John Tamny Is Making Economics Popular Again

When The Rolling Stones rerelease their classic 1971 album, "Sticky Fingers," in June, it will present an opportunity to learn a thing or two about rock 'n' roll — and also tax policy.

Indeed, one of the many great stories in a very compelling new book by John Tamny recounts how, in the 1970s, the British government forced the Stones into exile, first to France and then to the United States. In "Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics," Tamny recalls how the British government imposed an 83 percent marginal tax rate in the 1970s, which it then hiked to 98 percent for investments and so-called unearned income. That's when the Stones "upped and went to France," according to the group's guitarist Keith Richards.

The book establishes Tamny, the editor of RealClearMarkets and the political economy editor at Forbes, as the modern and American Frederic Bastiat. Each of Tamny's stories teaches an important economic lesson, but he does it in the most entertaining way you will ever read.

For example, while reading about the history of the famous movie "The French Connection," you'll learn about opportunity costs — the economic growth that could have been if it hadn't been for inefficient taxes or regulations.

His account of how the famous Sands Hotel in Las Vegas was replaced by the even more famous Venetian will teach you about the counterintuitive benefits of job destruction. And by the end of the book, Tamny will demystify both inflation and the Super Bowl.

The Stones' story teaches us about incentives: When the government increases the price of labor through high marginal rates, the supply of that particular good will shrink.

Tamny notes, "As it turned out, raising the cost of working for 83 percent meant the Inland Revenue Service collected 83 percent of nothing from the Rolling Stones."

The great work of Nobel Prize-winning economist Edward Prescott has long confirmed that people work more hours when marginal income tax rates are lower, especially when they are just starting out and also when they are nearing retirement. This effect is particularly pronounced in the presence of a generous welfare state that provides benefits for lost revenue.

But Tamny's Stones anecdote also teaches us that higher taxes on the rich punish everyone. They decrease the incentive for individuals to become wealthy in the future through entrepreneurship, human capital accumulation and career choices.

Economists at the American Enterprise Institute have studied this indirect effect of higher taxes on the rich and wrote about it in an article published in Tax Notes in November 2012, called "Should the Top Marginal Income Tax Rate Be 73 Percent?" Imagine a high-school student who graduates when the top marginal income tax rate is more than 70 percent. "He may decide not to pursue his dream of becoming a college-educated engineer because the government will take a large share of the returns to his college investment," they wrote. Then everyone would be worse off. He would be, and so would society because we would have one fewer engineer.

As Tamny concludes, "politicians who raise income tax rates on top earners ... are telling the strivers lower down that they will incur a penalty for succeeding."

Only a few writers have the ability to teach economics in a way that doesn't put most of us to sleep. Tamny is one of those, and "Popular Economics" is a book you will find yourself goingback to for years to come.