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Tax-the-Rich Slogan Not to Help Muni Bond ETFs Much

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Though it is still months away, the race toward presidential election has started. Among several agendas by both parties, wealth tax imposition (proposed by Democrat candidates) has been one of the most talked-about. Senator Elizabeth Warren wants to levy a 2% annual tax on household wealth above $50 million, and a 6% annual tax on net worth above $1 billion. Bernie Sanders has targeted the top 0.1%.

There is growing public support for the agenda too. According to a recent Reuters poll, Among the 4,441 respondents, 64% of Americans are supporting the levy of a wealth tax on the super-rich. While support among Democrats was stouter at 77%, the Republicans are also not behind with about 53% favoring the idea. According to polling by Gallup, concerns about the rich paying too little have been rising since the 2007-2009 crisis from 55% to more than 60% as of 2016.

Notably, a Reuters article pointed out that a booming stock market in the past decade boosted the top one percent’s share of American net worth from 27.8% to 32.2%. Although the share of wealth held by the bottom 50% of Americans has grown to 1.5%, the long-term trend is declining, with the share at less than half.

What Happens to Muni Bond ETFs?

“A wealth tax is levied on an individual’s net worth, such as stocks, bonds and real estate, as well as cash holdings, similar in concept to property taxes. It is separate from an income tax, which applies to wages, interest and dividends, among other sources,” per Reuters.

Muni bonds generate tax-free income. Per Bloomberg, muni securities delivered outsize returns after President Bill Clinton took office and went on to hike the top marginal tax rate. So, the $3.8-trillion muni bond market should be in focus in 2020, which is the election year and the change in government could occur (read: Will Biotech ETFs Excel in Election Year Post a Surge in 2019?).

But then, in Clinton’s time, it was the hike in income tax, not imposition of wealth tax. Under wealth tax, muni bond’s principle would be taxed. Along with some analysts, we also believe that “taxation of muni bond principal, at the levels proposed by prominent candidates, would be far more costly to their rich investors than would taxation of the corresponding interest.”

Having said this, we would like to note that there would definitely be some demand for income tax reduction (as much as possible) to mitigate some adverse effect of the imposition of the wealth tax. This could brighten up demand for munis, if chances of a Democrat win (who are clamoring for tax hike) is in the cards (read: 4 Reasons Why Muni Bond ETFs Are Rallying in 2019).

A Bloomberg article noted that “about 42% of the $60 billion of tax-exempt interest paid in 2017 went to Americans who make more than $500,000 a year, with another $22 billion paid to those earning between $100,000 and $500,000, according to Internal Revenue Service statistics.” So, one can expect a moderate uptick in muni bond ETFs given the latest tax talks.

Below we highlight some of the muni bond ETFs, which have added solid returns in the past four weeks (see all muni bond ETFs here).

First Trust Municipal High-Income ETF (FMHI - Free Report) – Yield 3.30%

VanEck Vectors AMT-Free Intermediate Municipal Index ETF (ITM - Free Report) – Yield 2.18%

VanEck Vectors AMT-Free Long Municipal Index ETF (MLN - Free Report) – Yield 2.74%

Franklin Liberty Municipal Bond ETF (FLMB - Free Report) – Yield 2.37%

Xtrackers Municipal Infrastructure Revenue Bond Fund (RVNU - Free Report) – Yield 2.72%

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