Curmudgeon’s Corner

January 01, 2003

Let's face it governments are inefficient. Wanton expenditure, wholly unjustified by the services provided to the citizenry, is a norm.

Most memorable is the not so long ago Department of Defense/NASA procurement frenzy that made conversation pieces of $600 toilet seats, $119 soap dishes and pliers at $999 a copy. The Clinton administration, in a supreme acknowledgement of boondoggle, even commissioned a "$400 Hammer Award" to be granted to those agencies mending their spendthrift ways by please don't laugh "reinventing government."

But government ways, like Mom's opinion of your first wife, are nearly impossible to change.

Witness recent pork-festooned appropriations bills calling for:

• $300,000 to pay for manure management systems in South Carolina,

• $50,000 slated for a tattoo removal program in San Luis Obispo County, California,

• $270,000 for combating "Goth culture" in Blue Springs, Missouri.

And don't forget the $250,000 earmarked by the Department of Agriculture for "developing pungency testing procedures to improve the quality and sensory consistency of Vidalia onions."

With a Bush tax cut package dangling piñata-like before Congress, true patriots are wondering how such vital programs as these can be funded with an ever-shrinking tax base.

That's why all the discourse in this august rag about boosting tax efficiency is so worrisome. In my book, it's damn near disloyal to put one's tax aversion ahead of the country's need for properly managed dung. Ask your-self, too, if you're really willing to let tattooed Goths proliferate in a no-man's land between Central California and the heart of Missouri just to save a few bucks in taxes.

Let's put this in real terms. An article in the May 2002 issue of Financial Planning compared the tax efficiency of ETFs versus mutual funds. An ETF based upon the S&P SmallCap 600/Barra Value Index, for example, was clocked at a 97.2% tax efficiency rate while its mutual fund analogue loped at 81.2%. (The after-tax return for the ETF was 15.7%; for the mutual fund, 13.2%. Each produced a before-tax total return of 16.2%.) Thus, a yearlong investment of $100,000 in the mutual fund, through a taxable account, delivered $3,040 to the tax man. Holders of the ETF version would have coughed up only $460 to Uncle Sam's minions, saving 84.9% in taxes.

Now think about that for a minute. For every $100,000 steered from the mutual fund to the ETF by muck-obliv-ious and Goth-loving advisors, the government was potentially denied $2,580 in tribute. That's six less hammers for the Department of Defense, or four fewer toilet seats for the space agency.

Don't care about small-cap value? Long term tax efficiency data on S&P 500 Index-based products analyzed by A. Seddik Meziani in the Fall 2001 Guide to Exchange-Traded Funds showed the average tax savings avail-able through an ETF to be 12.3% per dollar invested, compared to a mutual fund. The comparative tax savings for funds based upon the S&P MidCap 400 Index were even more dramatic-84.2%.

Find your next ETF

Reset All