An Ever Controversial Cliff Asness Explains Why, He Believes, The Tax Deal Is A Gift To The Middle Class

Tyler Durden's picture

AQR's head quant Cliff Asness, who as usual enjoys taking on what he believes is flawed conventional wisdom, takes on the topic of the Bush tax cut extension, and in typical fashion, presentd the upper class' view on things. What results is a piece that will likely not do much to bring the increasingly more polarized social and class extremes of America closer by even one bit.

The Bush Income Tax Cuts Were (Very Mildly) Progressive, posted in Forbes Magazine.

There is a perception that the Bush income tax cuts were a massive
gift to the wealthy. Well, that's kind of true. But along with that
perception seems to come the notion that they were massively regressive,
benefiting the wealthy at the expense of the middle-class and poor.
That's just not true.

The Bush tax cuts were ultimately a massive gift (generally I object
to the notion that the government letting you keep more of your own
money is a "gift," but I am using this sadly popular phraseology here
for illustration) to everyone who pays taxes--the wealthy receiving a
bit less than the middle-class, actually. A big part of the
misunderstanding comes from a hard-to-kill confusion about marginal vs.
total tax rates. A bigger part comes from something even simpler, only
looking at what happened to the tax rates on the high earners and not
even doing a comparison. Warning, there will be math in this op-ed.

Note, I am not writing this to argue that only a progressive tax cut
is a good tax cut. The argument about how progressive/regressive the tax
code should be is a topic for separate discussion. I am writing this
solely to clear up a massive misconception. You can't read this essay
and still call the Bush income tax cuts a giveaway to millionaires and
billionaires, unless you're willing to admit it was actually a giveaway
to all working people, with the middle-class getting the best deal.

To see why, let's review the basics using some made-up tax rates to
make sure we are all on the same page. Say the marginal tax rate on your
first $50,000 of income is 20% and on the next $50,000 of income is
40%. If you make $50,000 the tax rate is 20% or a total payment of
$10,000. If you make $100,000 the tax rate is 30%, coming from a total
payment of $10,000 on your first $50,000 of income, and $20,000 on your
second ($10,000 plus $20,000 is $30,000 in tax divided by $100,000 in
income or 30%).

Now let's examine someone making $1,000,000 and someone making
$100,000 before and after the Bush tax cuts (using actual tax rates
now). Pre-Bush the marginal tax rate on $1,000,000 was 39.6%, and on
$100,000 was 28%. 39.6% to 28% is a ratio of 1.41x. I can't prove that
ratios are the exact right way to look at this (for instance, if one
person's tax rate is near 0% it gets kind of dumb), but it seems a
reasonable starting point. So if one were to compare the marginal tax
rate of someone making $1,000,000 to $100,000 they'd come up with a
ratio of 1.41x and wrongly (as marginal rates make no sense for this)
conclude that this is representative of the progressivity of the tax

Although his marginal tax rate is 39.6%, the far more relevant total tax rate
on the guy making $1,000,000 is actually 36%, as only his income above
$373,650 is taxed at 39.6%, the rest at lower brackets (a Congressional
subcommittee decided on $373,650, as a round $374,000 would be a
"giveaway to the rich" and $373,000 would be the start of a socialist
revolution). The difference between marginal and total is much bigger at
$100,000. The marginal tax rate at an income of $100,000 was 28%, but
the total tax rate 20.5%.

Looking at ratios of income tax rates, the progressivity of total
rates (which are clearly what are relevant) is much greater at 36% on
the $1,000,000 in income divided by 20.5% on the $100,000, or a ratio of
1.76x vs. the 1.41x we obtained comparing marginal tax rates. Again,
before even looking at pre- vs. post-Bush tax rates, we can see how a
casual observer of the tax code who wrongly looked at marginal and not
total tax rates could greatly underestimate the code's progressivity.

