The Committee on Capital Markets Regulation released a report by Harvard Law School Professor John C. Coates recommending that mutual fund investors who hold less than 2% of a fund’s shares not be taxed on capital gains until they sell those shares. The current tax scheme puts U.S. funds at a competitive disadvantage, Coates says.

While the mutual fund industry in the U.S. is the world’s largest, its growth rate lags behind domestic and foreign competitors, the professor said.

In addition, Coates wants investors to be able to realize capital losses in the same way they realize capital gains and to be able to invest in foreign funds without incurring additional U.S. taxes.

Committee President Hal S. Scott, also a professor at Harvard, said, “Compared to E.U. counterparts, U.S. mutual funds are taxed less favorably and regulated less intelligently. The 70-year-old structure of U.S. regulation, unlike the more modernized E.U. system, makes the success of U.S. mutual funds dependent on the resources, responsiveness and flexibility of an underfunded, under-resourced and outdated Securities and Exchange Commission.”

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