Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
Upside of Inequality Oxford Unintended Consequences

AI Summary. Modeling U.S. venture-backed startups, the authors estimate that taxing capital gains as they accrue rather than at sale would cut founders' average ownership at exit by about 25% while raising the share of entrepreneurs with positive payoffs from roughly 16% to nearly 47%. Less risk-averse founders prefer taxation at sale.

Eduardo Azevedo, Florian Scheuer, Kent Smetters and Min Yang National Bureau of Economic Research
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~84% of venture backed founders end with zero exit value, while the top 2% capture ~80% of total exit value. Accrual-based taxation would reduce mean founder ownership stakes at exit by ~25%, but with fully refundable tax credits, raise the share of founders with >0 payoffs to ~47%.

How does taxing unrealized capital gains affect startup founders?

Core argument: The authors estimate that average founder shares at exit fall about 25% under accrual-based capital gains taxation relative to realization-based taxation, as advance taxation forces additional share sales before exit.

This paper examines how taxing unrealized capital gains affects entrepreneurship, combining a dynamic career-choice model with new evidence on all U.S. venture capital backed startups. Figure 1a plots a histogram of the positive company exit values. The distribution spans several orders of magnitude and is relatively similar to a lognormal, but with a right skew and fatter right tail. A stylized model highlights a key trade-off: accrual-based capital gains taxes dilute successful founders by forcing additional share sales before exit, a well known concern, yet they also provide insurance through tax credits to founders whose ventures fail, an aspect often overlooked. Quantitatively, advance taxation substantially reduces founders' ownership at exit: average founder shares fall about 25% under accrual-based taxation relative to realization based taxation. At the same time, accrual taxation increases the fraction of entrepreneurs with positive payoffs from around 16% to nearly 47%. Embedding these outcomes in a career-choice framework shows that the insurance value of accrual taxation partly offsets dilution costs: less risk-averse founders favor realization-based taxes, while more risk averse ones prefer accrual-based taxes. The strength of this insurance channel depends on the highly skewed distribution of entrepreneurial payoffs and the design of loss provisions under accrual-based taxation.

Takeaways by Macro Roundup® AI

  1. The authors estimate that average founder shares at exit fall about 25% under accrual-based capital gains taxation relative to realization-based taxation, as advance taxation forces additional share sales before exit.
  2. Accrual-based taxation raises the fraction of entrepreneurs with positive payoffs from around 16% to nearly 47%, providing insurance through tax credits to founders whose ventures fail.
  3. In the authors' career-choice framework, less risk-averse founders favor realization-based taxes while more risk-averse founders prefer accrual-based taxes, with the insurance channel's strength depending on the skewed payoff distribution and loss-provision design.

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