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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.
In 1994 Gary Robbins and Aldona Robbins, formerly economists with the
U.S. Department of the Treasury, performed an economic simulation to
estimate the number of new jobs and the increase in economic growth that
would result if the Contract with America's capital gains tax provisions
were adopted. The Robbinses' analysis was based on calculations of the
fall in the service cost of capital for a wide range of corporate
investment opportunities in response to the rate reduction. They then
translated the lower cost of capital calculations into estimates of the
impacts on gross national product and jobs by employing the standard
Cobb-Douglas production function to simulate the long-term economywide
production process.
The Robbinses' conclusion is that the GOP capital gains tax cut would,
by the year 2000, reduce the cost of capital by 5 percent, increase the
stock of capital by $2.2 trillion, and yield an extra $960 billion in
national output. The increased capital formation triggered by the tax
cut would give rise to 720,000 new jobs.
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.
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