Now, of course, the punch line is what happened after the Bush tax
cuts. The marginal tax rates at $1,000,000 in income fell to 35% (from
39.6%) and the total rate to 32% (from 36%). OK, so yes, high earners'
tax rates fell a decent amount. But the marginal tax rate at $100,000
fell to 25% and more relevant the total tax rate fell to 17.4%.
Comparing the total taxes paid on $1,000,000 to those on $100,000,
progressivity actually rose a tad from the prior 1.76x to the new level of 1.84x (a tax rate of 32% on $1,000,000 divided by 17.4% on $100,000).

To put this another way, the total income tax rate on someone making
$1,000,000 fell 11% from the Bush tax cuts. The total income tax rate on
someone making $100,000 fell 15.3%. On this scale the Bush tax cuts
were a progressive undertaking.

This is not particular to my choice of comparing an income of
$1,000,000 to $100,000. Judged by how much their total tax rates fell,
this is what happened for various income levels:


While the graph is a bit funky in the early income levels, it sends a
clear message. Viewed through this prism total (not marginal) tax rates
fell at least 10% for everyone, with considerable extra reduction for
those earning under $45,000 and between $60,000 and $200,000.

What makes this observation uncomfortable (for some) is that it's
precisely at odds with the popular notion that the middle class is being
destroyed in this country, and that the Bush income tax cuts are one of
the prime culprits.

One could take issue with my analysis. For instance, the Bush cuts in
capital gains and dividends were undeniably regressive (which alone,
again, doesn't make them bad or good). But there are plenty of
high-income people without a lot of wealth who did not benefit greatly
from this cut. This seems to separate the "working rich" from the rest
of the rich more than the rich from the not rich.

Next, while not about the Bush cuts in particular, but the
progressivity of our system in general, there are a host of other
progressive taxes, features of the tax code, and transfer payments that
mostly benefit the non-rich (such as Social Security, Medicare and even
the capped deductibility of mortgage interest), but some that are
regressive hurting everyone, but the rich less (like payroll taxes).
This is clearly a complex issue and I'm only looking at one aspect of

But it's a pretty important and pretty misunderstood aspect. First,
the tax code is far more progressive when viewed in terms of the correct
total tax rate, not the misleading marginal tax rate. Second,
considering federal income, and looking at it in terms of a percent
reduction in a tax bill, the Bush tax cuts hurt the very high earners
relative to middle-class earners (or put differently, helped the rich
less than the middle-class). On this important scale, the Bush tax cuts
were progressive.

I'm willing to bet that this is news to many.

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JackES's picture

hindenburg omen was triggered yesterday.

I am surprised you guys didn't mentione it.

doomandbloom's picture

sure...but what about the hindenburgs' triggered many weeks ago?

toathis's picture

that nonsense was killed off after QE II was announced.

No "Double-Dip". the babes at CNBC were correct...(you know, the MILFS you love to hate). Warren Buffet is never wrong. Got it?

UP we got. US equities are as cheap as I have ever seen them.

dlmaniac's picture

Don't understand how these folks on the left have the nerve to attack tax breaks. They act as if tax breaks were free welfare handouts that they typically enjoy while it's the money taking from other people's earnings to begin with. You know this system is totally screwed when people not paying income tax could somehow be allowed to vote on how much tax those who do should pay.

Common_Cents22's picture

It shocks me the level of stupidity, arrogance, and ignorance when they say, "how are we going to pay for tax cuts?" when it isn't governments fucking money in the first place!


It's like buying $15 in groceries at the store, handing them a $20 and the clerk asking how are they going to pay for your change due back?


Reality is certainly stranger than fiction.

pan-the-ist's picture

You have to pay to play, and if you're salary is large because you convinced some idiot that you're worth it, you got to pay more to play.

Taxes are progressive for the following reason.

1. Not everyone can make as much as you do.  It isn't possible, the system would break, and it isn't because you work hard, it's because there aren't enough high paying jobs for everyone.

