Taxing the rich only works up to a certian point. People get all bent out of shape when they hear that lowering taxes raises more money, but I guarantee in some cases it does work. This is a little long and the math may be off, but in real life this is the way things work. The very rich have a lot of money in investments. Many investments do not return much in capital, but appreciate in value. Real estate is a prime example. Here is how lowering taxes and offering tax breaks work to raise more money. Say Mr. H has an apartment worth 1 million. He bought it for $500,000 cash. He sits down and tries to decide whether or not to sell it and buy a bigger one. At present the property returns $100,000 a year in income. His net after expenses is $75,000. He is able use deprication to get it down to a taxable amount of $65,000. If he pays 30% in taxes his real income from the property is $45,500 on his million dollar asset. This is a 4.55% annual after taxes return. Since the building is still appreciating, this is not a bad deal for him. Still, he would like to invest in a $2,000,000 appartment.
If he does sell he typically will spend around 8% to sell and 3% to buy. This means that it will cost him around $140,000 to switch properties. This is money that will be spent in loan fees, escrow, title, real estate fees, excise tax, repairs, and other expenses.
If there is a tax free exchange, he is likely to do the deal. He will pay no taxes but the $140,000 he spends will be pumped into the economy. If the new purchase is just being built, a whole lot more money will be pumped into the economy from the new construction. Under this scenario, rent prices could drop with availability of new housing. More people can get jobs in the construction industry, and the economy moves. If he is denied the tax free exchange, he looks at losing another $200,000 to make the move. SInce his original investiment was $500,000 he is looking at only making $160,000 on the sale of the property. Many if not most investors will decide that the move does not make sense and will not buy. He and other investors don't buy, the building industry falters, rents go up and the economy starts to fall -remember stagflation under Jimmy Carter.

The capital tax works the same way with stocks. Many stocks grow in value and split, but only return 2 or 3 % in actual dividends, not a great return on value, but perhaps a good return on the original investment. If a person has stock worth $100,000 that he bought for $50,000 he might decide to sell some of it and buy a boat. At a 15% capital tax he figures he can pull out $50,000 and buy himself a $35,000 boat and have a little left over. The state gets its 8% sales tax on the $35,000 so the government gets a direct tax benifit of a little over 20% of the original $50,000. He has $5,000 left to dump spend on gas or other items. Put a 35 or 40% tax rate on the guy and everything changes. Since he now does not have enough extra to buy the boat he decides to take annual trips to Canada with his dividend money or to take out a consumer loan and make the payments with the dividends. In the first scenario the government loses the potential to make $10,000 in taxes plus and turnover taxes on the money spent. Spread over millions of people the economy again falters. In the second, the ecomomy fairs a little better, but the government still looses $7500 in taxable income and instead only gets to tax the $6000 in dividends. If the tax rate on this is to high, he again can't buy the boat and the economy falters.

The key is trying to find the right tax rate to get the government income without making to big of a discentive to make income. To high and the rich hide their income and do not turn it over. To low and the government can't run.