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Reflections

Obama Flunks Economics 101

by Ralph R. Reiland,
Professor of Free Enterprise

Barack Obama was remarkably slow on the uptake regarding his pastor's anti-white rants and anti-Americanism, i.e., it took 20 years for the verbally-accomplished Obama to utter a negative peep.

Similarly, Sen. Obama appears to be remarkably slow when it comes to economics, when it comes to understanding the long-established links between tax cuts, investment, job growth and prosperity.

During an interview in March on CNBC, the Democratic front-runner said that the top capital-gains tax rate should be nearly doubled, from the current 15 percent to "20 percent or 25 percent."

When asked by Charlie Gibson during a Democratic debate why he wanted to raise the tax when the historical evidence shows that higher tax rates on capital gains produce less revenue for the government, Obama responded by saying that a higher tax rate was justified under the banner of "fairness."

In other words, it's good to punish "the rich," even if it means less government revenues for retirees or tuition aid or new bridges and missiles.

Here's Gibson's question to Obama: "In each instance, when the rate dropped, revenues from the tax increased. The government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down. So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?"

Obama responded as follows, not denying that higher tax rates on capital gains resulted in less tax revenue while still justifying a tax increase: "Well, Charlie, what I've said is that I would look at raising the capital gains tax for purposes of fairness."

Obama was 16 months old when President John F. Kennedy argued the case for economic recovery by way of tax cuts to The Economic Club of New York on December 14, 1962.

"Our present tax system," said Kennedy to The Economic Club, "exerts too heavy a drag on growth," "siphons out of the private economy too large a share of personal and business purchasing power," and "reduces the financial incentives for personal effort, investment, and risk-taking."

Kennedy asserted that the "most direct and significant kind of federal action aiding economic growth is to make possible an increase in private consumption and investment demand -- to cut the fetters which hold back private spending."

To get the economy moving, in short, Kennedy argued for fewer fetters, fewer shackles on the private sector by an overblown and confiscatory government. The path to economic growth was via increases private spending, both private consumption spending and private investment spending, not increases in government spending.

"The federal government's most useful role," he contended, "is not to rush into a program of excessive increases in public expenditures, but to expand the incentives and opportunities for private expenditures."

Kennedy maintained that the "best means of strengthening demand among consumers and business is to reduce the burden on private income and the deterrents to private initiative which are imposed by our present tax system."

Pledging his administration to lower rates of taxation, he urged Congress to enact an "across-the-board, top-to-bottom cut in personal and corporate income taxes."

Tax cuts at the top, Kennedy argued, would encourage those in the upper income brackets to "invest more capital," thereby producing more jobs and more income for workers at every economic level. Kennedy, in other words, understood that "trickle down" wasn't a fictional or negative concept.

Prior to Kennedy's election, the D.C. politicians had jacked up the top marginal tax rate on income to 91 percent. In effect, that was a 100 percent tax rate, considering the added taxation at state and local levels -- a 100 percent disincentive for job creators in the economy to open another store or expand a business, a 100 percent disincentive for them to create another job or pull another person out of unemployment.

Kennedy's tax cuts were enacted early in 1964 (three months after he was assassinated), including a 21 point reduction in the top income tax rate, from 91 percent to 70 percent. Unemployment, 5.2 percent in 1964, dropped to 3.8 percent and 3.6 percent, respectively, in 1966 and 1968. Driving the job growth, private domestic investment expanded from 1964 to 1966 by 31 percent.

Ronald Reagan's tax cuts in the early 1980s produced a similar result. Investment spending jumped by 76 percent in the 1980s, in real (inflation-adjusted) dollars, and consumer spending in real dollars nearly doubled. Unemployment, 9.7 percent in 1982, fell to 5.5 percent by 1988, the lowest rate in 16 years.

After-tax per capita income rose by 19 percent in the 1980s, nearly double the rate in the 1970s, while the inflation-adjusted income of households in every quintile group increased every year from 1983 to 1990.

For the poorest fifth of income earners, real income increased by 12 percent in the 1980s, reversing a 17 percent slide from 1979 to 1983. The nation's poverty population, after growing by 7 million in the 1970s, dropped by 4 million in the 1980s.

The tax reform plan that Kennedy put forward in 1963 included a reduction in the maximum capital gains tax, from 25 percent to 19.5 percent. "JFK knew a cap-gains rate as high as 25 percent would lock up wealth that should flow to more productive investments," says Investor's Business Daily.

Obama, seeking to squeeze "the rich" in order to produce an economic recovery, shows that he's about as skilled in economics as he is in picking pastors.

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Ralph R. Reiland is an associate professor of economics at Robert Morris University in Pittsburgh.

Ralph R. Reiland
Phone: 412-884-4541
E-mail: rrreiland@aol.com

"Ralph R. Reiland is the B. Kenneth Simon Professor of Free Enterprise at Robert Morris University, the owner Amel's Restaurant, and a columnist with the Pittsburgh Tribune-Review."