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Tax Drag

What is 'Tax Drag'

The reduction of potential income due to taxes. Drag describes the loss in returns owing to taxation, usually on an investment. Tax drag is commonly used when describing the difference between an investment vehicle that is tax-sheltered and one that is not. For many individuals, tax drag can have a significant effect on overall investment performance.

Explaining 'Tax Drag'

Tax-efficient investing techniques are very important for recognizing capital gains, transferring wealth and estate planning.


Further Reading


Tax Management of Factor-Based Portfolios
jii.pm-research.com [PDF]
… Follow IIJ on Twitter. Article. Tax Management of Factor-Based Portfolios. Rey Santodomingo … 2016.7.2.078. Rey Santodomingo. is the director of investment strategy for tax-managed equities at Parametric Portfolio Associates LLC in Seattle, WA …

The Economics of Public FinanceThe Economics of Public Finance
www.jstor.org [PDF]
… Follow IIJ on Twitter. Article. Tax Management of Factor-Based Portfolios. Rey Santodomingo … 2016.7.2.078. Rey Santodomingo. is the director of investment strategy for tax-managed equities at Parametric Portfolio Associates LLC in Seattle, WA …

10 The effect of fiscal drag on tax revenue and tax burden10 The effect of fiscal drag on tax revenue and tax burden
books.google.com [PDF]
… Follow IIJ on Twitter. Article. Tax Management of Factor-Based Portfolios. Rey Santodomingo … 2016.7.2.078. Rey Santodomingo. is the director of investment strategy for tax-managed equities at Parametric Portfolio Associates LLC in Seattle, WA …

After the death of inflation: will fiscal drag survive?After the death of inflation: will fiscal drag survive?
onlinelibrary.wiley.com [PDF]
… Follow IIJ on Twitter. Article. Tax Management of Factor-Based Portfolios. Rey Santodomingo … 2016.7.2.078. Rey Santodomingo. is the director of investment strategy for tax-managed equities at Parametric Portfolio Associates LLC in Seattle, WA …

Optimal financing by money and taxes of productive and unproductive government spending: Effects on economic growth, inflation, and welfareOptimal financing by money and taxes of productive and unproductive government spending: Effects on economic growth, inflation, and welfare
papers.ssrn.com [PDF]
… Follow IIJ on Twitter. Article. Tax Management of Factor-Based Portfolios. Rey Santodomingo … 2016.7.2.078. Rey Santodomingo. is the director of investment strategy for tax-managed equities at Parametric Portfolio Associates LLC in Seattle, WA …

Can fiscal drag pay for the public spending effects of population ageing in New Zealand?Can fiscal drag pay for the public spending effects of population ageing in New Zealand?
www.tandfonline.com [PDF]
… Follow IIJ on Twitter. Article. Tax Management of Factor-Based Portfolios. Rey Santodomingo … 2016.7.2.078. Rey Santodomingo. is the director of investment strategy for tax-managed equities at Parametric Portfolio Associates LLC in Seattle, WA …

Globalization, tax reform ideals and social policy financingGlobalization, tax reform ideals and social policy financing
journals.sagepub.com [PDF]
… Follow IIJ on Twitter. Article. Tax Management of Factor-Based Portfolios. Rey Santodomingo … 2016.7.2.078. Rey Santodomingo. is the director of investment strategy for tax-managed equities at Parametric Portfolio Associates LLC in Seattle, WA …



Q&A About Tax Drag


What does tax drag describe?

Tax drag describes the loss in returns owing to taxation, usually on an investment.

How can you avoid real or nominal fiscal drag from happening?

You can avoid real or nominal fiscal drag by adjusting your tax thresholds in line with price rises so that taxpayers do not move into higher tax brackets due to inflation but still pay enough taxes to cover government expenses without creating excessive deficits or surpluses in public finances.

How can you tell if there is too much or too little tax in an economy?

If people are taxed at rates higher than necessary, then there will be less aggregate demand and deflationary pressure on the economy. This is called real fiscal drag. If people are taxed at rates lower than necessary, then there will be more aggregate demand and inflationary pressure on the economy. This is called nominal fiscal drag.

What does it mean for a country to have a negative fiscal position?

The country has an excess of spending over revenue, which means that they are running a deficit.

How can tax drag affect overall investment performance for individuals?

For many individuals, tax drag can have a significant effect on overall investment performance.

What is tax drag?

Tax drag is the reduction of potential income due to taxes.

What is fiscal drag?

Fiscal drag happens when the government's net fiscal position (spending minus taxation) fails to cover the private economy's spending gap.

How can you recognize capital gains with tax-efficient investing techniques?

By using tax-efficient investing techniques, investors can recognize capital gains and transfer wealth more effectively.

What are some important estate planning techniques that reduce the impact of taxes on your heirs?

Some important estate planning techniques that reduce the impact of taxes on your heirs include charitable giving and life insurance policies.

What does it mean for a country to have a positive fiscal position?

The country has more revenue than spending, so they are running a surplus.

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