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ICI Endorses Growth Act: Legislation Would Defer Taxes on Mutual Funds


WASHINGTON The Investment Company Institute is strongly supporting a new piece of legislation called The Growth Act, or Generating Retirement Ownership Through Long-Term Holding.

What ICI President Paul Schott Stevens likes about the plan, introduced in the U.S. House of Representatives two weeks ago by Reps. Paul Ryan (R-Wis.) and William Jefferson (D-La.), is that it would optimize the tax code for millions of Americans saving for retirement through mutual funds.

Whereas capital gains on todays mutual fund accounts are taxed every year, under The Growth Act, taxation would be deferred until the fund shares are sold.

That keeps more retirement savings invested longer and growing longer by taxing income when its withdrawn, not savings while they are being built up, Stevens said in an opening address to attendees at the ICI general membership meeting on May 11.

Modifying the tax treatment so that gains are allowed to compound for taxation when shares are sold rather than being nicked year by year, he said, would help the broad spectrum of American mutual fund investors saving for retirement, he added.

It is the ICIs position, Stevens continued, that such a modification would encourage more middle-income taxpayers to build retirement portfolios, where, unlike those with higher income levels, they have previously demonstrated an inability to rearrange their finances and avoid capital gains. Such a deferral would also recognize shareholders expectations, Stevens said, because people who choose to reinvest, rather than collect a dividend, should not find themselves taxed on what they did not receive.

Perhaps most importantly, Stevens added, permitting tax deferral would recognize the unique, long-term design of mutual fund investing. Long-term investors need a long-term tax policy, he said. The Growth Act is also germane to the debate over including private accounts in Social Security reform.

President Bush, who has made Social Security reform a centerpiece of his second term, wants to offer workers the option of diverting 4% of their 12.4% payroll tax into private accounts comprised of a mix of stock and bond funds. Proponents say it will help ensure Social Securitys long-term solvency and offer Americans more control over their retirement savings. They also say it would provide them with better returns than the current system and its likely that the tax benefits of The Growth Act, as characterized by Sen. Ryan, would enhance returns even further.

Although the Congressman is also the co-sponsor of a Social Security reform plan that includes private accounts, The Growth Act addresses the tax code only.

Those investors who opt in advance to leave capital gains generated by the fund manager reinvested in the fund are doing what so many policymakers want to seethey are holding for the long term, contributing to national savings, Ryan said in introducing the legislation on the U.S. House of Representatives floor.

While the ICI has neither endorsed or vetoed the idea of private accounts, Stevens said during a closed-door meeting with the financial press prior to his opening remarks, that as the debate over private accounts has raged on Capitol Hill, the ICI has been trying to sift through some of the ideas that are on the table.

He said further that the ICI is determined to be a part of the discussion going forward.

The ICIs backing of the Growth Act comes on the heels of a Social Security reform proposal from one of the fund industrys most respected voices, longtime Fidelity Investments executive and current MFS Investment Management Chairman Robert Pozen.

Editors Note: This is a corrected version of last weeks front-page story on The Growth Act.

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