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that it does provide angels with the opportunity to develop a diversified portfolio, enabling an investor with, say $250,000 available to invest, to invest this alongside investments by other members in, say 10 business- es, rather than in just one or two businesses if they were investing on their own. Tax incentives reduce the downside risk if a tax credit is applied to the amount invested or increase the upside if capital gains are not taxed, or reduce the loss if losses are exempt from tax. There is evidence that tax incentives do have a positive impact on angel re- turns. 25 However, the effectiveness of tax incentives is controversial. Supporters claim that they attract
new money into the market. In the UK, which offers substantial tax in- centives, many angels say that that would cut back their investment ac- tivity or withdraw from the market if they were eliminated. Critics, on the other hand, say that it creates market distortions, predominant- ly attracting passive investors, and attracts investment to companies with very low profitability, most of which disappear after a few years. It also attracts inappropriate, inex- perienced investors into the market. They also point to its regressive dis- tributive effect, passing on the risks to the taxpayer population while re- stricting the upside benefits to the investors. 26 This might indicate that
there is a need for any tax incentives to be carefully designed to minimize these negative outcomes and maxi- mize positive incomes. Since angels invest for capital gain this might suggest that tax incentives should be focused on tax relief on capital gains, the provision of loss relief and the ability to carry forward losses, with explicit incentives to reinvest gains back into the entrepreneurial economy.
24 Gregson, G, Bock, A J and Harrison, R T (2017) A review and simulation of business angel investment returns, Venture Capital, 19:4, 285-311. https://www.tandfonline. com/doi/pdf/10.1080/13691066.2017.1332546?casa_token=CRfNkTe3a5cAAAAA:Ze9GpaO9NvlrYad70ecQOCHgdKVH2jOO5OzrQYMJQK3DLp5w3fc4wNcoJczBoR R4cwi9GhHVciKo_Q 25 Harrison, R T, Bock, A J and Gregson, G (2020) Stairway to heaven? rethinking angel investment policy and practice, Journal of Business Venturing Insights, 14, e00180. https://www.sciencedirect.com/science/article/pii/S2352673420300366?casa_token=Ay2kQJP 4MDsAAAAA:DjUv_NlYY9JbAZMrKAW7uIxZd-WDGEdath0_KZ-HwyzyDWyCXGqvQA8TiMO0BH0qXLwB4lne_g 26 Ibid.
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