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The Parable of the Rolling Stones

In my post about Paul Krugman, I noted that taxes don’t create prosperity. That provoked a response today from a thoughtful commentor named Levi, a reply which included the following observation:

“In 2010 93% of the income gains went to the top 1%.”

I have not done any independent research to confirm this statistic, but I have no reason to doubt its veracity. Setting aside the fact that this has absolutely nothing to do with whether or not taxes create prosperity – they don’t – I thought this would be the perfect opportunity for me to express how I feel about that particular disparity and income inequality in general. Fact is, I’m totally cool with it. And here’s why.

Imagine a setting where you and your friend bump into an all-powerful genie who decides to magically set your income for the rest of your lives. But rather than accommodate your wishes, the genie offers two possible scenarios instead. In the first, you would make $100,000 a year, while your friend would make $1 million a year. In the second, both of you would make $40,000 per year.

Which do you choose? Easy. #1. You choose #1.

What? You don’t choose #1? Who in their right mind would choose scenario #2?  In scenario #1, the million made by your friend doesn’t come out of your pocket, so why would you forego 60 grand’s worth of income just to spite him/her? I do not understand that at all. I would much rather have more myself than insist that I and someone else have less just to satisfy some abstract concept of equality. Or is envy strong enough to persuade you to impoverish yourself at your friend’s expense? Again, that makes absolutely no sense to me.

The problem, it seems to me, is that too many people, and, implicitly, our friend Levi here, assume that any excess wealth that the 1% generate is coming out of the pockets of the poor. It isn’t. If income inequality actually were an issue of divvying up a finite pot, then it would definitely be a cause for concern. But the pot isn’t finite, and it’s not a question of divvying; it’s a question as to whether or not there’s going to be a pot at all.

To understand this, consider The Parable of the Rolling Stones.

2012 marks the Rolling Stones’ 50th anniversary. As they approach their 70th birthdays, the Stones have chosen to commemorate the occasion by performing at a handful of concerts in London and New York and charging an obscene amount of money for the tickets thereto. The end result will be a flurry of economic activity, which will benefit thousands of people, including various ticket vendors, marketers, stadium workers, T-shirt manufacturers, et al, but, most of all, it will greatly benefit four guys named Mick, Keith, Ron, and Charlie, who will likely pocket the lion’s share of all revenue generated, perhaps not 93% of all of it, but certainly close.

In our parable, however, a certain Whiner comes forth to decry the Stones’ greed, insisting that all monies should be distributed equally. Who are we to decide that Mick Jagger should thusly receive such a bounty when the guy selling keychains with Mick’s cartoon lips on them only gets twenty bucks an hour? Inequality, wails the Whiner! And thus the Whiner, along with other champions of fairness, did fashion a financial structure in which the highest and mightiest Rolling Stone received no more remuneration than the lowliest Keychain Vendor. And there was much rejoicing… until there was no more show.

Yes, for it seems that the mightiest of the Rolling Stones decided that it wasn’t worth their time to put on such a splendid spectacle without an accompanying obscenely massive compensation package, and thus they did cancel the concerts and all accompanying economic activity attached thereto. Instead of receiving the hefty compensation promised by the Whiner, the Keychain Vendor did verily receive nothing at all. The Keychain Vendor then longed for the $20 per hour he might have gotten had he not thrown in with the Whiner and stirred the pot, but alas.

And thus did fairness fell financial felicity for Stones, Whiners, and Keychain Vendors alike. Amen.

That’s how it works. That’s how it always works. When fairness becomes the preeminent value, everyone suffers, but at least they suffer equally. The only way to create income equality is to tear down the incomes of the highest earners.

This is true, incidentally, in non-financial fields of human endeavor, too. Is it fair that Lebron James is a much, much better basketball player than I am? No. So how to make us athletically equal? There’s no way to make me as physically capable as Mr. James, so you’d have to make Mr. James considerably less capable, with methods that might include tire irons administered to key body parts. Why would you want to do that? You achieve nothing and destroy much, all in the name of an elusive and unobtainable “fairness” or “equality” that does nothing but diminish.

So back to economics. The goal should not be to make incomes more equal. The goal should be to make all incomes higher and improve everyone’s quality of life. When there’s a way to make the poor richer, then it’s usually worth doing even if it makes the rich a whole lot richer along the way.

By the way, Keith Richards has been dead since 1977 and nobody’s noticed.

Raising the Star Wars Stakes
Economic Bedrock Principles

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  1. I am not so sure “income equality” as you describe it, is the goal people on the other side of the fence in regards to 99% and 1% statistics. Perhaps you are confusing it with income equality in terms of equal pay for equal work, as in a woman performing the same job as a man should earn the same pay, however I doubt Levi thinks that a burger flipper should earn the same pay as the CEO of a company that is a business industry leader.

