Dividend Investing Weekly: The Threat of Higher Taxes to the Bull Market

You are receiving this email because you signed up to receive our free e-letter Dividend Investing Weekly, or you purchased a product or service from its publisher, Eagle Financial Publications. [Dividend Investing Weekly] [Cash Machine]( [Quick Income Trader]( [Breakout Profits Alert]( [Hi-Tech Trader]( The Threat of Higher Taxes to the Bull Market by Bryan Perry Editor, [Cash Machine]( 10/21/2024 Sponsored Content [Don't put a penny in AI stocks until you read this]( Discover the AI pioneer 99% of investors have never heard of... but it's one of my top picks to own now. This company has been an AI pioneer since before anyone ever heard of ChatGPT. Its sustained high double-digit growth has analysts raising price targets. Get the name-FREE. [Discover this under-the-radar AI stock now, ahead of the crowd.]( Heading into the Nov. 5 election, there are a number of risks investors are carefully monitoring that could quickly alter the bullish mood of stock investors during a robust earnings season. (Analysts are projecting a 4.6% year-over-year increase in earnings, marking the fifth consecutive quarter of growth.) During this earnings season, the S&P sectors projected to be big winners are information technology, health care and communication services, while energy is expected to report the largest decline compared to a year ago. The best news is that upbeat earnings aren’t just a byproduct of cost savings or stock buybacks. The S&P is projected to deliver 4.8% year-over-year revenue growth for Q3, with 10 of the 11 market sectors showing positive sales growth, as the economy is enjoying broad sector participation. That said, the market faces downward revisions and sector specific challenges for the current quarter, painting a more complex outlook for investors. What keeps coming up within the analyst community is market valuation and the lofty premium the S&P currently sports. The forward 12-month P/E ratio for the S&P 500 is 21.6, exceeding both the 5-year average (19.5) and the 10-year average (18.0), indicating that the market might be pricing in rising future earnings expectations. However, that’s hard to dismiss, considering that the top-weighted S&P components are the high-growth mega-cap tech companies. Among the outliers in everyone’s peripheral vision, there is the potential for a widening regional war in the Middle East, a naval blockade of Taiwan exports by China and a sweep of the Senate, House and the White House by the Democratic Party, which would set in motion passage of higher taxes: income taxes, corporate taxes, capital gains and dividend taxes, estate taxes, excise taxes, property taxes and sales taxes. These higher taxes would be sold to voters as necessary to pay for exploding federal deficits to finance Social Security, Medicare, Medicaid, unemployment insurance, assistance to low-income individuals and soaring interest on the federal debt, since “tax and spend” represent a core pillar of party policy. To be fair, the blue party’s tax focus is aimed at corporations, the super-wealthy and stock market investors as a source of funds, but it is safe to say that a Democratic Party sweep would likely alter investor sentiment. 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[Click here now for the full story.]( The Impact of a Baseline Tax Increase Platform The effect of raising the corporate tax rate to 28% from 21% would likely include slower growth and lower wage increases, according to the Tax Foundation’s [latest update]( released October 16, 2024: “We estimate the proposed tax changes would reduce long-run GDP by 2.0 percent, the capital stock by 3.0 percent, wages by 1.2 percent and employment by about 786,000 full-time equivalent jobs. We find the tax policies would raise top tax rates on corporate and individual income to among the highest in the developed world, slowing economic growth and reducing competitiveness.” Source: The Tax Foundation (All provisions are modeled as starting in calendar year 2025, unless otherwise noted.) These estimates of lost GDP, wages, jobs and capital could be worse. They do not include Kamala Harris’ “novel and highly uncertain yet large tax increases on high earners and multinational corporations, namely a new minimum tax on unrealized capital gains” nor the “global minimum tax model.” Major business provisions modeled in the above study: - Increase the [corporate income tax]( rate from 21% to 28% - Increase the corporate alternative minimum tax introduced in the [Inflation]( Reduction Act from 15% to 21% - Quadruple the stock buyback tax in the Inflation Reduction Act from 1% to 