Capital Gains Tax Cut Doubled Unicorn Creation, NBER Study Finds

A National Bureau of Economic Research working paper by University of Florida economists Murillo Campello and Guilherme Junqueira offers striking evidence that capital gains tax policy directly shapes innovation outcomes. The study tracks 158,000 investment deals from 2004 to 2022, examining what happened after Congress dramatically expanded the Qualified Small Business Stock (QSBS) tax exemption in 2009 and 2010 — eliminating capital gains taxes entirely on investments in C corporations with assets under $50 million in qualifying industries.

The effects on venture behavior were dramatic. After the tax cut, venture capital firms — identified as the investor class most sensitive to the QSBS break — were 81% more likely to fund companies at their earliest development stage. They also showed greater willingness to back startups carrying debt and to invest in sectors outside their prior experience, both classic markers of higher-risk bets. The findings contrast with corporate investors who couldn't access the QSBS break, providing a clean natural experiment.

The riskier investing didn't come without casualties. Failure rates for venture-backed firms jumped 71% compared to the pre-2009 baseline. But the hits were enormous: successful exits after 2009 posted valuations 131% higher than before, and startups whose investors qualified for the tax break were twice as likely to reach unicorn status — valuations above $1 billion.

The underlying economic mechanism is intuitive but often overlooked in policy debates: reducing the tax drag on gains raises the expected return of risky bets, which in turn makes investors more willing to absorb the possibility of failure. The study's authors argue this tolerance for failure may be the tax break's most underappreciated benefit — it shifts the risk calculus enough to unlock investment that simply wouldn't happen otherwise. The findings arrive as policymakers in several countries debate wealth taxes and higher levies on investment returns, trends the research implicitly challenges.