Mike Crapo and Tim Johnson have introduced a bill in the Senate (S. 1082) to defer taxation of capital gains dividends from mutual funds that are reinvested in the same fund. The idea, according to their news release, is to "keep retirement savings earning more money for a longer period of time" and to treat those invested in mutual funds the same as those investing in the stock market. See Crapo website on GROWTH Act.
That's problematic for several reasons. First, the changes should go the other way. Instead of extending more preferential treatment to capital gains, Congress should eliminate the preference. Second, the fact that these funds may be used for retirement doesn't justify the tax reduction. Third, equating the trigger for taxation as the time that mutual fund shares themselves are sold is inappropriate and gives an inappropriate tax deferral. Holding stock through mutual funds means that when the mutual fund sells shares, it is as though the holder of the mutual fund had sold shares. The proposal gives a tax break to mutual fund ownership that parallels in part the tax treatment of individual retirement accounts, but those funds are established expresslyto encourage retirement savings, whereas mutual funds may be merely a way of diversifying.
Congress still seems to think that cutting taxes is the answer to every economic issue. Retirement savings not as good as they should be? cut taxes on income flows from vehicles that are used for retirement. Nobody buying as many cars? Give a tax break on the purchase of any number of new vehicles. Nobody investing as much as they should be in R&D? give a tax credit instead of a deduction. All these tax breaks are indirect ways of accomplishing policy that likely reward many a taxpayer for doing what the taxpayer would be doing without the tax break. They cost the federal fisc, and they add complications to an already complex tax code. They aren't very well targeted, and likely do as much public harm as public good in most cases. Congress should stop these special tax breaks, and start thinking about how to collect more in taxes in ways that are fair and help create a sustainable democractic foundation. The GROWTH Act proposed by Crapo-Johnson is not a good idea.
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