Proof that Lowering Tax Rates, Even Sharply, Leads to Higher Tax Collections

In a story that bemoans the fact that mutual fund holders have to pay taxes on their gains because fund managers sold some of the underlying stocks in the mutual funds’ portfolios (a complaint I don’t have a lot of sympathy for, but that’s a matter for another time, Investment News stumbled into a result (requires paid subscription) supporting the positive impact of supply-side tax cuts:

Investors in taxable mutual funds paid 56% more in taxes on their fund holdings in 2006 than they did in 2005, according to a report released today by Lipper Inc.

Mutual fund investors paid $23.8 billion in taxes last year even without selling their funds, according to the 141-page report, “Taxes in the Mutual Fund Industry—2007: Assessing the Impact of Taxes on Shareholders’ Returns,” issued by the mutual fund research firm in Denver.

Fueled by changes in the tax law reducing taxes on dividends, mutual funds distributed a record $418.5 billion last year, up 57% from $266.5 billion 2005, said Tom Roseen, senior research analyst.

That’s roughly $8.5 billion more to the federal treasury, and $152 billion more in capital that could either be reinvested by fund holders if they continued to be confident in future fund performance, or redirected elsewhere if they saw better opportunities elsewhere.

More dollars to the federal treasury and better allocation of capital. What’s not to like?