"Animal spirits," said John Maynard Keynes, are the essential spring of capitalism. We depend on the animal spirits of investors, high earners and entrepreneurs for a growing economy.

Keynes, a subtler analyst of market economies than the single-minded booster of high government spending that so-called Keynesian economists depict, knew whereof he spoke. People don't just respond in linear quantum jumps to the incentives and disincentives they perceive around them. They perk up when their animal spirits are aroused, and they slump down into inertia when they are not.

Barack Obama's tax plans, announced in his budget message last week, threaten to depress the animal spirits that we depend on for economic recovery. I reach this conclusion on the basis of my past errors. In 1993, I -- like many economic conservatives -- predicted that the Clinton tax increase, to a 39.6 percent marginal tax rate on high earners, would squelch economic growth. It didn't, or at least not so much as to prevent what became, later in the decade, robust growth.

Why was I wrong? Because, I came to think, the Clintonites managed to hit a sweet spot with the 39.6 percent rate. It was a number that started with a three. To high earners, not bothering to calculate exact returns to the last decimal point but just concentrating on the big picture, it seemed that the government was taking just about one third -- hey, maybe a bit more -- of their incomes. They would get to keep the other two thirds, pretty much. So they proceeded to try to make intelligent investments and to earn large amounts of money without being preoccupied with how much the government would snatch from their hands.

Quite a contrast with the 1970s, when the high income tax rate was 50 percent, and 70 percent on "unearned" (i.e., investment) income. In that environment, the animal spirits of the productive class were directed away from making productive investments and toward sheltering their income from seizure by the government.

I remember rich men in locker rooms engaging in discussions along the lines of, "My tax shelter is bigger than your tax shelter." To heck with figuring out whether your investment was going to be productive in the long term. The only question was how much money you could shelter from the tax collector in the short term.

I think there is a serious risk that the Obama tax proposals are going to bring back those days. Yes, they call for returning the high income tax rate only to the sweet spot of 39.6 percent. But they also want to reduce the amount of the mortgage interest and charitable deductions for high earners, which would channel less money to charities and more to the government (and thus to public employee unions and, through them, to the Democratic Party) and would raise the effective rate on high earners to above 40 percent -- a number with a four in front of it. Continued...