Will Increasing Corporate Capital Gains Taxes Increase Unemployment?

Many argue that increasing corporate capital gains tax will have the effect of increasing unemployment. While this conclusion is heavily disputed, there is an argument made that supports the idea.

Taxing the Growth

Many argue that taxes on capital gains is similar to taxing the growth of a fruit bearing plant such as a tomato. The tomatoes themselves are income and should appropriately be taxed. The growth of the tomato plant, however does not produce income in itself. This is similar to capital gains.

As the plant gets bigger, it will produce more tomatoes and therefore bring in more income and more taxes. However, if you require a tax on the actual growth – the capital gains – that is like taxing the fertilizer, sun and rain that makes the plant grow. Less sun, fertilizer and rain means less growth, less production, and therefore less money from taxes.

Fewer Jobs

Because a company is unable to grow as rapidly when capital gains are taxed it doesn’t need to hire as many new employees. Low growth means lower needs for employees, which means the company has less need for hiring. 

In this way, a tax on capital gains can increase unemployment.