December 4, 2009
H.R. 4191’s Securities Transaction Tax Would Impose Substantial Costs on Middle-Class Fund Investors
This proposal aims at Wall Street, but hits Main Street, by taxing middle-class savers.
H.R. 4191’s securities transaction tax would apply to portfolio transactions of mutual funds, exchange-traded funds (ETFs), and closed-end funds—thereby imposing substantial costs (through lower returns) on 79 million fund shareholders.1 These costs would be borne by shareholders in any fund that holds equities or uses financial instruments such as futures contracts to hedge risk (including interest rate risk). Most of these shareholders are middle-class investors saving for long-term needs, such as retirement and college, and for readily-accessible reserves to meet emergencies.2
The proposal would raise taxes on middle-class investors, depress stock prices, increase the cost of hedging risk, and drive stock trading to foreign markets that do not impose this tax.
Retirement Accounts Investing Through Funds Would Be Taxed Despite Intended Exemption
Because the fund itself will bear the tax on its portfolio transactions, the fund’s tax-exempt investors effectively will pay the tax—even though this tax would not be paid had they invested directly, outside the fund, in the same securities. Thus, the bill still disadvantages fund shareholders.
To correct this defect, the bill would need to permit a fund to flow-through to its shareholders the tax incurred at the fund portfolio level. This amendment, however, would necessitate highly complex reporting mechanisms, created at substantial cost, for ensuring that fund shareholders received per-share details (perhaps on a daily basis) regarding the tax incurred by the fund. Since fund shares are held not only through the funds themselves, but also through various intermediaries in omnibus accounts, the costs of disseminating this information also would be substantial.
Fund Investors Would Not Benefit From the $100,000 Transaction Credit
The same flow-through mechanism would be needed to ensure that fund shareholders benefit from the bill’s credit for the first $100,000 of stock transactions per year. Without a flow-through mechanism, the tax paid on the fund portfolio transactions would be borne directly by these shareholders. The complexities described above would be compounded because fund shareholders typically hold shares in multiple funds.3 These investors could apply the annual $100,000 exemption only by aggregating their allocable share of the transactions for each fund and then determining the tax to be refunded. Additional burden and complexity would arise in making these determinations.
1 The other 11 million fund shareholders (out of the 90 million total) hold only money market mutual fund shares and would not bear the tax.
2 The median household income of mutual-fund-owning households was $80,000 in 2008. See, http://www.ici.org/pdf/fm-v18n8.pdf, Figure 2. Moreover, 68 percent of households owned funds through employer-sponsored retirement plans (id., Figure 8) and over a quarter put saving for education among their financial goals (id., Figure 7).