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Tax Hike in the Cards? ETFs in Focus

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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

Vanguard S&P 500 ETF (VOO - Free Report)

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.

Rareview Tax Advantaged Income ETF (RTAI - Free Report)

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%.

VanEck Vectors Intermediate Muni ETF (ITM - Free Report)

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.

iShares 20+ Year Treasury Bond ETF (TLT - Free Report)

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.