Kauffman-Funded Research Measures How Taxes Affect Investment Incentives for Startups and Innovative Firms

KANSAS CITY, Mo. (Feb. 9, 2015) — The Tax Policy Center today released a report, funded by the Kauffman Foundation, that examines how the current U.S. tax system affects incentives to invest and how those might change under various tax reforms. It specifically focuses on entrepreneurial ventures and firms large and small that invest in new ideas.

"New and young firms are America's engine of job creation," said Kauffman Foundation Policy Director Jason Wiens. "As tax-reform discussions continue in Washington, this report highlights important ways in which federal tax policy can incentivize certain types of investment in startups.

Further work on how taxes impact entrepreneurship will be critical to ensuring any changes to the tax code do not constrain this source of economic growth."

Titled "Tax Policy and Investment by Startups and Innovative Firms," the paper examines how several tax incentives try to encourage investment in research and development and by small businesses.

The study finds, however, that those advantages are weakened, and sometimes eliminated, for two main reasons: first, because businesses that invest in new ideas rely more on higher-taxed equity than do firms that focus on tangible investment; and, second, because startups are often limited in their ability to use tax deductions and credits.

These limits can more than offset the benefit from tax incentives.

For more information and to access the full report, visit www.taxpolicycenter.org.

About the Tax Policy Center
The Tax Policy Center is a joint venture of the Urban Institute and Brookings Institution. It is made up of nationally recognized experts in tax, budget, and social policy who have served at the highest levels of government. Based in Washington, D.C., the center provides timely, accessible analysis and facts about tax policy to policymakers, journalists, citizens, and researchers.