2. Because of #1 some people have to live on a lower salary, and some people in 'poverty'.

3. People who live on a lower salary need more of their income to survive, so that amount isn't taxed.

4. If wealthy people lived well within their means, they would have no problem paying progressive taxes.

Now quit being a fucking piss whiner.

IQ 145's picture

 "US equities are as cheap as I have ever seen them." Be patient, the fat lady didn't sing yet.

Dburn's picture

News to everyone? No not really. First you have to find the middle class before you can call call it news. Sometime between 2001 and now they were wiped clean off the planet. But not so with the top 1-5% which expanded dramatically. If there was a middle class left I'm sure they would point out that in real terms they haven't seen a raise for 30 years. Compare that to the so call high earners. You can't really with no middle class left, but assume it's sometime in the 80s just for fun. 

Can you beleive it? If the minimum wage had been given COLA treatment like Govt workers, it would be $19.00 an hour now or what would be commonly referred to as above survival wages but still not quite middle class. At $7.25 it seems to have fallen a tad behind. Then compare that with the great wealth Transfer to the nation's elite. Now Thats fucking news.

Bob's picture

That's news?  Depends on where you sleep and who you sleep with, imo.  Too bad alot of dumb ho's are getting kicked outta bed now--what a shock: "I thought you cared!"

Everybodys All American's picture

The "gift" will be the higher interest rate everyone in the middle and lower class will be borrowing at thanks to the spending associated with the planned bill. The bond market is clear in it's response to the plan.

optionninja's picture

Line 10: POMO + Bernanke > Hindenburg Omen 

Line 20: repeat until it doesn't work anymore... 

chet's picture

The wealthy have a lot of non-wealthy apologists falling all over themselves to excuse a situation where a single digit percentage of people own over 50% of the nation's wealth.

It's an interesting phenomenon.  I find the motivations of the apologists more interesting than the wealthy.  The rich have the incentive to increase their money and power.  But what does some boot-licking columnist gain from giving serial rimjobs to the rich in print?


Toonces's picture

He gets to keep your nose out of his business.

Bob Sacamano's picture

The left whined for a decade about the Bush tax cuts and how terrible they were -- in which case they should push to let them ALL expire.  The fact they were only willing to give up 20% of the Bush tax cuts tells you it was an important benefit to the bottom 80%. 

cosmictrainwreck's picture

yaeh, and I'm still whining...but truthfully "we" don't whine near as hard as the top 10% do....almost need ear-muffs. So, please 'slain me why if, as alleged, all these fuckin' cuts are so fuckin' wonderful for growing the economy and help all the poor "sm bus owners" that hire everybody.... WTF? Only thing came out of the Bush cuts was a godamn RE bubble, inflated bullshit numbers everywhere, monstrous gains by top 5% in net worth, etc etc ad nauseum. Where was all the true growth & hiring (besides constuction for the fucking boom)? 

Bob Sacamano's picture

Since you think the Bush tax cuts are evil, I will fully support letting them ALL expire so you and others will feel so much better.  Deal?   

cosmictrainwreck's picture

oh - did I mention the most wonderfullest of all effect of Bush cuts? wall street cap gains for the insiders & billions in bonuses, etc etc

Encroaching Darkness's picture

It seems like you need to be an accountant, a lawyer and a MENSA genius just to keep some fraction of what you earn these days. The old saw "ignorance of the law is no excuse" is a total FAIL when the CONgress passes 1500+ page bills, especially several in one session. Hell, THEY don't even know what's in them, how can we?
I'm not sure a FLAT tax is any answer, how can one-size-fits-all work in taxation when it SURE doesn't work in clothing? On the other hand, COMPLEXITY to preserve CRONY CAPITALISM is also a proven FAIL.
TERM LIMITS, MANDATORY ON-LINE BILL POSTING TWO WEEKS PRIOR to vote and POPULAR VETO would seem to be necesary to "fix" this runaway legislative branch and imperialistic executive branch.
We have choices; they dwindle as we watch. Prepare as best you can.

