The ability to defer capital gains creates more heterogeneity in aftertax returns
than previously recognized.
For the pharmaceutical industry, one economic problem is that only 3 out of every 10 of their products generate aftertax returns
(measured in present value terms) in excess of average, aftertax R&D costs.
However, as documented below, over a longer time period the tax rate on capital income has come down markedly, thereby contributing to higher aftertax returns
Households may choose to invest in a wide array of financial assets, and there are often asset-specific tax rules that determine the relationship between pretax and aftertax returns
. Part of my research has focused on taxpayer response to specific tax rules on particular classes of assets, while another part has explored more broadly how the structure of household portfolios, and the allocation of portfolio assets between taxable and tax-deferred accounts, is affected by taxation.
It should be noted that when aftertax returns
are required, the tax lot selection will affect the fund's aftertax return
Finally, using a simulation to test whether following simple tax-avoidance strategies would have significantly boosted investors' aftertax returns
, the authors find that simple rules that accelerate the realization of tax losses could substantially improve aftertax returns
for many investors.
The difference is in how the funds are managed: Most fund managers tend to sell stocks with the lowest cost basis--and the highest profit--to boost returns, but tax-managed fund managers follow a different strategy, emphasizing aftertax returns
Tax rate differences over time and between countries can be very large, thereby significantly affecting aftertax returns
The result was that aftertax returns
dwindled to 71.5%, a loss of 23% in just five years.
For taxpayers with substantial investments, CPAs will need to calculate the break-even point to determine whether their aftertax returns
fall below the aftertax cost of financed home ownership.
However, individuals in poor health or those able to produce aftertax returns
higher than 5% may be better off opting for benefits at 62.
* A Roth IRA provides investors with a substantially greater aftertax return
than a taxable investment or a nondeductible IRA.