In an op-ed published in Townhall this week, ATR Federal Affairs Manager Bryan Bashur highlighted the detrimental effects a tax on exchange-traded funds (ETFs) would have on retail investors.

Senate Finance Committee Chairman Ron Wyden (D-Ore.) has proposed to tax ETFs by repealing a provision from statute that allows ETFs to distribute shares in-kind without immediately triggering the capital gains tax.

Notably, Wyden’s ETF tax will break President Biden’s pledge not to raise taxes on Americans earning less than $400,000. Millions of Americans invested in ETFs earn far less than $400,000. As Bashur points out:

According to the Securities Industry and Financial Markets Association (SIFMA), in 2019 there were $4.4 trillion in U.S. ETF assets. Approximately, “9.6 million households, or around 8% of total U.S. households, own ETFs.” In fact, the median income for households owning ETFs is $125,000.

Over the past few years, the growth of ETFs has outpaced mutual funds. A tax on ETFs would stymie this growth and limit any potential opportunities for ETFs to become a more integral investment option for employee retirement plans. Bashur explains that:

Adopting Wyden’s proposal and eliminating the current tax advantage for ETFs could slow investment into ETFs, making them unattractive for any consideration of 401k investment in ETFs. This would limit low-cost options for investors and stymie future innovations for retail investors’ retirement funds.

In recent years, investor interest in ETFs has grown faster than other investment products. From 2000 to 2017, ETFs grew at a compound annual growth rate of 25 percent as compared to mutual funds that grew by only 6 percent over the same period of time. This explosive growth in ETFs is largely due to increased demand for investments that are lower cost, transparent, and offer more liquidity than competitor products.

Moreover, there is ample potential for crypto investors to get involved in innovative ETF products. Bashur states that:

Federal intervention into the tax structure of ETFs could eliminate any potential for new ETFs. For example, Fidelity is in discussions with the Securities and Exchange Commission (SEC) to launch a bitcoin ETF, and Invesco is partnering with Galaxy Digital Holdings to launch new crypto ETFs. While the SEC has not yet approved cryptocurrency ETFs, countries such as Canada, Germany, and Switzerland are taking the lead. Abroad, assets in cryptocurrency ETFs “tripled from $3bn at the end of last year to $9bn as of June.”

Bashur implores members of Congress to oppose a tax on ETFs. In a world of increasingly democratized investment options, taxing ETFs would be a regressive political action that will only shut out retail investor participation in the financial markets.

Click here to read the full op-ed.