from my recent working paper "Financing Ventures: Some Macro economics," written with Jeremy Greenwood and Pengfei Han. 3The Tax Cuts and Jobs Act made two significant changes to business tax law. First, it lowered the federal tax rate by up to 14 percentage points for businesses, with varying rate changes depending on the form of incorporation. Second, it allowed companies to deduct the full cost of their investments in anything other than structures from current taxes.Our paper analyzes the effect of tax rate changes in a model in which VC-financed innovation drives economic growth-with the aim of explaining real-world funding for leading firms in sectors such as information and communication technology, biotechnology, and services, where VC funding is particularly important for startups.In the United States, entrepreneurs funded with VC pay a 15 percent tax rate on their gains after an initial public offering or acquisition. In other countries, especially in Europe, similar entrepreneurs would pay much higher tax rates. Our model predicts that increasing the U.S. tax rate from 15 percent to 35 percent would decrease growth by 0.11 percentage points for as long as the change persists. This seemingly small growth change is very important, as it has a large cumulative effect on the level of output over time.

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“…2 In 2018, the prediction was mostly correct, as noted in Barro (2019). 3 Greenwood, Han, and Sánchez (2018).…”

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confidence: 99%

Tax Cuts, Venture Capital, and Long-Term Growth

Sánchez¹

2019

Self Cite

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Financing Ventures

Cited by 1 publication

References 18 publications

Tax Cuts, Venture Capital, and Long-Term Growth

Tax Cuts, Venture Capital, and Long-Term Growth

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