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Would a flat tax affect munis?
Q
Recently one of your brokers recommended a muni-bond that matures in 2037. I wondered what would happen to its core value and the relative value of the interest it paid if, by some outside chance, there were meaningful tax reform (like a flat tax) during that period. I was told that the idea of such a thing happening was laughable. It may be far fetched, but impossible? I don’t think so.
A
James A. Klotz responds:
We agree that it’s possible, but in our opinion it’s unlikely because of the special interests and incentives that are currently entrenched in the tax code.
Interestingly, we investigated the “flat tax” back in 1996 when it was the main plank in Steve Forbes’ presidential platform. We determined the tax would have to be in the 25%-30% range to maintain the level of tax receipts at that time. At those rates, we felt it would have very little impact on the municipal bond market.
Today it is clear that any tax-reform would center on eliminating the Alternative Minimum Tax (AMT). Once again, the main issue will be making up the shortfall in revenue that repealing the AMT would involve.
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