Among many agendas, Biden always had plans for tax hikes. In line with that plan, House Democrats drew a host of tax hikes on corporations and wealthy people to finance the costs associated with the social safety net and climate policy that could touch as much as $3.5 trillion.
The plan demands top corporate and individual tax rates of 26.5% and 39.6%, respectively, according to a summary released by the tax-writing Ways and Means Committee, as quoted on CNBC. The proposal includes a 3% surcharge on individual income above $5 million and a capital gains tax of 25%.
However, Senate Democrats will also have their sayings in passing the tax proposals. Sen. Joe Manchin, D-W.V., has called for a corporate rate of 25%. A few moderate Democrats say they won’t support President Joe Biden’s $3.5 trillion package without a removal of the cap on state and local tax deductions, known as SALT.
Notably, in the 2017 Republican tax cuts proposal, the GOP cut it to 21% from 35%. Republicans also cut the top individual tax rate to 37%.The above tax plan may mean a somber Wall Street for the short term. First, Biden’s plan to increase the capital-gains tax could result in a large-scale stock sell-off, according to economic analyses, as quoted on CNBC.
In 1986, as part of the Reagan tax plan, the top rate for capital gains surged from 20% in 1986 to 28% in 1987. Just before the hike, capital gains’ realizations shot up by 60%, the CNBC article noted. Then again, things were always not as scary as expected.
In 2013, the S&P 500 added about 30% despite the nine percentage-point increase in capital gains tax rate. In 1981, the tax rate dropped about eight percentage points, but the S&P 500 skidded 10%, a Barrons’ article noted.
Plus, any hike in tax rate should not impact the markets over the long term. Against this backdrop, below we highlight a few ETF bets.
ETFs in Focus
We expect the medium-to-long term bet on the large-cap focused S&P 500 ETFs to be worth. Plus, small companies – which are more domestically focused and have less foreign exposure – pay huge taxes in America. This is because these pint-sized companies can’t pile cash in foreign lands. Hence, the segment may fall prey to Biden’s prospective tax plan.
The Rareview Tax Advantaged Income ETF seeks total return with an emphasis on providing current income, a substantial portion of which will be exempt from federal income taxes. The expense ratio of the fund is 1.91%.
The underlying Bloomberg Barclays AMT-Free Intermediate Continuous Municipal Index comprises publicly traded municipal bonds that cover the U.S. dollar denominated intermediate term tax-exempt bond market. The fund charges 24 bps in fees and yields 1.91% annually.
If the stock market takes a dive, the bond market should gain on rising safe-haven demand. This along with a dovish Fed will make TLT a good-performing fund all over again.