Capital Gains Tax Relief and Entrepreneurship: Evidence from the QSBS Exemption
Professor Joan Farre-Mensa
Associate Professor of Finance
Bielinksi Family Faculty Scholar
Interim Head of the Department of Finance
University of Illinois Chicago
Designing effective policy to foster entrepreneurship and innovation remains a pressing challenge. We analyze the 2010 expansion of the Qualified Small Business Stock (QSBS) exemption, which eliminated federal capital gains taxes on startup equity in eligible industries. The QSBS expansion increased firm births by 10%—especially in industries with high exit activity and skilled labor intensity—and startup patenting by 23%. In addition to raising expected returns for startup founders and investors, the reform increased the value of equity compensation. This led startups to expand equity grants to employees and strengthened their ability to compete for talent with established incumbents.
