One Solution

Congress is already considering a proposal that would encourage more personal savings by allowing investors to keep more dollars invested longer. This proposal would help millions of American savers and “should-be” savers fund their future health, education, and retirement goals.

Introduced by Representatives Paul Ryan (R-WI) and Artur Davis (D-AL) in June, the Generate Retirement Ownership Through Long-Term Holding (GROWTH) Act of 2007 (H.R. 2796) would defer taxation of automatically reinvested capital gains until mutual fund shares are redeemed, rather than taxing the gains every year. In introducing the Growth Act, Congressman Ryan pointed out that:

“Currently, investors who buy shares in a mutual fund and hold for the long term find themselves taxed as they go—even though no fund shares were sold and no income was received. This legislation allows mutual fund shareholders to keep more of their own money working for them longer by deferring capital gains taxes until they actually sell their investment.”

Rep. Joseph Crowley (D-NY) joined Ryan and Davis as an original cosponsor.

On October 2, Senators Michael Crapo (R-ID) and Tim Johnson (D-SD) introduced the GROWTH Act in the Senate (S. 2126), where Senator Judd Gregg (R-NH) joined them as an original cosponsor. In introducing the Senate bill, Sen. Crapo observed that:

“Mutual fund savers who automatically reinvest are doing what policymakers want to see. They are holding for the long term, contributing to national savings, and building up their own retirement nest egg. These Americans should be encouraged to save, not discouraged through a tax on automatic reinvestments.”

In the 109th Congress, the GROWTH Act of 2005 had 73 bipartisan cosponsors in the House and 6 in the Senate.

This important piece of legislation provides a sensible way for tens of millions of Americans—most of them middle class—to create a more secure financial future for themselves and their families.

Send a personal letter to your Members of Congress asking them to pass the Growth Act!

Who Would Benefit from This Proposal?

The U.S. Securities and Exchange Commission concluded in a report on mutual fund fees, “Although fund expenses play a key role in determining ultimate shareholder wealth, taxes play an even larger role for many investors in mutual funds.”

Of the 90 million Americans who own mutual funds, nearly 40 million own them in taxable accounts, including 31 million in long-term taxable accounts.

For these investors, one of the most frustrating aspects of the tax law is this: for taxable accounts, they must pay taxes today on fund shares they may not sell for years. Obviously, fund shareholders, like other investors, expect to be taxed when they sell their shares. But not before. Nor should they be. Not when they are still building for retirement and other long-term financial goals.

How Will the Growth Act Help Investors?

First, middle-income taxpayers would be encouraged to build their portfolios—not penalized for it. Most mutual fund investors have less ability than higher-income taxpayers to rearrange their finances to minimize capital gains or to raise funds to pay the taxes. Indeed, many find themselves with no other practical alternative but to sell shares to pay their taxes.

Second, deferral would recognize shareholders’ expectations. People who plan in advance to automatically reinvest dividends should not find themselves taxed on what they didn't receive, didn't sell, didn’t spend—didn't even touch.

Third, permitting tax deferral would recognize the unique nature of mutual fund investing. The investors who are automatically reinvesting are in for the long haul. With a balanced, diversified portfolio, they aren’t making a buy-or-sell decision about each holding and they aren’t making year-to-year decisions about keeping their money invested. What should be taxed is the growth of the overall fund from the day a taxpayer first invests in it to the day they dispose of it. Long-term investors need a long-term tax policy.

What Would It Cost?

It’s important to keep in mind that this proposal would defer capital gains taxes, not reduce or eliminate them. A Joint Economic Committee study found that, in the long run, deferring capital gains taxes would likely increase federal revenue, by producing larger account balances and thus higher tax revenues when fund shares are sold. The study concluded that “both individual investors and the U.S. Treasury would benefit from this tax change.”

When you add it up, it’s clear that the current treatment of reinvested gains is counterproductive—it slows down savings, discourages savers, and dampens tax revenues.

For More Information

• Generate Retirement Ownership Through Long-Term Holding (GROWTH) Act of 2007 (H.R. 2796)
  

• Generate Retirement Ownership Through Long-Term Holding (GROWTH) Act of 2007 (S. 2126)
  

• Cosponsors of the Growth Act of 2005

• Frequently Asked Questions
• Investment Company Institute President Paul Schott Stevens Discusses the Growth Act (video)
• “Funding Our Future: Ensuring a Strong Public and Private Retirement System” (address by ICI President Paul Schott Stevens)
• Taxation of Mutual Fund Shareholders
• Top Ten Facts About Mutual Fund Owners

What Others Say About Capital Gains Taxes

Mutual Fund Investors Unite!
“...unlike every other kind of investment, as a mutual fund shareholder you have to pay tax on what your fund earns even though you personally have not sold anything or taken possession of any profit! The Growth Act...would give mutual fund investors the same tax treatment on their long-term gains as other investors enjoy...”

