Capital Gains Taxes, Venture Capitalists, And Entrepreneurship

Topics:
Small Business,
Venture Capital
Tags:
Entrepreneur,
University Of Cologne,
Taxes,
Management,
Investment,
Financing Startups,
Financial Planning,
Finance,
Entrepreneurship,
Venture Capital
Source:
University of Cologne

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Overview: In many countries including the U.S., capital gains earned by owners of start up firms are taxed at lower rates than other types of income. This paper analyses the implications of this tax policy for economic efficiency. We consider a model where the success of an entrepreneurial project depends on financing and business advice provided by venture capitalists and venture capitalists cannot commit to providing effort. If entrepreneurs and venture capitalists are equally well informed about project quality, the incentive problems between entrepreneurs and venture capitalists can be solved by private contracting, so that tax policy should be neutral. If entrepreneurs are better informed about the quality of their project than venture capitalists, contracts between entrepreneurs and venture capitalists are distorted.

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Format: PDF | Size: 45KB | Date: Feb 2003 | Pages: 15

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