Angel investing has become an important part of the fuel behind the entrepreneurial economic expansion. While investment by entrepreneurs and their friends and family still provides about 85% of the capital for new start-ups, angel investing is the next most common source of outside equity funding.
In the past angels hid in the shadows. Entrepreneurs had to gain access through a labyrinth of contacts through a mysterious network of attorneys and accountants. While that is still the case with many angels, more and more of them are coming into public view by joining various angel networks like the Nashville Capital Network we have here in Nashville.
As is usually the case, the more important something becomes, the more likely that governmental officials try to get their fingers into it. Inc.com has an article about the growing trend of states offering tax credits to entice entrepreneurs to invest in deals. This may sound good on the surface -- how can tax breaks be a bad thing, after all -- but, it is poor public policy.
Most tax credits really do not have the kind of impact on investing in deals that lawmakers would like to think. Angels have a certain percentage of their holdings that they set aside to invest in start-ups. While tax credits may give them a short-term windfall, they do not alter if or how much they plan to invest.
These credit plans tend to be limited to a certain percentage and capped at amount. "(T)he credits range from 15% to 50% of the amount invested, up to $1 million per person per year." Many are only on the books for a short time, sometimes only for a single year and must be renewed. These tax breaks are often the first to go when lawmakers get into their "soak the rich" mode of operation.
If one really wants to spur investment, why not create these angle investment tax credits with no cap and no limit? The answer is simple. This is a political strategy that positions lawmakers in the middle. They help the economy without looking like they are favoring the rich.
Looking at our tax structure as it now exists through the lens of angel investments, we see how fundamentally our tax system is flawed.
- Entrepreneurship has been the single driving force of our economic growth for the past twenty years. It is expected to do so for the foreseeable future.
- Angle investment is an important fuel for this growth. Angels provide capital to higher growth, higher potential new ventures.
- The tax system as it exists now inhibits angel investment. Why else would politicians cut back on taxes for angel investors to spur their investment in deals?
Rather than tinker with the current system, a strategy that never works over the long term and only adds to the complexity of the current system, let's throw out the current tax code and start fresh. Individual investment and entrepreneurship were not major forces in our economy when the current income tax system was enacted. But today they are the most important source of our prosperity.
Private investment and entrepreneurship are our hope for the future. Let's create a new, simpler, fairer tax system that is aligned with our new economy and recognizes the fact that governmental policy making that tries to micro-manage economic behavior never achieves the desired, or should I say publicly stated desired results.