    What may be a more accurate description of their goals would be taxation equality. And what they seem to be saying is that there is a difference between a person who earns $70k a year working 50 hours per week and someone earning $700k a year working 50 hours per week. There are some people who believe the structure of taxation rates should take a closer look at the fact that any working person with a family will have significant expenses known as the cost of living, which is for the most part how the taxation structure is arranged today.

    However it sounds like they are saying that it might be wise to restructure tax rates so that that gross excesses of someone earning $700million per year is taxed at a rate to more closely reflect the difference between the income of those who earn enough to live working full time and those who reap profits in gross excess from those earning a living.

    It could be seen as not having anything to do with equality, but rather recognizing and celebrating the differences between adept and hard working people who excel and should be rewarded for their hard work and those who are OK with not making a killing.

    Distinguishing between the two does not mandate that the government let a handful of individuals reap life from the middle class by not allowing them to have their business hand in the revenue pot of Governing Bodies of taxation and policy making.

    Taxation structures such as currently implemented, that are not generous enough to working class and too generous to those who govern the working class leads to fiscal cliffs

    • Taxation equality? Given that the top 10% of wage earners pay over 70% of all federal income taxes and 47% of Americans pay no income taxes at all, how do you make the case that the rich are skating and the poor are getting screwed?

      • I saw a great comic the other day. It was a picture of Obama saying:

        “I won’t allow the half of Americans who pay no taxes to bear the burden of the other half who aren’t paying their fare share.”

  2. I am not saying the working class is getting screwed, I am saying that the plan the President submitted, which effectively ends several tax breaks for the highest earning classes and returns to rates closer to what they were during the Clinton administration will prevent bottom-up economic collapses similar to “the fiscal cliff”.

    The percentages you listed are simply totals, which fail to paint an accurate picture of the tax burden placed on all American Citizens.

    A thousand people who all give 30% of a modest income (not much above the expenses that it costs a person to live) shoulder a much heavier tax burden than ten individuals who all give 35% of a ridiculously obscene income (those whose income is such that the cost of living isn’t even close to a drop from their bucket)

    And then there is the whole idea of how taxes are effectively “borrowed” by the government from the People. While working families who live paycheck to paycheck have that 30% removed out of every pay day check, even if they get every penny back and then some, it cannot be conveniently overlooked that they are not being compensated for directly and personally providing the funds which the government uses to loan or gift to the “1%” who have nothing taking out of their pay and in fact typically do not make their IRS payments until several years later.

    Just because the government refunds what they took from the working class as if if were some mandated savings account, a complete refund from what they collected is about the crappiest return rates I have ever heard of compared to any other non-mandated savings accounts.

  3. whoops, forgot to make a point!

    after: “A thousand people who all give 30% of a modest income (not much above the expenses that it costs a person to live) shoulder a much heavier tax burden than ten individuals who all give 35% of a ridiculously obscene income (those whose income is such that the cost of living isn’t even close to a drop from their bucket)”

    I meant to add “the burden is much greater on the working class even if the top earners paid 99.999% of all tax revenue. It has more to do with “the drop in the bucket” principle than the 70% of total dollar amount.

    Furthermore, lending the govt 30% of your paycheck at every pay period all year long, even if it is fully refunded and then some does NOT meet the definition of “paying no taxes”

  4. Who,

    You seem to be of the mindset where you think each taxpayer’s burden should hurt the same as another’s. That is, you seem to think we will only achieve “fairness” (whatever that even means) with our tax structure if the rich person’s tax obligations infringe on his lifestyle as much as the tax obligations of the middle class individual infringe on his lifestyle. That is your argument in a nutshell.

    Your idea of fairness is impossible to achieve. You could never tax the uber-rich sufficiently such that their tax payments hurt them as much as mine hurt me. After all, my tax payments restrict my ability to participate in a whole host of non-luxurious activities … good luck inflicting that much tax pain on Warren Buffett.

    Your idea of fairness is also bizarre. Where else do we charge someone based on the discomfort it will cause them. Goodness gracious. Talk about envy. You see, the nice thing about having lots of money is that it means you can buy more stuff … or you can buy the same stuff with less difficulty. (This is what they tell me, at least.) I hope I never become so bitter and envious that I want someone to pay until it hurts. I honestly don’t understand that mentality.

    As for withholdings, I agree that the system is stupid. But my reasons are probably different than yours. The problem with withholdings is that it masks to the average person how much they are really paying in taxes. If the average person has $1,000 withheld from their paychecks and gets a $100 refund at the end of the year, he rejoices that he got a $100 check from the government. The correct reaction, however, would be to acknowledge the $900 paid in taxes, and to hold the government accountable for the appropriate use of those funds. But because he/she didn’t have to sit down and write a $900 check, he is largely unaware (or insensitive) to the the amount of his tax payments. Luckily this is only a problem for 53% of taxpayers. (sigh)

    As for the idea that we are making an interest free loan to the government .. if a taxpayer does this, it’s his own fault. Rather than calculating some arbitrary number of exemptions and having taxes withheld accordingly, I instead tell the federal (and state) government exactly (to the penny) how much I want them to withhold from each of my paychecks. This is easy to do. And since the only portion of my tax payments that constitute an interest-free loan to the government is the amount of my refund, any interest-free loan I make to the government is my own fault.


