The Effects of the Qualified Small Business Stock Exemption on Entrepreneurship and Innovation

The Qualified Small Business Stock (QSBS) exemption allows certain entrepreneurs, their employees, and their investors to sell shares of their companies without paying any—or only greatly reduced—capital gains taxes. Using a diff-in-diff identification strategy, we show that the QSBS exemption increase in 2010 led to a 12% increase in firm births in industries eligible for the exemption relative to non-eligible industries. We show that the exemption's effect on entrepreneurship is concentrated in industries that have a high rate of startup exits, in high-tech industries, and in those with a high fraction of STEM employment. The exemption also led to an increase in startup employment—but only among employees with a bachelor's or higher degree. These findings suggest that the QSBS exemption spurred entrepreneurship by increasing prospective entrepreneurs' after-tax benefit of founding a successful startup and by making it easier for them to attract highly-educated talent. In addition, we show that the QSBS exemption increased startups' ability to raise their first round of venture capital. Taken together, our findings suggest that the QSBS exemption increases both the willingness of prospective entrepreneurs to become founders and their ability to raise the resources they need to be successful. Finally, we also show that the QSBS exemption led to higher patenting in treated startups, thus suggesting that it was particularly helpful to innovative startups