—Gail Buckner, Fox News, June 9, 2006

“Keep It Simple”
“… we suggest that mutual fund capital gains should be taxed in the same way as gains on other securities. This is the system in many other countries….The change we suggest doesn't reduce the total tax paid on capital gains. It just shifts the tax into the future, when shareholders redeem fund shares.”

—Eugene F. Fama and Kenneth R. French, The Wall Street Journal, February 25, 2006

“What Bush Could Add”
“The tax proposal that Bush (and the Democrats in their response) ignored isn't actually a tax cut, but a tax shift that would appeal to millions of Americans regardless of their political affiliation....The mutual funds capital gains tax proposal floated in Congress last year would allow fund investors to defer capital gains on reinvested distributions until the fund is sold. Effectively, it would allow funds to be treated like stocks, simplifying personal accounting and making mutual funds a more attractive investment. Best of all, the proposal ultimately is revenue-neutral to Uncle Sam. While the distributions go untaxed during the current year, the overall gains are taxed when the fund is sold.”

—Chuck Jaffe, MarketWatch, February 1, 2006

“The Mutual Fund Penalty”
“Fundholders who reinvest capital gains distributions, and most do, actually have to dig into their pockets to pay taxes on the gains that are still there in the funds....It's an odd tax policy quirk for a government that says it wants to encourage long-term saving and investing.”

—Fleming Meeks, SmartMoney, February 2006

“This is the year the tax bug will wake up and bite fund investors”
“A bill called the Growth Act, introduced this year in both the House and the Senate…would make owning a mutual fund more like owning an individual stock. It also would make saving a bit more attractive in a nation where the savings rate has fallen to near zero.”

—David Nicklaus, St. Louis Post-Dispatch, December 5, 2005

“Beware the Investor Class”
“With the House and Senate weighing crucial votes on making permanent the 15 percent tax rates on investor dividends and capital gains, you would think our elected officials would consider the needs of America’s stock-owning families…. The ‘tax cuts for the rich’ argument just gets weaker and weaker as the investment class gets larger and larger.”

—Lawrence Kudlow, The Washington Times, November 16, 2005

“Dont Let Capital Gains Taxes Add Insult to Injury”
“There is one other thing you can do to reduce the time you spend dealing with mutual fund distributions: Call your senator. The Growth Act, introduced by Sens. Michael Crapo, R-Idaho, Tim Johnson, D-S.D., and Jim Bunning, R-Ky., would let you defer taxes on reinvested distributions until you sell your fund.”

—John Waggoner, USA Today, November 11, 2005

“Fund Cap-Gain Tax Deferral Is in Play”
“[O]nce again shareholders industrywide will heft an unfair tax burden regarding cap gain distributions compared with stock investors....That tax bite discourages people from investing, says Keith Lawson, tax counsel for the ICI. And that hurts their financial readiness for retirement.”

—Paul Katzeff, Investor's Business Daily, October 21, 2005

“Capital Gains Fuel Tax Code Debate: Industry Supports Reform, But Timing Might be Off”
“This year's capital gains payouts are expected to be the largest since the boom of the late 1990s....Running contrary to those gains, however, are rusty tax laws that, critics say, unfairly clip those households that choose to reinvest capital gains.”

—James M. Amend, Money Management Executive, October 17, 2005

“It's Already That Time to Think about Taxes Again”
“It's worth noting that a bill to ease the mutual-fund tax bite recently was introduced to Congress. Called the GROWTH ACT, it would let fund investors delay paying taxes on reinvested gains until they actually sell their shares.”

—Russ Wiles, The Arizona Republic, October 16, 2005

“Capital gains on funds may induce tax shock; In industry, Congress, some agitate for reform”
The “tax structure makes it more expensive to invest through mutual funds than it is to buy the same stocks directly. That strikes U.S. Rep. Paul Ryan (R-Wis.) as unfair. 'Mutual funds have helped to put real wealth and assets into the hands of the middle class, yet they are discriminated against in tax policy,' he said. He is leading a
legislative effort to change the way that mutual fund distributions are taxed.”

—Avrum D. Lank, The Milwaukee Journal Sentinel, October 16, 2005

“A Capital Gains Comeback. Is Your Fund Ready?”
“Even though the maximum tax rate on long-term gains has fallen from 20 percent to 15 percent, taxes in general can still take a bigger bite from a fund's total returns than even expenses.”

—Paul J. Lim, The New York Times, October 16, 2005

“Don't Wait for Congress to Fix Mutual-fund Tax”
“No time better than the present: Let's get rid of the archaic, unfair rules that annually sting mutual-fund investors with surprise tax bills. [The GROWTH Act] would put funds on the same footing as stocks and other investments, letting the investor decide when a taxable gain would be triggered.”

—Jeff Brown, The Philadelphia Inquirer, October 9, 2005

“Savers, This Legislation Will Grow on You”
“Congressmen Dennis Moore, Jim Ryun, Emanuel Cleaver, Sam Graves and Ike Skelton should be applauded for embracing new legislation that has the potential to help millions of ordinary Americans save and invest for more comfortable retirements…. it’s imperative that others in Congress join our local representatives to make the GROWTH Act one of Washington’s priorities this fall.”

