The flaw in the capital gains tax, of course, is that of taxing the capital base due to inflation. Given that the rapid turnover of assets imposes greater social costs than lower turnover of assets, and given that this is a penalty that compounds over time, I am strongly in favour of permitting indexation of capital assets for all assets held five years or more.

Well I agree with that.

A 70% capital gains tax is a red herring in discussions in the US, where capital gains taxes reached their peak at just under 50% in the late 70's and were all the way down to 28% by 1992, before the radical right wing attack on public non-military spending got underway in 1994. So take a level of 30%.

You know that today's capital gain rate is 15%, right?

Since these are purely speculative investments, if there is any risk aversion at all, these are not stable payoffs, and stock demand=supply adjustments result in a shift in those returns so that the higher the downside risk, the greater the average return.

Does this represent the most productive financial intermediation for the economy as a whole? Of course not. Those who are induced to hold the riskier positions not only accept the higher volatility of return, but they also impose greater risk of insolvancy on the system as a whole.

I wouldn't start here in the discussion of public equities.  I would say the following:

1.  Many public companies need money to grow.  They can grow through internally generated cash, borrowing from banks or the public markets, or secondary offerings in the public equity markets.  
   
2.  Investors who buy public equities (includes pension funds, university endownments, individual investors, etc) absorb all available information, and bid the price of a company stock to what they view as the appropriate price.  Simplifying here a little, but the price of a company is best viewed as it's PE ratio.  If a company is viewed as being able to grow its earnings fast in the coming years, it will have a high forward looking PE--the market is willing to pay more for its earning, because the future earnings stream is expected to grow.
   
3.  This allows the high PE companies to issue new stock in a secondary offering, and give up less of the ownership of the company to the new shareholders--ie: the offering is less dilutive to existing shareholders.  So owners of the high PE company, through their surrogate owners being management, can raise funds for their company with, say, a 50 PE, as opposed to a slower growing company with a PE of 10.
   
4.  I imagine you will disagree with the following, but I believe the free markets, through the stock market, have the most accurate view of future growth and companies that will grow.  Therefore, I think the best method to allocate capital is through the mechanism that I just described above--ie: the companies with the best opportunities as viewed by the market get equity funds with less dilutive offerings.  So I view these processes as efficient as we are going to get.  Improvements can come with more timely information available to all, and cleaning up the financial markets, which has happened over the years, in general--ie. no unfair advantages to any inside players.

thus from only the viewpoint of effective capital and equity markets, I would want to move the capital gains tax to the lower levels.  When I think of the income distribution aspect of things, it pushes me higher on the tax rate.  I would think the current 15% with your concept of inflation adjustment for the cost basis would be about right,,,IMHO.