4% - Make permanent the excess business loss limitation for pass-through businesses - Further limit the deductibility of employee compensation under Section 162(m) - Increase the global intangible low-taxed income (GILTI) tax rate from 10.5% to 21% - Repeal the reduced tax rate on foreign-derived intangible income (FDII) The implications of hiking the corporate tax rate from 21% to 28% complicates U.S. competitiveness. The signing of the Tax Cuts and Jobs Act (TCJA) by then-President Donald Trump on December 22, 2017, lowered the corporate tax rate from 35% to 21%, providing one of the most significant revisions in the U.S. tax system in decades. It targeted the offshoring of American businesses by removing the incentive for corporations to redomicile to jurisdictions outside the United States. [How to Use A.I. to Trade the 'Up-Crash']( The stock market feels like a volatile game of tug-of-war. Prices are climbing, but the volatility and mixed signals make it feel like we're heading toward an "up-crash," where sudden surges lead to unexpected drops. Navigating this market requires precise timing, as making a safe exit before the next "up-crash" could mean the difference between significant losses and confident gains. Want to learn how to trade the 'up-crash'? [Watch and learn FREE how A.I. can give you the edge in volatile markets.]( The Tax Cuts and Jobs Act is set to expire December 31, 2025, and if not extended, many of the tax changes will revert to their pre-2017 levels. “It’s going to be the Super Bowl of tax law changes in less than 18 months,” said Mark Steber, chief tax information officer at tax preparer Jackson Hewitt. Changes will affect people differently, but Steber said everyone’s “tax rates will be higher. That’s inarguable.” Source: The Tax Foundation On the surface (chart, above), the percentage of tax revenues from corporations in the United States is stated to be low, around 6% of all federal tax revenue, which seems small by comparison when individual income taxes (federal, state and local) were the primary source of tax revenue in 2021, at 42.1% of tax revenue. The 6% figure is low because more than half of business income in the United States is reported on individual tax returns. Relative to other OECD countries, the U.S. approach to taxing business income boosts the share of tax revenue from individual income taxes in the United States and [reduces]( the share of corporate tax revenue. The American Enterprise Institute (AEI) explains the difference of how corporates calculate their taxes: “In the United States, there are generally two forms of businesses, each facing a different tax regime. Traditional C corporations pay corporate income tax at the entity level and their payments show up in the corporate tax revenue statistics. In contrast, ‘pass-through’ businesses -- S corporations, partnerships and sole proprietorships -- do not face the corporate income tax. Instead, their profits are immediately passed to their owners as business income each year and, typically, taxed as ordinary income. These owners’ tax remittances show up as individual income tax collections, not corporate income tax collections.” The thought that an increase in the corporate tax rate only impacts large corporations can be misleading. While the corporate tax rate itself doesn’t directly affect pass-through entities, owners of these businesses may be impacted if the business has retained earnings. The higher corporate tax rate could also reduce the amount of profits available for distribution. This may help explain why the United States has smaller corporate tax collections relative to GDP than some other countries. In the words of economist Art Laffer, “Taxes have consequences,” which, by extension means that “elections can have major tax consequences.” Sincerely, [bryan-perry-sig] Bryan Perry Editor, Cash Machine Editor, Premium Income PRO Editor, Quick Income Trader Editor, Breakout Options Alert Editor, Hi-Tech Trader Editor, Micro-Cap Stock Trader About Bryan Perry: [Bryan Perry]Bryan Perry specializes in high dividend paying investments. This weekly e-letter combines his decades-long experience in income investing with a simple, easy-to-read format that investors of all stripes can work into their portfolios. Bryan also serves as Editor of these services: [Cash Machine]( [Premium Income PRO]( [Quick Income Trader]( [Breakout Profits Alert]( [Hi-Tech Trader]( and [Micro-Cap Stock Trader](. About Us: Eagle Financial Publications is located in Rosslyn, VA. – Blocks from the Capitol. Our products have been helping investors build their wealth for several decades. 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