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All About Biden's Tax Plan & Its Impact on the ETF World

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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 largest real increase in capital gains rates in history. That rate would apply only to households with income exceeding $1 million, which make up the majority of capital-gains income.

A Hike in Taxes Mean a Tepid Wall Street, At Least for Short Term

The above tax plan means a somber Wall Street. Firstly, 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. An overall stock market selloff means a short-term rough patch for the likes of iShares Core S&P Total U.S. Stock Market ETF (ITOT - Free Report) .

Moreover, a hike in corporate taxes is surely bad news for markets. Goldman Sachs 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 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 ETF (KRE - Free Report) and Invesco S&P SmallCap Health Care Portfolio (PSCH - Free Report) .

Staples & Housing Stocks to Gain as Low-Income Individuals to Remain Largely Unaffected?

Biden proposes to maintain the tax cuts that Trump signed in 2017 for households making less than $400,000, including the larger standard deduction and child tax credit. However, Biden is likely to keep start the tax again at wages above$400,000, per a Wall Street Journal article. Overall, benefits for the low-income group means no tensions for consumer stocks, especially the staple ones. So, ETFs like iShares U.S. Consumer Services ETF (IYC - Free Report) and Consumer Staples Select Sector SPDR Fund (XLP - Free Report) 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 ETF (XHB - Free Report) .

Good for US Manufacturing & Infrastructure?

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 (IFRA - Free Report) and Invesco Dynamic Building & Construction ETF (PKB - Free Report) and First Trust RBA American Industrial Renaissance ETF (AIRR - Free Report) .

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 (MUB - Free Report) could thus gain in the Biden presidency.

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