Tax Drag Percentage is higher at a shorter time horizon and lower return, why?

In the Annual Wealth Based Taxation, the Kaplan notes gives an example changing n=10 to n=20 causing the tax drag percentage to increase.

However, it also states that the tax drag percentage is higher at a shorter time hortizon and lower return. How can a longer tim horizon cause the Tax Drag % to increase and a shorter time horizon can also cause the tax drag % to increase?

Thank you!

when you have a longer time horizon you end up paying MORE TAX - so the TAX DRAG - which is reducing your investment return INCREASES. This is a case where you have a tax rate of say 20%, return of 10% and you are comparing tax drag between 5 years and 10 years.

(Calculate the numbers and see what is happening).

The 2nd one is an example where you are comparing tax rate of 20%, horizon of 5 years, and between 2 returns one of say 10% and another of 20%. The drag due to 20% tax on a 10% return will definitely be higher than the same 20% tax on 20% return wouldn’t it? Do the math again and see for yourself.


Also remember that by wealth based taxation object of taxation is not only return amount than total amount including principal. That’ s why tax rates at wealth tax are usually in small percentage (eg. 3 %). Also this tax is not progressive as income tax so richer investors (with larger portfolios exactly pay less (their after tax total wealth is less affected).

Thank you for the detailed answers! Understood now!

My friend borrowed the only two TA plus calculators I have for the FRM exam… I probably need to find a regular calculator to do the tax questions.

Thank you for the information!

Did you already memorize the Seven Global Tax Regimes? I am still trying to remember that.

You have only two main groups, Common progressive and Flat and light. Others are versions of both. The first is characteristic for developed markets that do not have problems with capital inflows, second is common for countries that want attract foreign investments.

By favorable treatment of specific kind of capital flow (eg. interest, dividends, capital gains), regulator may obtain successful fiscal policy and meet particular country’s objectives.

Also, there is third group of countries which de facto lost sovereignty in fiscal policy because of indebtedness so they are forced to implement more radical forms of taxation because such has been imposed by IMF and other international organizations.This is another reason for establishing so many derivations of primarily two tax system versions.

and its nice to still see cpk123 helping out the AF community even though he/she has passed…

faith in humanity restored (=

Hi Flashback,

You are amazing! Thanks for these information! Helped a lot to remember.

No problem. I’m glad to help.