Startup Tax Break Expansion Puts UIC Research in the Spotlight
New study reveals how capital gains relief boosts entrepreneurship and innovation
A recent New York Times article, “How Republicans Supersized Silicon Valley’s Favorite Tax Break,” highlights the expansion of the Qualified Small Business Stock (QSBS) exemption, a policy that allows early investors and founders to avoid capital gains taxes on startup equity. The article cites a new research study, “Capital Gains Tax Relief and Entrepreneurship,” by UIC Business faculty Jun Chen and Joan Farre-Mensa, which demonstrates the exemption’s impact on boosting entrepreneurship and innovation.
The newly expanded exemption now allows up to $15 million in gains to be tax-free—up from the previous $10 million cap—and shortens the required holding period for stock from five years to just three, with partial benefits beginning even earlier. Supporters argue the policy encourages long-term investment in high-risk startups. Critics, however, contend that the benefits disproportionately favor the wealthiest investors.
Against this backdrop, the study by Chen and Farre-Mensa offers rare empirical insight into what such tax breaks actually achieve. Using comprehensive industry- and firm-level data, they found:
- A 10% increase in new firm formation in QSBS-eligible sectors
- A 23% rise in successful patent filings, with no decline in quality
- Increased use of equity compensation, helping startups attract skilled workers
- Improved access to early-stage venture capital, particularly first-round funding
The researchers conclude that targeted capital gains tax relief can meaningfully spur entrepreneurship and innovation, supporting a key argument made by proponents of the QSBS exemption.
📘 Read the full study on SSRN: Capital Gains Tax Relief and Entrepreneurship
📰 Read the NYT article: How Republicans Supersized Silicon Valley’s Favorite Tax Break