Introduction

Alastair Grant/Associated Press

Whether in the Senate majority leader's proposal this week to raise taxes on incomes over $1 million a year or in President Obama's plan to limit deductions for people making over $200,000 a year, the debate has always come back to a basic question: How do higher taxes affect a nation's economy?

Opponents of raising the rate on well-off individuals and companies say that the British experience with raising income taxes has shown that higher rates depress investment and drag down economic growth. But backers of the increases say there is no such evidence. Britain raised its rates in April 2010, from 40 percent to 50 percent on people with incomes above £150,000 -- about $230,000 -- a far higher percentage than is being considered in the U.S.

What do we know, if anything, about the effect of the higher taxes in Britain? How do policy makers know if the new rates will produce more revenue and improve the economy?