Assuming that the capital gains tax reduction would lower the cost of capital and stimulate additional investment and business formation, what would be the effect on jobs?

Several forecasters have attempted to estimate through economic simulation models the direct employment gain from a capital gains tax cut.

Historical experience also confirms that the corollary is true as well: when the capital gains tax rises, job opportunities are reduced.

Affects not jobs but wages

In the long term the real impact on workers of a change in the capital gains tax is reflected not in jobs but in wages. Consider the chain of events when the capital gains tax is raised:

* The higher tax lowers the expected after-tax return for the owner of capital.
* The lower rate of return on capital leads businesses to reduce their purchases of capital equipment, computers, new technologies, and the like. In the very short term firms may use less capital and more labor to produce goods and services.
* Because capital is more expensive, the cost of production rises and output falls.
* Because workers have less capital to work with, the average worker’s productivity–the amount of goods and services he or she can produce in an hour–falls.
* Because wages are ultimately a function of productivity, the wage rate will eventually fall.