As promised, President Trump’s administration announced a tax plan on Wednesday that mainly revolved around cutting corporate taxes and adjusting personal tax rates.
However, the document did not reveal much details and did not disclose the plan’s effect on budget deficit.
Though most market participants are not sure if Congress will pass any of these tax proposals, the Trump administration seems confident about the materialization of the tax plan, even if a second attempt at canceling the Affordable Care Act flops.
The administration sees the completion of “the biggest overhaul of the tax code since President Ronald Reagan by the end of the year”, as per Treasury Secretary Steven Mnuchin.
As per the overhaul plan, Trump has suggested a 15% corporate tax rate compared with the present 35%. The administration has proposed three tax brackets with rates of 35%, 25%, and 10%, down from the current 7 brackets, “double the standard deduction that Americans can claim on their tax returns and [a] repeal [of] the estate tax and alternative minimum tax.”
Let’s consider a few ETFs that stand to gain out of this tax overhaul, if it at all gets enacted.
In the face of lower corporate taxes, companies’ profitability would be enhanced. This higher profitability may push companies into act of enhancing shareholders’ wealth. As per an analyst, “there is approximately $1.2 trillion held overseas that can’t be brought back to the U.S. without getting hit with the 35 percent corporate tax rate.”
Trump also plans to propose a tax on over $2.6 trillion in offshore earnings. Overall, tax cuts and a one-time repatriation tax could boost share repurchases by companies. PowerShares Buyback Achievers Portfolio (NASDAAQ:PKW) and SPDR S&P 500 Buyback ETF (NYSEARCA:SPYB) can be beneficiaries of this move (read: Buyback ETFs: Trump Beneficiary or Overhyped Bets?).
Dividend Growth ETFs
Tax savings may also result in fatter and faster dividend hikes.S&P Global “expects to see a clearly communicated and orderly distribution of capital through share buybacks, dividends, and to a lesser extent, debt repayments,” if repatriation comes.
This puts dividend growth ETFs like iShares Core Dividend Growth ETF (NYSEARCA:DGRO) and SPDR S&P Dividend ETF (NYSEARCA:SDY) in focus. The stocks making up these ETFs have a history of consistent dividend hikes (read: An Investor’s Guide to Dividend Aristocrat ETFs).
As per the report of S&P Global, “the technology sector controls more than 40% of the total corporate cash and investments, much of it held overseas.” So, a repatriation tax along with lower corporate tax would bring back a significant portion of that cash.
Plus, with such ease in corporate and individual tax rates, more activity in the economy and more portability and cash balances at the corporate level are expected. This makes Pacer US Cash Cows 100 ETF (BATS:COWZ) an intriguing pick. The fund looks to offer exposure to large and mid-capitalization U.S. companies with high free cash flow yields (read: 4 ETFs to Profit Out of Cash Kings).