Washington (April 29, 2003) -- Your mutual fund's dismal performance may be due more to taxes than anything else, according to a new study endorsed by the Joint Economic Committee.

The study by Lipper Research demonstrates that "over the long run the largest drag on mutual fund performance is taxes," said Congressman Jim Saxton, vice chairman of the committee. "It also demonstrates that a major component of this drag is the treatment of capital gains distributions. Tax deferral of these gains, to the extent possible, would benefit many millions of investors."

Saxton blamed the illogical treatment of capital gains for the plight of investors. "Under current tax law, millions of investors are subject to capital gains taxes even if they do not sell their mutual fund shares, and even if the value of these unsold shares declines," he said. "In recent years, many billions of tax dollars have been paid by mutual fund owners holding shares whose value has now plunged to levels below the price at which they were purchased."

This creates a “heads I win, tails you lose' proposition for the government,” said Saxton. "If mutual fund shares go up in value, the taxpayer owning mutual funds can be immediately taxed, but if the shares then fall in value, the taxpayer does not receive an immediate capital loss deduction. These shareholders may be no better off than they were in 1997 or 1998, but they have been forced to pay taxes on capital gains that are not reflected in the current value of their shares. A better policy regarding capital gains would be to tax mutual fund shareholders the same way as other individual investors are taxed: when their shares are sold.”

-- WebCPA staff

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