—William M. Lyons, The Kansas City Star, August 30, 2005

“High Time to End the Mutual Fund Tax Penalty”
“I see no valid reason why the tax treatment for funds should differ so widely from that for stocks….this issue resonates with fund investors more than any other mutual fund issue that Congress could address.”

—Russel Kinnel, Morningstar.com, August 8, 2005

“Looking to Locate the Comfort Zone”
“Policymakers and private-sector experts are casting about for ideas that will enable the coming generation of retirees to live in reasonable comfort but won't cost so much that they bust the government and/or employers.”

—Albert Crenshaw, The Washington Post, July 24, 2005

“In Support of Deferring Tax on Fund Gains”
“A very important piece of legislation introduced this month would provide tax relief for millions of Americans who invest in mutual funds for long-term-savings goals.”

—InvestmentNews, May 30, 2005

“Bill Would Defer Taxes on Mutual Fund Gains”
“Both parties believe the [Growth] bill speaks to their constituents—with mutual funds being part of half of the nation’s households and considered the investment for ‘everyman’—and the bill is revenue-neutral in the end (it defers taxes, but does not eliminate them).”

—Charles Jaffe, The Baltimore Sun, May 29, 2005

“This Season, Taxes May Spoil Your Mutual Fund Party”
[Capital gains distributions] “can be particularly annoying because they are often a levy on paper-only profits. And the accounting is sometimes confusing for shareholders. When a fund distributes, say, $1 a share, the net asset value of a fund share is simultaneously reduced by $1, so the investor is no richer.”

—Norm Alster, The New York Times, December 19, 2004

“All I Want for Christmas: A Change in Taxes”
“Two congressmen say they will reintroduce early next year their proposals to allow fund investors who reinvest capital-gains distributions to defer tax on all or part of those payouts until the fund shares are sold.”

—Karen Damato, The Wall Street Journal, December 17, 2004

Providing Tax Equity for Mutual Fund Investors: Changing the Tax Treatment of Capital Gain Distributions
“In a number of respects, the current tax system is counterproductive and biased against saving and investment…. [F]or shareholders holding mutual fund shares outside of qualified retirement accounts, the annual tax bite levied on their annual distributions can significantly reduce fund performance.”

—Joint Economic Committee, United States Congress, April 2004

“Is the Tax Bite Too Big on Your Mutual Funds?”
“A bill before Congress would let fund investors put off paying capital-gains taxes until they cash out: the same treatment stockholders enjoy.”

—Robert Barker, BusinessWeek, January 28, 2002

Double Whammy for U.S. Investors: Federal and State Capital Gains Tax Rates High
“Both short- and long-term individual capital gains on equities are taxed at higher rates in the United States than in most of the other 23 countries surveyed.”

—American Council for Capital Formation Center for Policy Research, May 2001

“Taxes on Gains You Don’t Get”
“Few of the nearly 84 million Americans who invest in mutual funds understand—until it’s too late—that their returns are diminished by another big tax wallop” [capital gains taxes].

—Consumer Reports, May 2001

“Capital Gains Tax Relief for Mutual Fund Investors”
“… it is quite possible for a mutual fund investor to have taxable capital gains even when he has actually lost money….mutual fund investors often end up with tax liabilities much greater than an investor in individual stocks with the same identical portfolio….”

—Bruce Bartlett, National Center for Policy Analysis, April 2001

“Proposed Law to Defer Capital Gains on Funds”
Rep. Jim Saxton (R-NJ) introduced a bill that would defer up to $3,000 in taxes on reinvested capital gains until shares are sold. “Representative Saxton saw the tax on mutual funds as not only inconsistent with taxes on other investments, but disproportionately burdensome to low- and middle-income investors whose primary investment vehicles are mutual funds.”

—James Novakoff, IFA.com, September 14, 2000

Encouraging Personal Saving and Investment: Changing the Tax Treatment of Unrealized Capital Gains
“Until the shareholder realizes a capital gain through the sale of an asset, no tax liability should incur….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 preliquidation rate of return.”

—Joint Economic Committee, United States Congress, June 2000

“You Should Be Tax-Aware, Even If Your Fund Isn’t”
“In a robust bull market with outsized gains, investors might be willing to overlook a number of return-whittling ills, such as fees or taxes. But this tax season, many are getting a reminder that taxes do count. Just ask anyone suffering the cruel irony of a hefty capital-gains distribution by a fund that ended the year in the red.”

—Anne Kates Smith, The Street.com, March 5, 1999

“Should We Lower the Capital Gains Tax?”
Newt Gingrich, Kenneth Kies, and Lawrence Kudlow spoke at the Cato Institute’s Policy Forum, “Should We Lower the Capital Gains Tax?” Gingrich said, “Our core message is very simple: Cutting the capital gains tax rate helps anyone who is preparing for retirement, starting a business, saving for college tuition, or planning to buy a house. The lower the capital gains tax rate, the better off society is.”

—Cato Policy Report, Vol. XX No. 5, September/October 1998