February 12, 2019

The 2020 White House race has already begun, and leave no doubt, the next 20 months will be a high-voltage political war between the Trump re-election camp and his opposition that will surely take civility to new lows. The field of Democratic contenders has already taken on the likeness of the Boston Marathon. But on the flip side, having run a couple of marathons myself, it’s always entertaining to see the muscle-bound frontrunners heaving on their knees about eight miles into the race.

So far, the calls to bridge the “wealth gap” are the loudest in decades, with bills being crafted to tax the rich to the tune of 70% or more. To be a “one-percenter” in today’s economy, you must have an adjusted gross income of at least $422,000, according to IRS statistics for tax year 2018. The top 1% account for 1.4 million individual income tax returns out of 141.2 million total. Meanwhile, the top 1.0% accounted for 39% of total income tax paid in 2015. Wow! What would America do without its one-percenters?

The U.S. government’s total revenue is estimated to be $3.4 trillion for fiscal year 2019, according to the latest estimate from the Office of Management and Budget (OMB) for the year running October 1, 2018 to September 30, 2019. Individual taxpayers provide most of that money. In fact, income taxes contribute $1.7 trillion, half of the total, which means 1.4 million households ponied up $653 billion of the tax bill.

While this hard data from the IRS seems clear enough, an army of angry and ambitious socialists running for President in 2020 are saying that the one-percenters are “freeloaders” and are “not paying their fair share.” Against a backdrop of rising entitlement spending, movements for student loan amnesty, free college education, open borders, universal healthcare (“Medicare for all”), and guaranteed income for all – I’d liken the one-percenters to the “Sugar Daddy” class already footing 39% of the total income tax bill, so you probably don’t want to push them into moving their legal residency to somewhere outside the U.S.

These rich folks will still be your neighbors, for sure, for almost half the year, but they won’t be paying for everyone’s free stuff – like the new breed of socialists demand. “People of means,” as Presidential hopeful Howard Schultz likes to describe billionaires like himself, or those making as “little” as $422,000 per year, can afford two residences. They can run a business in the U.S. and pay income taxes from Cabo, Mexico, which carries the lowest overall income tax burden among developed nations. Salud, amigo!

Sound silly? The world is getting smaller every day for people of means. If for whatever reason this anti-rich narrative gets out of first gear and warrants any notion of genuine attention, it will not be well received by the financial markets and capital will flow out of America faster than it is currently flowing out of China. It’s important to act respectfully to those that one depends on, but Bernie Sanders & Co. are tone deaf when this centuries-old pattern of trying to shake down the rich results in a massive exodus.

The fight for who runs the country will pretty much come down to a debate between those who create and produce the wealth and those who want to take it and redistribute it. Bernie Sanders and Alexandria Ocasio-Cortez are in the latter category as they stir up an angry populace. According to the Tax Policy Center, over 76 million (45.3% of adult heads-of-household) won’t pay any federal income tax for 2018, up from 72.6 million (43.2%) in 2016. That’s quite a “freeloader” voter base damning the one-percenters!

From my point of view, having traveled quite a bit, if you were born in the United States, you’ve already won the lottery. So, I’ll jump off the moral hazard soapbox and point to where investors should focus.

Dividends Matter, Now More Than Ever

One place the liberal elite won’t let the socialists touch is the tax treatment for qualified dividends. This is a sacred cow for the wealthy and, by definition, there are far more liberal millionaires and billionaires than those of the conservative ilk. Most billionaires are socially liberal, but fiscally conservative.

The maximum tax rate on qualified dividends is 20% for those paying the current maximum federal income tax rate of 39.6%, and this very special rate on passive income earned from invested capital in common stocks is very likely to take on a whole new luster in the year ahead.

Not only is the Fed now officially on hold, but the European Economic Council slashed the Eurozone’s growth rate for GDP by a full third last week from 1.9% to 1.3% with the risk of that number being cut further. This means that any political push for a trillion-dollar infrastructure bill means that taxes will go UP to pay for the big new spending bill. My best guess is that we should all expect a bump in the gas tax.

According to AAA, the national average for a gallon of gas is fairly low, at $2.28 as of February 9. The federal trust fund that pays for highways and transit projects through gas tax revenue is projected to pile up a $138 billion deficit by 2027 unless it slashes funding or finds new sources of revenue. The federal gas tax hasn’t been raised for 25 years and with the ink on President Trump’s 2018 tax reform barely dry, a fuel tax looks to me to be a bi-partisan avenue for passing what should be a popular transportation and infrastructure bill – and a way of avoiding political suicide if one opposes local infrastructure spending.

In my opinion, the table is now set for dividend growth stocks and higher-yielding defensive dividend stocks to shine in the year ahead as most one-percenters do the heavy tax lifting by plowing into the best-yielding, highly liquid, and most tax favorable asset class money can buy.

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license.

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