President Trump Considers Historic Tax Reform
President Donald Trump has pledged to implement a plan for sweeping tax reform. Cutting individual tax rates across the board and reducing the number of tax brackets from the current seven to three.
The question is how will this effect demand for municipal bonds?
Interest earned on municipal bonds is exempt from Federal income tax which has historically led to high demand from investors of all tax brackets, but particularly from individuals in the highest tax brackets. The higher your tax rate, the greater the benefit received from the tax exempt status. So, theoretically, if President Trump was to lower the highest tax bracket from the current 39.6% to 33%, as he has implied, demand for tax-free income should wane.
However while the tax benefit would shrink with lower overall tax rates, there would still be an advantage over other forms of taxable income. Even taking a reduction in the marginal tax rates into consideration demand for municipal bonds should remain strong, at least over the short term. Currently, the municipal market suffers from a strong supply and demand imbalance. Reduced tax rates should help bridge the supply/demand divide in the short term, but over the long term and that divide diminishes tax reform may have a more dramatic impact on demand in the municipal bond market.
( Source : The Hill )
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