We've all heard the argument that an increase in taxation of the wealthy, or of investment earnings in particular (capital gains + dividends) will discourage investment and hurt the overall economy. But the following counter-argument has occurred to me. Assuming government spending is held constant, each additional dollar in revenue gained through such taxation will lower the national debt by one dollar. In turn, one dollar less will be sold and bought in treasury bonds. So in all, it will decrease the amount invested in treasury bonds, but without affecting the amount available for investment elsewhere. Of course, this doesn't mean nothing has changed; the proportion of investments in treasury bonds vs private stocks and bonds shifts, and the wealthy have slightly less money in total because instead of giving the government a dollar they can get, say, 3% interest in, they hand it over and get no interest. And those who invested in private firms will keep slightly less of their income, and in turn the government debt will increase less quickly because there is less interest paid on this total debt. The amount of money in private vs. public hands shifts. But the total amount which could be invested in corporations, real estate, etc. would remain about the same.
That is, unless some investors, seeing they are taxed just a little bit more, decide to spend their money on consumables instead of investing it. But then consumer demand increases, and presumably that means profits from firms supplying such products increases, incentivizing more investment. I'm not so certain that this calculation balances out 1-to-1. But it seems far from obvious that taxing investment income decreases the total amount of private investment very drastically as the initial anti-tax argument might suggest. What do you professionals think of this? I realize there are several questions here which may have complex answers, and am happy to be referred to links discussing the issue; still, any rough summary of how much of what I've said may be right, or wrong, would be welcome.