The Impact of Tax Policy on the Private Equity Industry and Entrepreneurial Activity in the United States: An investigation into how returns in the private equity industry lead to the creation of new businesses

Abstract

Corporate tax rates have a large and significant adverse effect on corporate investment and entrepreneurship (Djankov et al. 2010), is what Djankov discovered in his research. Similarly, this paper will investigate the effect of federal taxes on the economy, yet a different section of it. However, this study will also examine the effect that personal income and long-term capital gains tax rates have on the specific section of the economy. My analysis will investigate how historic changes in United States federal tax policy have affected returns in the Private Equity industry and how those returns have influenced entrepreneurial activity, specifically the creation of new businesses, in the United States. This investigation focuses on modern private equity dating back to 1980, as this point is largely considered to be the origin of the institutional private equity firm in the United States. Additionally, this study will use the historic analysis to predict how the Tax Reform Act of 2017 will likely impact the Private Equity industry and entrepreneurial activity in the economy over the next decade, based off the previous tax code changes of study. Through research and economic analysis this study has found that federal personal income taxes, corporate taxes, and long-term capital gains taxes have a small, sometimes unnoticeable, effect on private equity industry returns and entrepreneurial activity, as there are countless other economic factors at play in both situations. However, this research has discovered that due to the nature and magnitude of this new federal tax code to be implemented starting in 2018, there will be sizeable benefits to both the private equity industry and the creation of new businesses, which will theoretically have a direct effect on the domestic economy.