  5. Sorry for not being clear Andy, I certainly don’t want to anybody punished. The bitterness that comes from wishing others to suffer any personal pain experienced is akin to Old Testament Justice.

    That is not fairness, it’s wrong

    It is not my intention to be insulting, I understand that others will have their own theories as to what actions should be taken in regards to the budget and taxation policy. I understand that those who share similar beliefs form groups. That the different groups may find their collective beliefs in be in opposition. But I honestly fail to understand how anyone could label the expiration of specific tax breaks and choosing to not extend such breaks as being bitter. So I don’t agree that it would be wanting to inflict any sort pain on anyone.

    I didn’t agree with the assertions made or the statistic listed, but this is not my blog and it it’s not a good place for people with my opinions to discuss these issues. Stating my views here will be viewed as disrespectful and replies will likely mirror that.

    Preaching to the choir is pointless, preaching to the choir of a staunchly opposing ideology will only fetch me what I deserve or likely had coming.

    I should know better, and that is my mistake not any of yours.


    • Letting the Bush tax cuts expire is fine with me.

      But that’s not what Obama (or you) are proposing. Instead, you are proposing letting the Bush tax cuts expire just for the uber-wealthy … but keeping them in place for everyone else. That’s why it’s bitter, because as you expressed in your earlier post, in order for the rich to shoulder more of the burden, they have to pay more (e.g., it has to hurt more). It’s the lopsided treatment of the Bush tax cuts that reeks of bitterness.

      As an aside, while I am OK with letting the Bush tax cuts expire, I think they should expire for everyone or for nobody at all. It’s no wonder our country is so divided when the have-nots are willing to expect more and more from the haves, even then they (the have-nots) are contributing so little (sometimes nothing at all). Are we really surprised that this kind of environment leads to division and polarization? For people of all economic status, proposals and policies like these create an “us vs. them” environment. Perhaps for once we should put all Americans in the same boat and ask them all to row in the same direction … as a team. Raising taxes on the rich but on nobody else is akin to putting only the rich people in a boat and having the rest of Americans stand on the shore yelling at the rich people to “row faster!” It’s just silly.

      And whatever is ultimately done with taxes, unless the inroads made with respect to spending cuts are at least 2x or 3x larger than what is made up with increased tax revenue, it simply won’t be sustainable. The core problem is excessive spending, not insufficient tax revenue. Unless we solve the core problem, we’ll simply be putting a Band-Aid on a cancer. And frankly, I’m not convinced either party is willing to make the necessary cuts.

      Whether or not it’s worth your time to comment on this blog is obviously up for you to decide. And if your only goal is to convince other people of the soundness of your viewpoints, I’d probably agree that you are unlikely to find success here. But if you also have a goal of better understanding the views of others, of challenging your own viewpoints and seeing if they stand up to scrutiny, blogs like these may be useful to you.

      By the way, I never thought anything you said was disrespectful. Well, perhaps only disrespectful to logic and reason, but I’ll let it slide. 🙂

  6. Jim, as you’re probably aware, the setup your pining for in your parable has been implemented since Reagan’s time. For those who aren’t aware, it’s called trickle-down or supply side-economics. Yes, the US has conducted a huge Reaganomics experiment the last 30 years by cutting taxes, deregulating the financial sector, and eviscerating unions. And, to put it lightly, these policies have been found wanting. A couple of facts. From 1947 to 1973 inflation-adjusted median income doubled. Compare this to the measly 22% increase in median real incomes from 1973 to 2004. As the link below mentions, median income over the last decade has actually declined. Oh, and the economic growth rates were notably higher _before_ Reagan and his supply-side policies compared with those since. That’s not spin; it’s data (see links). But, certainly, there is much more to an economy than just tax rates, unions, and regulation. This complexity then slices a couple ways, of course, as the supply-side policy proponents have to 1) admit that different policies would work fine, and/or 2) say their beloved policies don’t benefit the country. But do they admit this?

    Whatever you make of it, post-WWI US economic policy has almost never been more Republican, and economic growth rates have almost never been lower.

      • And it has everything to do with income inequality. You say (or suggest) that significant inequality is fine as long as everybody’s incomes are going up. Over the last 30 years, inequality has skyrocketed while median incomes have stagnated.

