Transaction Tax Around the Corner

Inflation is creeping around the house but sooner or later our proud baby will be on its two hind legs, stumbling along, knocking us for a loop as food and crude take more of our earnings. Right now we're in a small comfort zone where we look in the crib and see baby inflation and think 'how cute', but it won't be long before the little darling will be keeping us up at night demanding to be fed more and more. Yes, we have that to look forward to but on the good side we're starting to get a little economic traction with a more confident stock market. Just as that's happening a few politicians are contemplating greasing the recovery flagpole. Certain Capitol Hill bandits have proposed plans to tax all mutual fund transactions.

Just to bring you up to speed, active managed mutual funds, as their name implies, buy and sell stocks and bonds along with other more complicated financial trades. Unless the fund is an index fund, where there is little trading, most active funds have a turnover of assets of around 30% per year (as a rough estimate). Every time there would be a sale and or a purchase of a stock or bond by the mutual fund managers it would create a tax according to the proposal being floated around by certain Democratic politicians.

If at any time in economic history people need help to get back on their feet the last thing they need is to have their mutual funds burdened with a tax that will do nothing but reduce total returns. It is estimated that if the government gets away with this scheme the average annual rate of return to investors will decrease by approximately 25%.

Treasury Secretary Geithner, who should know of what he speaks, criticized this Democratic initiative while Speaker Pelosi said the plan 'has a great deal of merit'. Not content to potentially destroy retirement plans of the average United States citizen the Speaker suggested that the U.S. coordinate with other developed countries to impose a similar tax. (Nothing like exporting American misery)

To illustrate how much an investor would lose assume an investment of $50,000 in a mythical mutual fund that earns a consistent 10% per year for 15 years (this does not exist, by the way), and you would have a total gross of $208,862 versus $158,608 at an 8% return over the same period. In addition, deduct the normal tax on cap gains and dividends and bingo, your savings are virtually destroyed by taxation. Many developed countries provide incentives for their citizens to save. The United States is not bashful in doing everything it can to make it as difficult as possible for the average person to accumulate wealth.

And, don't think you can run to an insurance annuity variable account because it would be taxed the same way on their managed sub accounts.

Damon Silver, policy director at the AFL-CIO, was quoted in the January 4-8 2010 Investment News as saying, 'the tax would encourage long-term investment while discouraging what he calls churning of stock trades.'

Damon, sounding like a recent graduate of the Jethro Bodine School of Finance, should know that churning is an illegal activity and not something any mutual fund uses as a money management technique. Perhaps Silvers was referring to rapid fire computer trades employed by some hedge funds. Churning is a criminal activity whereby a broker buys and sells securities simply to create commissions

Slashing total returns with an additional tax would cause retirees to face recalculating and reducing their income.

The total cost of this proposed tax to the mutual funds is estimated to be $70 billion per year. After reading what certain elected officials in this administration plan I thought why not just have them petition to have the United States merge with Canada and be done with it.

If you want to calculate how much the proposed tax would cost you go to my calculators at www.primaryplanner.com and run numbers based on the decrease in returns, print it and call your elected official.

If you need additional information on anything in this blog e mail me at pstanley@westminsterfinancial.com or call 877 783 7080.