Geithner tax comments were off the mark: Investors won’t be hurt by SEC’s 12(b)-1 proposal

I am writing to comment on a few things that Treasury Secretary Timothy Geithner said this month, which…

I am writing to comment on a few things that Treasury Secretary Timothy Geithner said this month, which appeared in the article “Failure to raise top tax rate a “$700B fiscal mistake’: Geithner” (Aug. 5).

He was quoted as saying: “Letting the top-end tax cuts expire will only affect less than 3% of small-business owners,” and “borrowing to finance tax cuts for the top 2% would be a $700 billion fiscal mistake.”

The Tax Foundation analyzed Internal Revenue Service data for 2007 and found the top 1% of income earners paid 40.42% of all federal income taxes; their share of adjusted gross income was just 21.2%. The top 3% paid 53.75% despite earning 29.97% of AGI; the top 5% paid 60.63% while earning 35.75% of AGI, and the top 10% paid 71.22% and comprised 46.44% of AGI.

Additionally, the bottom 50% of income earners paid 2.9% of federal income taxes even though they represented 12.83% of AGI. Incredibly, the bottom 95% of income earners paid less in federal income taxes than the top 1%, due to the significant progressiveness of marginal rates in conjunction with refundable credits and deductions.

Does Mr. Geithner not recognize the fact that many of the “less than 3% of small-business owners” are in the category of income earners paying more than half of all federal income taxes? These small-business owners own pass-through entities such as S corporations, LLCs, etc., where the income flows directly onto their 1040s.

As noted by the IRS statistics, these individuals are already shouldering the bulk of the federal income tax burden while historically being the primary source of job creation. In addition to these statistics, the effects of health care legislation, financial-reform legislation and all the bureaucracy, regulation, taxes, fees and costs associated with them are leaving small-business owners with no incentive to hire and expand.

Perhaps this is why the unemployment stands at 9.5%, with the underemployment rate closer to 17% and the average time spent unemployed at an all-time record high in spite of the $850-plus billion so-called “stimulus program” passed last year.

Although diversification is understood with respect to investment portfolios, concentration has taken the reins in terms of who pays taxes, with so few paying so much. This is unsustainable because our tax system is ever more reliant on fewer and fewer individuals, who are subject to economic forces as well as tax policy.

Jason Hochstadt

Executive vice president

Jedi Management Inc.

Fort Lee, N.J.

I don’t understand how small investors would be hurt by the Securities and Exchange Commission’s proposal (“12(b)-1 proposal may hurt investors, advisers contend,” July 26).

First, when an investor is “sold” a C share, it is by a broker — there is no advice conveyed. Making such a case is in clear violation of state and federal securities law.

Those who sell C shares are brokers regulated by the Financial Industry Regulatory Authority Inc. Those who offer advice are registered as advisers under the 1940 Investment Advisers Act and can’t accept 12(b)-1 fees, which are commissions.

Financial advisers who use mutual funds as a part of the client’s asset allocation, and charge on average a 1% maximum, are able through their custodian to offer A shares with the load waived, as well as no-load funds.

Clients of advisers simply aren’t charged 5% upfront commissions.

Here is the evidence:

• The average expense ratio of funds with a 1% 12(b)-1 fee is 2.02% (about 8,400 funds).

• The average expense ratio of funds that don’t charge a 12(b)-1 is 0.86% (about 8,300 funds).

Add the “expensive fee-only planner’s” fee, and the investor saves 16 basis points, or about 9%, annually, and gets the protection of a fiduciary.

The real problem is that brokers want all the benefit (the 1% fee) of an adviser, with none of the responsibility to the investor.

Ask the investor which is a better value: 2.02% for an adviser not to have to act in their best interest or 1.86% for an adviser to have to act as a fiduciary? The 1% trail can’t be “spun” as advice, because it isn’t.

Brent E. Bentrim

Managing director

Carolopolis Fiduciary Counsel Inc.

Charleston, S.C.