While governments are tempted to raise taxes on capital gain in order to reduce their public deficits, the study realized by the London based Adam Smith Institute explains why the temptation should be resisted. Based on clear economic reasoning and on evidence from the US, Australia and Canada, they show that there is a Laffer curve effect at work; one that is probably stronger than in the case of personal income tax. In other words: higher capital gains tax rates are very likely to give lower tax revenues.
A government looking for higher tax revenues should therefore lower and not increase the prevailing capital gains tax rate. But, some will oppose, wouldn’t a cut in capital gains tax rate be another gift to the rich? Here again the study is enlightening. Capital gain taxes are paid in large part by individuals about to retire selling their business; while the rich can always postpone the realization of their gains, especially when the increase of the capital gain tax rates is presented as a temporary one. And how could it be otherwise when some countries have no or low taxes on capital gains?
The Effect of Capital Gains Tax Rises on Revenues