All About Biden's Tax Plan & Its Impact on the ETF World
Zacks Investment Research | Sep 25, 2020 01:00AM ET
Apart from COVID-19, presidential election is a pretty hot topic now, especially with the event just a few weeks away. Chances of Democrats taking over the House and Senate in November are rising. Per the asset management company DWS, there is a 60% probability of Democratic candidate Biden winning the Presidency and a 42% chance for Democrats winning the Presidency and both Houses of Congress.”
So, investors must be interested in Biden’s political strategy and its impact on the investment world. Amid many other proposals and agenda, Biden’s $4-trillion-tax plan has been the most talked-about lately. Let’s discuss the issue in detail and see what effect it will have on the ETF world.
Biden Wants Tax Hike
His winning means the partial rollback of President Trump’s Tax Cuts and Jobs Act. Notably, President Trump’s tax law lowered the corporate tax rate from 35% to 21%, starting 2018. Analysis by the Tax Foundation reveals that Biden’s plan is to hike the corporate tax rate to 28%.
Biden is also proposing to levy a minimum tax rate of 15% — a potentially damaging outcome for some major companies which pay little in taxes. As far as individual taxes are concerned, Biden’s proposals include a top individual tax rate of 39.6%, up from 37%. He would also expand the 12.4% Social Security payroll tax, per a Wall Street Journal article. Biden's tax plan is intended to generate more revenues are needed to pay down the huge debt incurred to fight the recession.
Biden has proposed raising the top tax rate for capital gains for the highest earners to 39.6% from 23.8%, the ITOT .
Moreover, a hike in corporate taxes is surely bad news for markets. Goldman Sachs (NYSE:GS) cautioned that Biden's tax plan, coupled with an expected drag on GDP, would lower next year's S&P 500 per-share earnings by $20 to $150 , per a CNN article. Michael Wilson, chief U.S. equity strategist at Morgan Stanley (NYSE:MS) said “extrapolating current multiples on that kind of earnings decline makes 100-150 points on the S&P 500 a baseline for the impact of a tax cut rollback, all else equal,” as quoted on Fox Business.
Some of biggest gainers of the Trump tax cut plan — banks, healthcare and retail — may now feel the pain. So, keep a close check on the likes SPDR S&P Regional Banking (NYSE:KRE) ETF XLP should remain steady.
But then, the article said that Biden would offer targeted tax credits for middle-income households, including proposals aimed at boosting retirement savings, child care and first-time home purchases. This should be beneficial for homebuilding ETFs like SPDR S&P Homebuilders (NYSE:XHB) ETF XHB .
Good for US Manufacturing & Infrastructure?
Get The News You Want
While tax hike is a negative for Wall Street, Biden’s push for tax incentives will encourage domestic manufacturing. Biden proposed a $1.3-trillion infrastructure overhaul last year. The Democratic presidential candidate’s campaign aims to invest in restoring highways, roads and bridges, changing water pipes, building out rural broadband access, and updating schools among other works.
The proposals should boost ETFs like iShares U.S. Infrastructure ETF AIRR .
Will Muni Bonds Get Back to Their Old Form?
Muni bond investing was deemed to lose its luster under Trump’s tax plan. This is because tax cuts were supposed to replace the need for muni bond investing (mainly meant for tax exemption) by taxable treasuries or corporate bonds.
Biden would repeal the $10,000 cap on the state and local tax deduction, a change from 2017 that increased taxes on high-income households, particularly in states such as New York, New Jersey and California. With high-income earners probably likely to face higher taxes in the potential Biden era, muni bonds investing might now see a surge in demand. iShares National Muni Bond ETF Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
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