…comes from Peter Diamond, a Nobel prize winner in economics, and Emmanuel Saez, a UC Berkeley economics professor. In a piece in today’s Wall Street Journal, they write, “we conclude that raising the top tax rate is very likely to result in revenue increases at least until we reach the 50% rate that held during the first Reagan administration, and possibly until the 70% rate of the 1970s. To reduce tax avoidance opportunities, tax rates on capital gains and dividends should increase along with the basic rate.”
Translation: We think that people don’t react to higher taxes on income by avoiding them, but in the event that they do, let’s raise taxes on capital gains, as well.
It should be noted that even Bill Clinton had enough sense to lower the capital gains tax in ’97, resulting in higher revenue.
The CATO Institute’s Alan Reynolds ran the numbers last year, examining tax rates from the fifties forward, and the resulting tax revenue. You can read his entire analysis here.