Bob's picture

Funny,  I could swear I've heard that idea of online posting of Bills prior to votes somewhere before:

LawsofPhysics's picture

Gee, sounds like the "middle class" got a deal.  Too bad the new poverty line is $100,000 per year.  Please keep the GOP shilling to a minimum.  

toathis's picture

((((I AM NOT A TROLL))))

quit junking. I want a serious debate

Obama put the breaks on a massive DEFLATIONARY COLLAPSE! got it?

He will win in 2012... that debate is long over. it is a done deal.

i would and will bet everything I own on it.

Get used to the recovery folks! HE re-wrote the laws of Macro Economics in two years!

Where is the doom? Where is the bubble? Where is the impending collapse going to come from? How do you invest for "End of the World" scenario?

What is coming? What is the "event"?

Zyroh's picture

if you've already bet everything on it (and you have) no point in debate.  don't expect much of a debate either when you come to my house begging for some of my food.  charity is great and all, but i'll feed my kids before feeding useful idiots.  feeding useful idiots got us in this mess in the first place.

baserunr's picture

"feeding useful idiots got us in this mess in the first place."  Amen to that!


IQ 145's picture

 "He will win in 2012--" Euww. what an awful thought.

weinerdog43's picture

No kidding.  Some of us stupidly believed that 'change' was coming to Washington.  Hah!  Sure fooled me. 

"Dipshit Palin" vs. "Gutless Obama".  I can't wait. 

Encroaching Darkness's picture

OK, I'll bite (slow day).

Read "The Black Swan" by Nassim Nicholas Taleb. He describes events that are not just unpredicted, but UNPREDICTABLE. When you ask, "Where is the doom? Where is the bubble?" and "What is coming? What is the "event"? we literally CANNOT answer. You are expecting some aspects of the world to continue "as is", when they will not and can not. Worse, just as the biologists of 18th century Europe "knew" there was no such thing as a black swan, and it took reality (in Australia) to enlighten them otherwise, so are we: whatever "event" occurs will be UNFORSEEN and UNFORSEEABLE, and we will all be enlightened by reality, in whatever form it takes.

Worldwide banking failure?  Agricultural collapse due to loss of oil supplies in food-producing areas like US, Canada and Australia? WWIII (nuclear), started by NK or Iran (or France? now THAT would be a Black Swan!)? I have no idea. But no-one has rewritten the laws of Macro Economics; supply and demand work the same way they have previously. Politicians continue to pass laws that no one has read, no one understands and no one can obey (if they had read and understood them).

If you haven't diversified outside the dollar, you have ALREADY "bet everything you own" on it (Obama's success). Best of luck - and I hope for your sake you're right. Being pecked by Black Swans is a tough way to go.

ewmayer's picture

This might be interesting if the rich actually paid anywhere close to those marginal tax rates.

As it is, it's kinda like listening to the CEO of a big multinational whining about how higher corporate tax rates will be "business-unfriendly job killers" when his corporation uses offshore-tax-dodging tricks in order to get its actual tax rate close to zero.

ewmayer's picture


Eye am naught a trowel, either. Spell chequers are sew col.

b_thunder's picture

"there are plenty of high-income people without a lot of wealth who did not benefit greatly from this [dividend] cut"   - yes, let's all shed a tear for those assholes.  no, let's start TARP 2.0 to bail them out!   or perhaps A$ness shoudl start a pro-bono "financial literacy camp" for high-income people to teach them how to save a few % from their massive paychecks and build some wealth?




goodrich4bk's picture

Let's cut the crap about keeping "your own money" is not a "gift".  When you support government services without paying for them, you've received a gift.  When you borrow for 30 years to fund the services, the services are actually stolen from the next generation.  And no, the government's services are not just given to the sick and elderly.  Starting wars without taxing to pay for them is also a goddam gift to the military-industrial complex.

