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.
Question: Mr. President announces that, starting in 2011, there will be a sharp increase in tax rates. What do you think individuals and businesses will do in 2010? Using basic economics, Arthur Laffer in a Wall Street Journal article dated June 6 gives us a very plausible scenario: Individuals and businesses will do their best to transform the wealth and income to be taxed in 2011 into wealth and income to be taxed in 2010.