Providing Tax Equity for Mutual Fund Investors: Changing the Taxation of Capital Gain Distributions

17 Pages Posted: 18 Feb 2005

Date Written: April 2004


Mutual funds are an important vehicle for low- and middle-income households to invest in the stock market and save for the future. The number of families investing in mutual funds has increased more than 1,000 percent, from 4.6 million households investing in mutual funds in 1980, to a high of 56.3 million in 2001. For 2003, 53.3 million households owned mutual funds.

Recently, the mutual fund industry has received much attention relating to corporate structures, trading fees and expenses, and potential abuses in the industry. All of these issues are important and result in additional costs to mutual fund investors and should be fully addressed. Nonetheless, it is extremely important that attention not be diverted from the largest costs affecting mutual fund shareholders - taxes.

Even if shareholders do nothing more than buy and hold mutual fund shares, they could still be hit with potentially large tax liabilities due to capital gain distributions. Shareholders are then either forced to sell assets to pay the tax liability, or must divert capital from other more productive uses in order to pay the tax. The current tax on mutual fund capital gain distributions is economically inefficient, creates an opportunity cost to shareholders, and can further result in considerable economic losses due to the effects of compounding.

A bill (H.R. 496) introduced by Rep. Jim Saxton (R-NJ) addresses the problems taxable mutual fund investors face relating to the unfair and highly punitive tax levied on capital gain distributions. The bill would allow a deferral of capital gain distributions up to $6,000 for married couples filing jointly and $3,000 for all other tax filers. The deferral provision in Rep. Saxton's bill would provide substantial benefits to low- and middle-income taxpayers investing in mutual funds and significantly aid American families saving for their future.

Keywords: Mutual Funds, capital gain distribution, tax reform

JEL Classification: H2, G19, G23

Suggested Citation

Fichtner, Jason J., Providing Tax Equity for Mutual Fund Investors: Changing the Taxation of Capital Gain Distributions (April 2004). Available at SSRN: or

Jason J. Fichtner (Contact Author)

Johns Hopkins University - SAIS ( email )

1717 Massachusetts Avenue NW
Washington DC, DC 20036
United States

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