Taxes and the growth in mutual funds: Evidence from OBRA 93

Frank Murphy, James Stekelberg

Research output: Contribution to journalArticlepeer-review


In recent years, individuals have steadily moved from direct ownership of equities to holding securities through mutual funds. Prior research has attributed this phenomenon to tax incentives to hold mutual funds in tax-preferred retirement accounts. In contrast, employing household-level microdata and using OBRA 93 as a quasi-natural experimental setting, we find that on average, investors reduced their mutual fund holdings within tax-preferred accounts following a tax rate increase. However, we also observe that this effect is primarily driven by investors with relatively high trading activity within their tax-preferred accounts; investors exhibiting relatively low trading activity generally increased their mutual fund investments in these accounts after OBRA 93. Investors who increased their mutual fund holdings did not do so by rebalancing away from other asset classes. Collectively, our results suggest that taxes are not driving the growth in mutual funds. This finding has important public policy implications because of the growing popularity of using mutual funds as a retirement savings vehicle, the dwindling number of individuals covered by defined benefit plans, the dramatic increase in the importance of mutual funds as a financial intermediary, and the continued state of flux in U.S. tax policy.

Original languageEnglish (US)
Article number106859
JournalJournal of Accounting and Public Policy
Issue number3
StatePublished - May 1 2021
Externally publishedYes


  • Individual investors
  • Mutual funds
  • Shareholder taxes
  • Stock ownership
  • Tax-preferred retirement accounts

ASJC Scopus subject areas

  • Accounting
  • Sociology and Political Science


Dive into the research topics of 'Taxes and the growth in mutual funds: Evidence from OBRA 93'. Together they form a unique fingerprint.

Cite this