Where’s the gain in the capital gains tax?

The idea of ‘squeezing the rich’ may be politically attractive. But, says Arthur B. Laffer, it means less tax revenue — as the coalition may be about to learn the hard way

Britain’s new coalition government has a simple mission: to walk the thin line separating huge deficits and political correctness. Just how can a government patched together from former political adversaries raise the revenues needed — and still be fair to the poor, the various minorities and the disenfranchised? The answer they seem to have alighted on is the old saw of ‘tax the rich’. The first salvo in this new class warfare skirmish is to raise the capital gains tax rate, with new upper rates of 40 per cent and even 50 per cent being discussed. And thus the coalition falls for one of the greatest fallacies in economics.

The underlying premise is that the rich, because they own so much of the country’s wealth, can easily afford to pay higher taxes.