Proposed Tax Cut Impact Called Positive
January 8, 2001
Mutual fund industry analysts are optimistic about the impact the tax cut proposed by President-elect George W. Bush will have on the industry. The proposal would streamline the current five-rate tax structure to a four-rate structure. Under the current structure, the lowest rate is 15 percent and the highest is 39.6 percent. Under the proposal, the lowest rate would drop to 10 percent and the highest to 33 percent. This would provide approximately $460 billion of tax relief over five years, according to President-elect Bush's website, "A Tax Cut with a Purpose."
The plan will also reduce the so-called "marriage penalty" by allowing two-earner families to deduct up to an additional $3,000, and eliminate the so-called "death tax."
The plan will boost retirement savings, according to mutual fund analysts.
"Theoretically this tax-cut should bring more investors in the market," said Geoffrey Bobroff, president of Bobroff Consulting of East Greenwich, R.I. "But when you think of the [investing] industry, it has probably reached the majority of investors that it wants or can afford to reach. Therefore, I am not sure [the tax cut] is going to open up any new markets. What it may do is allow individuals to invest more of their assets within the fund industry, which is fine."
Other types of investments might suffer, however, as a result of the tax cut, said Bobroff. A tax cut would possibly hurt municipal investing as well as variable annuities.
"It would hurt variable annuity investing because part of the reason for a variable annuity is the tax-deferred buildup," he said. "But if taxes are less, are you, the investor, going to be inclined to use those products or would you rather use an after-tax product?"
There is a good chance a proposal to increase the limits on annual IRA contributions from $2,000 to $5,000 will be tacked on to the tax cut proposal, said Bobroff. If that happens, mutual funds in particular would benefit because high proportions of IRA's are generally invested in mutual funds, he said.
An increase of tax incentives will have a positive effect on retirement savings, said John Collins, a spokesperson for the Investment Company Institute of Washington, D.C.
A tax cut would definitely have a positive effect on the mutual fund industry, said Kevin A Hasset, senior economist with the American Enterprise Institute for Public Policy Research of Washington D.C. One of the main motivations for the proposed top marginal tax rate cut - to 33 percent from 39.6 percent - is the strong empirical evidence that wealthy investors save more if the marginal tax rate is lower because it increases the after-tax income they get from investments, according to Hasset. So, there would be a surge in mutual fund inflows in response to the plan, if it were passed, he said.
But not only the wealthy will benefit from the plan, said Hasset.
"A broad tax rate cut also benefits medium income people because their tax rate goes down as well," he said. "So the idea is that if he puts money in an investment that pays him something that's taxable, like a dividend, then the tax on that dividend goes down. That should make him more willing to buy [mutual funds]."