Taxes and the growth in mutual funds: Evidence from OBRA 93 |
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| Authors: | Frank Murphy James Stekelberg |
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| Affiliation: | 1. School of Business, University of Connecticut, 2100 Hillside Rd., Unit 1041A, Storrs, CT 06269, United States;2. College of Business, Colorado State University, 501 W. Laurel St., Fort Collins, CO 80523, United States;1. University of Colorado Denver, 1475 Lawrence Street, Denver, CO 80202, USA;2. Bentley University, 175 Forest Street, Waltham, MA 02452, USA;3. Northeastern University, 404 Hayden Hall, 360 Huntington Avenue, Boston, MA 02115, USA;1. Data & Text Mining Laboratory, Jerusalem School of Business Administration, Israel;2. Rutgers Business School – Newark and New Brunswick, Rutgers University, Department of Accounting and Information Systems, United States;3. Stern School of Business Administration, New York University and, QMA LLC, United States;4. Freeman College of Management, Bucknell University, United States;1. Kindai University, Faculty of Business Administration, 3-4-1 Kowakae, Higashiosaka City, Osaka 577-8502 Japan;2. Kobe University, Graduate School of Business Administration, 2-1 Rokkodai, Nada, Kobe, Hyogo 657-8501, Japan;1. D’Amore-McKim School of Business Northeastern University, United States;2. College of Business Administration University of Nebraska – Lincoln, United States;3. Farmer School of Business Miami University, United States;1. Western Michigan University, United States;2. George Mason University, United States;3. Florida Atlantic University, United States |
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| Abstract: | In recent years, individuals have steadily moved from direct ownership of equities to holding securities through mutual funds. Prior research has attributed this phenomenon to tax incentives to hold mutual funds in tax-preferred retirement accounts. In contrast, employing household-level microdata and using OBRA 93 as a quasi-natural experimental setting, we find that on average, investors reduced their mutual fund holdings within tax-preferred accounts following a tax rate increase. However, we also observe that this effect is primarily driven by investors with relatively high trading activity within their tax-preferred accounts; investors exhibiting relatively low trading activity generally increased their mutual fund investments in these accounts after OBRA 93. Investors who increased their mutual fund holdings did not do so by rebalancing away from other asset classes. Collectively, our results suggest that taxes are not driving the growth in mutual funds. This finding has important public policy implications because of the growing popularity of using mutual funds as a retirement savings vehicle, the dwindling number of individuals covered by defined benefit plans, the dramatic increase in the importance of mutual funds as a financial intermediary, and the continued state of flux in U.S. tax policy. |
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| Keywords: | Mutual funds Tax-preferred retirement accounts Shareholder taxes Stock ownership Individual investors |
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