Encouraging Personal Saving and Investment: Changing the Tax Treatment of Unrealized Capital Gains

18 Pages Posted: 18 Feb 2005

Date Written: June 2000


To increase personal saving and investment and to promote tax neutrality among various investment vehicles, the tax treatment of capital gains unrealized by shareholders should be modified. The current practice of forcing distributions of capital gains to mutual fund shareholders should be changed. Until the shareholder realizes a capital gain through the sale of an asset, no tax liability should incur. With respect to regulated investment companies, the realization point that triggers a capital gains tax liability should be moved from the corporate level down to the individual shareholder level. Since mutual funds are a popular vehicle for saving and investment of middle-income households, this tax reform would greatly increase the incentives for these people to invest and save for their future by increasing their pre liquidation rate of return.

The current tax treatment of mutual funds causes the average mutual fund investor to lose between 10 percent and 20 percent a year of their pre-liquidation rate of return. On a $10,000 investment earning a 10 percent annual rate of return, a 2.3 percentage point reduction in the pre-liquidation rate of return would cost a mutual fund investor almost $82,000 over a 30 year period - on a $26,000 investment a mutual fund investor would forego approximately $213,000 over a 30 year period.

A change in the tax treatment of mutual funds would have a beneficial impact on all owners of mutual funds, but the benefits would primarily help those making less than $100,000 a year, with 43% of households owning mutual funds earning less than $50,000 a year.

Keywords: Mutual Funds, capital gain distribution, tax reform

JEL Classification: H2, G19, G23

Suggested Citation

Fichtner, Jason J., Encouraging Personal Saving and Investment: Changing the Tax Treatment of Unrealized Capital Gains (June 2000). Available at SSRN: https://ssrn.com/abstract=668581 or http://dx.doi.org/10.2139/ssrn.668581

Jason J. Fichtner (Contact Author)

Johns Hopkins University - SAIS ( email )

1717 Massachusetts Avenue NW
Washington DC, DC 20036
United States

HOME PAGE: http://https://sites.google.com/site/jasonjfichtner/

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