Abstract
Exchange-traded funds (ETFs) were created not only to offer the same diversification and convenience presented by mutual funds, but also to alleviate the tax burden on investors. This chapter examines why mutual funds present a disadvantage relative to ETFs, by reviewing the relevant tax laws and how ETFs operate to produce the significant tax savings reported by their sponsors.
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Notes
- 1.
This chapter draws from the author’s previous work on the subject. See A. Seddik Meziani, “Along Came a SPDR: How Tax-Efficient are S&P Depositary Receipts?” in “A Guide to Exchange-Traded Funds,” Institutional Investor (Fall 2001), pp. 144–154.
- 2.
- 3.
- 4.
Note that this rate climbs to 39.1% if we add the average rate levied by U.S. states. Corporations headquartered in the countries that make up the Organisation for Economic Co-operation and Development (OECD) pay an average rate of only 25%.
- 5.
The individual income tax on dividends ramps up to 28.6% if we add to the top federal marginal tax rate the average rate levied by U.S states on dividend income, which is five percentage points higher than the average tax rate of 23.2% faced by taxpayers in the OECD countries.
- 6.
Internal Revenue Code Section 851(b).
- 7.
Ibid., Section 4982(b).
- 8.
Ibid., Section 4982(a).
- 9.
Ibid., Section 351(a).
- 10.
Ibid., Section 351(e).
- 11.
Ibid., Section 1031(a).
- 12.
Ibid., Section 358(a)(1).
- 13.
- 14.
Internal Revenue Code Section 1031.
- 15.
Internal Revenue Code Section 851(b).
- 16.
Ibid., Section 1031(a).
- 17.
Ibid., Section 1031(b).
- 18.
Internal Revenue Code Section 1211(b).
- 19.
Ibid., Section 1(h)(11)(b)(iii).
- 20.
Ibid., Section 163(d)(4)(b).
- 21.
Ibid., Section 243(a)(c).
- 22.
Ibid., Section 316.
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Meziani, A.S. (2016). Exploring the Tax Advantages of Exchange-Traded Funds. In: Exchange-Traded Funds. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-39095-0_3
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DOI: https://doi.org/10.1057/978-1-137-39095-0_3
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Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-137-39094-3
Online ISBN: 978-1-137-39095-0
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