          • I don’t believe I said one caused the other. Either way, in your post you said: “The goal should be to make all incomes higher and improve everyone’s quality of life. When there’s a way to make the poor richer, then it’s usually worth doing even if it makes the rich a whole lot richer along the way.”

            I agree with your statement, but since Reagan was elected, this has not happened. Fairly consistently Republicans have focused on decreasing taxes for the wealthy even though there is no evidence that this helps the middle class. The data on this isn’t that open to interpretation, either. Real median income growth was much higher when top marginal tax rates were 80-90% from the 1950-70s compared to when the top rates were 50-30% since Reagan was in office.

            I’m not arguing to argue. I seriously would love to see some data on how the middle class has done better since taxes on the rich were brought down to their current levels.

          • “I don’t believe I said one caused the other.”

            Well, clarity would be quite helpful. Do you believe one caused the other? Because if you don’t, I can’t understand why you would “love to see some data on how the middle class has done better since taxes on the rich were brought down to their current levels.” The strong implication is that you believe these two data points are correlated – i.e., one caused the other.

            For myself, I see no evidence that the tax rate of the rich has any bearing on the income of middle-class Americans.

  7. You presented a parable vaunting trickle-down economics (i.e., protect the rich “job creators” at all costs and the rest will benefit). The conservative ascendancy tried this for ~30 years, and it produced lower economic growth and lower median real income growth compared with the economic policies in place from WWII to Reagan.

    • Again, you’re responding to a phantom argument that isn’t represented in this post. I do not “vaunt” trickle down economics here, nor do I claim that we must “protect the rich ‘job creators’ at all costs.” That’s tedious, hyperbolic, straw man nonsense.

      You seem to have a single template in which you attempt to shoehorn everything I say. I find that increasingly tiresome.

    • Anyone can come up with hard data. That doesn’t make you smart, and it doesn’t make your opinions valid (or those of anyone else invalid).

      How to identify the correct and sufficient data … and how to then interpret the data is the real key. So with all due respect, I encourage you not to post one or two data points and suggest you have the answers to the world’s dilemmas. You lose credibility. I’m going to go out on a limb and suggest there is more relevant data on the issue than what you have posted … and that some of it will support your world view, and some of it will contradict your world view. And most of it could either support or contradict your worldview, depending on how the data are interpreted.

      I usually tune out when people (of all political persuasions) try to make politically-charged statements of causality using several decades worth of data.

      • Sure, some data is very complicated and open to interpretation. But the data on median incomes isn’t easy to spin (although I’d probably be surprised). Like I said to Jim, I’m not arguing to argue. I’d love to see you use Census income data from the last 60-70 years, and paint a straightforward case where the median citizen has done well after taxes on the rich started to come down. I certainly may be missing something, and I’m open to learning.

        And if you wanna say, well the global economy is complicated, and there were other factors involved in median income stagnation, that’s fine too. But if you do so, you can’t say the parable presented by Jim is necessarily good for the middle class over the long run either.

  8. I think I’d have to agree with Who that the argument isn’t really about “income equality” but rather tax burden “equality” which was sort hand waved over in the parable. One argument I heard several times from lefties before the election was to the effect that they didn’t care how much Romney made, but that the percentage he paid in taxes was much less than people who made much less.

    Anyway, I would have to disagree when you say the pot isn’t finite. The pot certainly isn’t infinite or the keychain vendor could be paid $1000/hr and Mick could still make the obscene amounts that he wants. That’s the problem- the pot IS finite and it MUST be divvied up somehow. Your parable absolutely illustrates this. Yes, distributing it equally isn’t the answer and were that attempted the outcome of your parable would likely come to pass. So the question then becomes how to divy it up and by what method and who has the right to determine that.

    • Re: pot infinity…

      I need to revise and extend my remarks. The Rolling Stones-centric pot in this example is finite, yes. But the overall wealth pot, which includes the Stones pot and all others, is only limited by the creativity and imagination of people looking to generate wealth. If the keychain vendor is stymied by the Stones, he is free to innovate and create his own pot of wealth, selling keychains or shoes or yoga classes.

      The point is that income inequality doesn’t create a scarcity of opportunity.

  9. How many of the lefties who argued Romney didn’t pay a high enough tax rate understand the difference between a marginal tax rate and an effective tax rate? The ones who do understand the difference played dumb so they could dupe the masses who don’t understand the difference.

    • Excellent, excellent point. Our friend Levi seems to be missing that distinction as well. When the top tax rate was 91%, the rich were not paying 91% of their income in taxes.

    • Me!

      I’m a fan of a progressive tax system. But I’m not a fan of libs trying to make it as progressive as they possibly can, either by taxing the rich to the nth or by removing virtually ALL income tax burden from the middle class.

      But it doesn’t matter what we believe … a flat tax is as likely as a Hermain Cain presidency. Same goes for the “fair tax.”