The National Dialogue on Entrepreneurship reports on a study by the Community Development Venture Capital Association that tax incentives for equity investments in start-up and emerging ventures has grown significantly over the past decade.
"A new study from the Community Development Venture Capital Association (CDVCA), State Tax Credit Incentives for Equity Investments: A Review of Current Practices, highlights this progress. Eighteen states now offer tax credits to equity investors, with most of these programs coming on line in the past five years. These credits typically fall in the range of 20-40% of the value of each investment."
While any tax breaks are welcome, too often these end up becoming programs of social and economic engineering. Take for example Hawaii, which has a "program for technology financing, provide a 100% credit."
Also, such programs have strict requirements that generate many hours of time from your investor's CPA to assure compliance. (See my earlier post on the growth of the tax compliance industry). I saw this first hand in our business when we had an infusion of equity investment.
Let's pull the current tax system out by its roots. A program such as Rep. Linder's FairTax would lead to a dramatic increase in investments in emerging business and more reinvestment by entrepreneurs into their own ventures without government agencies and politicians trying to decide winners and losers. That is for the market to sort out.
While programs like equity investment tax credits may be created with good intentions, we all know where the road that is paved with good intentions leads to....
