Obama: Why Reaganomics Didn't Work. Spread the Wealth

The 1980s tax cuts weren't really necessary, says the Democratic nominee.

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What does Barack Obama believe about taxes and how they affect economic growth? It would be nice to know since a) he is proposing raising taxes on some incomes, investments, and small businesses right into the teeth of a downturn, b) if elected, he will be working with a Democrat-dominated Congress that has in the past proposed a variety of tax increases, including a "millionaire surtax."

What would a President Obama do? In that context, I think this quote from his book The Audacity of Hope is most illustrative: "The high marginal tax rates that existed when Reagan took office may not have curbed incentives to work or invest, but they did distort investment decisions—and did lead to the wasteful industry of setting up tax shelters."

In other words, a tax system that wasn't indexed for inflation and that had a sky-high 70 percent top rate was not a disincentive to working or investing. Just not a factor. Made no difference. Zippo. (As Obama himself put it earlier this year when John Edwards accused him of being pro-Reagan, "I didn't say I liked Ronald Reagan's policies.")

At worst, Obama seems to say in his book, high rates can be somewhat inefficient in that they nudge people to spend time and money to try to avoid paying taxes. (By the way, it is weird that he doesn't seem to notice this same inefficiency phenomenon happening with our second-highest-on-the-planet corporate tax rate.)

Yet the initial effect of the 1980s tax cuts was a deluge of folks back into the labor market (the labor force participation rate went from 63.6 percent in 1980 to 66.5 percent in 1989). The longer-term effect was a stunning rise in productivity, along with a technological boom, that continues today. On top of all this, I have heard plenty of liberal economists, including some working for Obama, say that high tax rates have a truly negative effect only when they are up at the 70 to 90 percent extremes. In short, anything less than a doubling of rates from current levels wouldn't hurt the economy—and it would be so much fairer. Let the Great Experiment begin....