Economic View - How Health Plan Turns Supply-Side Ideas Upside Down - NYTimes.com

Economic View - How Health Plan Turns Supply-Side Ideas Upside Down - NYTimes.com: "BARACK OBAMA is, in many ways, the left’s answer to Ronald Reagan."

Both came to office as charismatic and self-confident leaders, elected in times of economic crisis and determined to move the economy in a new direction. What is less obvious, however, is that the signature domestic issue in President Obama’s first year in office — health care reform — is shaping up to be the antithesis of President Reagan’s supply-side economics.

The starting point for Ronald Reagan was the idea that people respond to incentives. The incentives that he most worried about were those provided by the tax system. According to his budget director, David A. Stockman, Mr. Reagan would regale the staff with stories of how he, as an actor, used to alter his work schedule in response to the tax code.

“You could only make four pictures, and then you were in the top bracket,” Mr. Reagan would say. “So we all quit working after four pictures and went off to the country.”

The key economic concept here is the marginal tax rate, which measures the percentage of a family’s incremental income to which the government lays claim. During Mr. Reagan’s time in office, the top marginal tax rate on earned income fell to 28 percent from 50 percent.

The verdict on supply-side economics is mixed. The most striking claim associated with the theory — that cuts in marginal rates could generate so much extra work effort that tax revenue would rise — is unlikely to apply except in extreme cases. But substantial evidence supports the more modest proposition that high marginal tax rates discourage people from working to their full potential. Mr. Reagan’s behavior as a movie actor is a case in point.