How Progressive Can We Go?

Progressives like to argue for radical redistribution of income through the tax system; conservatives like to counter by pointing out the incentives such redistribution establishes. Neoclassical economic theory supports the conservative response: if we increase taxes on capital to too high a level, domestic interest rates fall relative to international interest rates, investors take their capital abroad, and we experience lower consumption at home. We're more equal but poorer. A sad story.

But how close are we to this doomsday prediction? Tax rates in Eastern Europe are very low (average tax rates below 15%, compared to nearly 20% in the U.S.). Yet we don't see a rush of capital from the U.S. to Eastern Europe, mostly because investors are risk averse and U.S. investments are more secure than investments subject to the whims of less stable foreign governments. How much more progressive can we make the tax system before we see serious capital flight? I'm sure NBER has a working paper on this question.

Thoughts?