U.S. Supreme Court Justice Learned Hand was the tax expert during his years of service. One of his most quoted opinions was this one: “Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant” (Commissioner v. Newman, 159 F2d 848 (1947). We have all heard the expression “it’s not what you earn, but what you keep that counts.” Many investors will look at their pretax return and expense ratio but do not study the after-tax return on their portfolio. A recent Morningstar study looked at the past decade ending Jan. 31, both actively managed and passively managed (index and exchanged traded) U.S. equity products including all market cap sizes and investment styles. By using a 10-year time frame the impact of the 2008 meltdown was minimized, so that many U.S. equity investment products appeared to be tax-efficient over the past five years when, in fact, they were simply working off capital losses accumulated in 2008. Let’s start by looking at the tax impact on the average active and passive U.S. equity investment products for the 10-year period ending January. The formula used is Tax Drag Equals Pre-Tax Return minus After-Tax Return. Morningstar reported the average fund examined lost 1.02 percent of its return to taxes every year with a net expense ratio of 1.05 percent. This means the impact of taxes and expenses are about equal, although most investors ignore the tax aspect. Drilling down further, when the 1.02 percent tax impact is compounded, the annual tax drag is a 10.7 percent loss over 10 years. Add to that the tax increase for many investors makes the future tax drag even worse. Next, the Morningstar data separates out large cap and small cap stocks to see if the tax drag impacts different investment options depending on the cap size of the purchased securities. Within large cap, the average annual tax drag over the past decade was 0.86 percent and with small cap, the annual tax drag was 1.15 percent. Then, let’s ask what our goal is? Is reducing taxes an end in itself or is the larger purpose to end up with more after-tax wealth? Prudent goals might be to maximize after-tax returns. particularly when capital-gain distributions have increased for many investment products while tax rates have risen for many investors. Investors and their advisers should review the after-tax returns of the products...