Does raising tax rates on capital gains raise revenue?

[muon2]

I would draw a couple of inferences from the article.

1) The elasticity of capital compared to labor is reflected in the volatility of capital gains taxes in advance of a rate hike and following a rate cut.

2) Gradual rate changes in capital gains rates should reduce volatility by making the arbitrage of tax rate timing less of a factor compared to true market timing.

3) Some fraction of capital elasticity is due to income sheltering to take advantage of the large gap between income and capital gains rates.

Unsaid in the article, but noted by commentators defending the lower capital gains rate is that capital gains due to dividend income has already been taxed once on the corporate side. Also a frequent observation of tax cutters is that the US has a relatively high corporate rate compared to other industrialized nations.

The above collection of thoughts and observation would tend to argue for a system of minimal corporate taxation but treatment of capital gains as ordinary income. A change to such a system would need be phased in over a period as long as a decade or more. Long term capital asset value would need an inflation adjustment so that the dollar value of the gains were comparable to dollars earned in the current tax year.

[muon2]

Regardless of the revenue question, there is still the issue of the magnitude of the change in tax rates. I find the behavior around the time of a major change in rates back to 1986 quite striking, and clearly a market distortion. Yet the small bumps from Bush I and Clinton in 1991-3 did not cause a significant distortion. If I'm reading this correctly whether one is raising or lowering rates it should be scaled in small steps to avoid the big spikes in activity that accompany rate changes of 5% or more.

[muon2]

Torie, any problems with avoidance of the capital gains tax could be eliminated by making it apply upon any gain regardless of whether the gain is 'realized'.

Are you suggesting that all assets be treated as real property? Owners of real property do pay on unrealized gains in the form of property taxes based on assessment.