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Review of Finance Vol. 28 No. 5 2024

The labor effects of R&D tax incentives: evidence from VC-backed startups

Jun Chen1; Shenje Hshieh2

1 College of Business Administration, University of Illinois at Chicago , Chicago, Illinois, · 2 Department of Economics and Finance, College of Business, City University of Hong Kong , Kowloon, Hong Kong SAR

Abstract

We evaluate the impact of the Protecting Americans from Tax Hikes (PATH) Act of 2015, which allowed some existing venture-capital-backed startups to monetize their research and development (R&D) tax credits against payroll taxes in the United States. We show that marginally eligible startups increase their demand for R&D workers more than marginally ineligible startups after the PATH Act’s enactment. These effects are stronger among startups that are financially constrained. Marginally eligible startups subsequently recruit workers with more education and experience and file more patents with new inventors. Our findings suggest payroll tax credits are effective in scaling startups and stimulating R&D activities through skilled labor recruitment.

DOI
10.1093/rof/rfae026
Volume
28
Issue
5
Pages
1451-1482
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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