The effectiveness of tax incentives for business angels

Worldwide, governments have implemented numerous initiatives to promote business angel (BA) investment activity. However, assessments of these initiatives produce mixed results, hence discussion about their effectiveness continues to be debated. A popular approach to increase BA investment activity involves changing their risk-return ratio through the introduction of various kinds of tax incentives. The most common form of tax incentive is a front-end tax relief that has the effect of reducing the real cost of the investment. The chapter reviews and compares the evidence on the effectiveness of different tax programs around the world. This reveals that there is very limited evidence that tax incentives for BAs are effective, with tax expenditures generally being higher than the tax revenues that are generated by the investments. The authors attribute the failure of the programs to their poor design. However, it needs to be acknowledged that there are inconsistencies in the results of the assessments of the programs. These may be attributable to the choice of hypotheses and methods in the assessments. Hence, there is a need for further research on the effectiveness of tax initiatives for BAs.