Then again, may the austerity posers here have it right.  Perhaps I'll not pay my mortgage next month and when the bank complains that I've got sufficient income to pay my debt to them I'll just remind them that its my money and bugger off!

snowball777's picture

Less regressive is not synonymous with "mildly progressive"; this quant is either a retard or should be hoisted on the nearest pitard.

SheepDog-One's picture

Translation- You peasants should be glad we swept you an extra crumb from the table'.

Stuck on Zero's picture

Cliff is an ass and a liar.  The middle class pay taxes for Social Security and on earned income at high rates.  The wealthy pay taxes on long-term capital gains at low rates and on tax-free bonds.  The wealthy also have lawyers and off-shore havens to shelter their incomes.  These tax aversion techniques are not available to the middle class.  Warren Buffet was correct when he stated that he pays a much lower tax rate than his secretary.

IQ 145's picture

 Did he say that ? how careless; one shouldn't provoke the masses.

malek's picture

He said that.

But that was long before he got suckered in as well (derivatives), and then one day (in the GFC) became aware his Berkshire Hathaway empire would mostly implode soon - so he hopped on the bailout bandwagon and since then enjoys partaking in the game of exploiting the masses.
He has become just another shill.

Payable on Death's picture

The problem with the Bush tax cuts is that something like 40% of the population doesn't pay Federal income taxes. (He traded lower top rates for a larger zero rate bracket.)

Thus, 7.65% (or even 15.3%) is not so much different than cap gains favored by the "rich". Also, the standard deduction and Schedule A are phased out as income goes up--making marginal rates and average rates even higher, to say nothing of AMT.

Regardless, 40% not paying is the key thing. We are here: Democracy "can only exist until the voters discover that they can vote themselves largesse from the public treasury". I think an unintended consequence of the Bush cuts is Obamacare. No one really believes that the government can reduce the overall cost of healthcare. However, many rightly know that government can cut their particular cost of health care by making someone else pay for it. If you don't pay income taxes, your demand for services should be more or less infinite. This demand from non-taxpaying voters goes a long way to explaining why politicians are rational to spend money the government doesn't have--they get relected by non-taxpaying voters.

At this point we need a flatter tax table--lower rates for all in exchange for the elimination of deductions. If you want to go all the way, the Fair Tax would get this done. That and term limits should tame the beast.

weinerdog43's picture

"...term limits should tame the beast."

Nonsense.  All it will do is create an even faster revolving door between corporate lobbyists and congresscritters.  The only way to regain control would be to limit corporate money and the Supremes have already popped that baloon.  The sad fact is the ship is going down and the best thing one can do is get your own life preserver (gold and silver) ready for your family.  I hope I'm wrong, but I'm not optimistic. 

Payable on Death's picture

The FairTax and term limits. The FairTax takes away the biggest focus of lobbying--the tax code.

Actually, my concern about term limits is the further empowerment of the bureaucracy.

the grateful unemployed's picture

it's probably also wrong to assume that the Bush tax cuts have a roll in destroying the economy, and that more tax cuts, and logically, a larger tax cut to the wealthy is in order. In that case Obama is a friggin genius.

dark pools of soros's picture

your assness has spoken

Let them all fail's picture

This is an interesting but irrelevant way to look at this tax data.  The smaller earners might get a bigger break on their tax rate but first, absolutely, larger earners are getting more money as the "gift" so that the more you earn the more the government is "giving" you, hence  it is a giveaway moreso to the millionaire and billionaire class.  Second, to say that middle class is getting a great deal here because they get tax breaks now is asinine because all the $$$ given as tax breaks to wealthy individuals will have to be paid in the future by everyone in the form of taxes, which will be raised to pay off our debts. 

I get Cliff's points and attempt to look at this in a new way but its a stupid misleading article.