1. A lot of small business owners have S Corp's. They pass through all their earnings to their personal accounts at the end of the year. In effect there is little difference between their personal and their business fortunes. A cut in the capital gains tax leads to more money in the pockets of small business owners and in some cases under some conditions will lead to an expansion of business due to increased profits; the profits of the individual being little different than the profits of the business.
2. A capital gains cut leads to increased investing which bolsters the stock market. An increasing stock market leads to more IPOs and more investment in general - which of course can lead to hiring. IPOs = more business activity = hiring.
3. Increased savings in one period lead to increased spending in the next. You can see this in nearly any recession where savings increase during the recession and then decrease during the recovery. So in effect the reduction of capital gains can also lead to increased savings and help the eventual recovery. This is so because of the economics identity: Investment = Savings - government deficit - current account deficit which can be derived from the more obvious Investment = Private Savings + Government Savings + Foreign Savings
There is a lot of discussion right now even between professional economists as to what the spending multipliers are for various actions such as tax cuts, rebates, infrastructure spending and so on. The truth is there is no general agreement as where one gets the best multiplier and under what conditions. It would seem wise to adapt a variety of stimulus actions.
A few of my bookmarks. Here is a great article by Hussman on the accounting identity above:
http://www.hussmanfunds.com/wmc/wmc041206.htm
Also his weekly commentaries are a good read.
Here's one of many blogs covering spending multipliers this week;
http://gregmankiw.blogspot.com/2008/...ltipliers.html