The Entitlement Trap

Posted December 20, 2012 by admin. tags:
Chains of a trap


Written by Nathan White, Chief Investment Officer of Paragon
Wealth Management

I read in the Wall street Journal today that the Tax
Foundation notes that almost 70% of Americans take out more from the tax system
than they put into it.  Seventy percent!  No wonder the debate about the
fiscal cliff is primarily focused on taxes.  It’s a great strategy to
distract people’s attention away from the real problem – spending.  Is it
inevitable that as democracies age their citizens become accustomed to the
resulting prosperity and take it ever more for granted by voting themselves
ever more entitlements?   Entitlements are always so very well
intentioned and therefore difficult to argue against in a moral sense.
After all, who wants to deny assistance to Sandy/Katrina victims, single parents,
the homeless, those who can’t afford college (isn’t that everyone now?),
retirees, “working families”, farmers, the unemployed – the list is
unfortunately now endless.

The problem is that eventually the entitlements and spending
become unsustainable.  So how do we break this vicious cycle?  The
problem is offering entitlements in the first place.  No one ever wants
their entitlements cut or taxes raised per se (despite what Warren Buffett
says).  We usually want someone else’s benefit to be cut or taxes
raised.  The mega rich often support higher taxes on themselves because it
won’t materially change their lifestyle but it does create barriers to entry to
more people becoming like them.  It entrenches their place at the top.
But I digress, once begun entitlements are hard to end.
Think about it on a personal level, if you get a deduction for a mortgage
or tax credit for children do you want those ended or reduced?  No,
because it means your refund will go down or tax payment will go up – either
way you’re out of more money.  In fact, if offered an entitlement it
behooves you to take it because if not than you will be worse off economically
on both a relative and absolute level.  You don’t have the option for
either a mortgage deduction or a lower rate.

Now let’s say you’re idealistic and want to take a stand
against the growth of the entitlement state that will eventually end in great
pain.  You decide to take the high road and refuse any entitlement offered
by the government.  Great, except for the fact that you will become
progressively less well-off as time goes by.  On a relative basis this
could become very painful as others who take the entitlements maintain or
increase their standard of living – at least until it all comes crashing down.
The more entitlements grow and replace things that people purchased before on
their own the more expensive or difficult those things become to obtain in the
private market.  Thus if you chose to forgo entitlements it would
progressively become harder to maintain your standard of living.

Entitlements are such a catch-22 in that one almost “has” to
use them and that eventually they can bring the whole system down.  The
only way to avoid their deleterious effect is to not enact them in the first
place or to severely limit their use.  However, everyone likes “free”
goodies and politicians use this to their own advantage.  It creates the
entitlement trap that can eventually bring an economy to its knees.

Disclaimer
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Fiscal Cliff…

Posted December 14, 2012 by admin. tags:
The Fiscal Cliff

Written by Dave Young, President of Paragon Wealth Management

So here we are again.  
Another saga of politicians making promises, trading accusations and
accomplishing nothing of substance.  It's
been said that the definition of insanity is doing the same thing over and over
and expecting a different result.  So
what does that say about our "leaders" in Washington?

It's obvious we have a 16 Trillion and growing problem.   One
side believes that the solution is to keep increasing taxes…as long as we
only do it to the "rich".  The
other side believes that the only solution is to cut government spending.

This impasse brings us to what the media loves to call the
"Fiscal Cliff".

What makes the Fiscal Cliff such a great title is that it
sounds really scary.  Fear increases
attention.  Increased attention
translates into more viewership.  More
viewership translates into more revenue for the media outlets.  As a result, the media loves scary things,
real or imagined.

In reality, if our politicians cannot agree on a solution
then that will create a problem.  That
problem will be more of a fiscal slide over time rather than the fiscal cliff
that has been portrayed.  If the slide
occurs it will likely take months to play out before it has any direct effect
on our economy.

If it did play out over six months or more then the revenue
that would be sucked out of the economy could potentially push us into another
recession.  If that recession played out
then that would be bad for all investments.

Even though it would take months to play out from a
practical standpoint, potential selling could be immediate and more severe if
investors act emotionally and start selling just because they are scared. 

In the previous politically induced potential calamities,
ie. the European Crisis, the Debt Ceiling Crisis, and the U.S. Treasury Debt
Downgrade Crisis… politicians reacted by effectively doing nothing and
kicking the can down the road.  In the
end, they did what they always do and went back to spending more of other
people's money.  

There is a decent chance that they will do nothing.  Not because it is the right thing to do…but
because it is politically advantageous. 
If they do "something" it will likely not help the core debt
problem.  However, just going through the
actions of doing something would likely have a positive effect on the markets.

In my opinion, I believe that if the market does sell off
because of what the politicians do, I don't think that it would be long
lived.  In other words I would expect the
losses to be reversed over the following months just like the previous
political meltdowns.  On the other hand,
if they come to some agreement that is viewed positively by investors then
there is a decent chance we could see some upward market movement.  In short, I think that there is more downside
for investors by being out of the market right now than there is to stay
invested.  Keep in mind, unfortunately, I
can't see into the future, and markets are free to do whatever they want.

In the end, the most important thing to do is make sure that
your risk tolerance is set at a level that you can live with.  Make sure you are comfortable with your mix of
conservative versus growth oriented investments.   If
your risk tolerance is set properly, then you should not be stressed regardless
of how things play out.  As always,
please contact us if you have any questions or concerns.

Disclaimer
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results. 

How Tax Rates Affect Business Decisions

Posted December 7, 2012 by admin. tags:
The Scale

Written by Nathan White,
Chief Investment Officer of Paragon Wealth Management

This is an absolutely
great piece in the op-ed section of the Wall Street Journal last Friday about
the hypocrisy of those who support higher taxes and claim that tax rates don’t
affect business decisions!  I urge all to read!

To view the entire
article please visit: wsj.com

Here is an excerpt from
the article:

When President Obama
needed a business executive to come to his campaign defense, Jim
Sinegal was there. The Costco co-founder, director and former
CEO even made a prime-time speech at the Democratic Party convention in
Charlotte. So what a surprise this week to see that Mr. Sinegal and the rest of
the Costco board voted to give themselves a special dividend to avoid Mr.
Obama’s looming tax increase. Is this what the President means by “tax
fairness”?

Specifically, the giant
retailer announced Wednesday that the company will pay a special dividend of $7
a share this month. That’s a $3 billion Christmas gift for shareholders that
will let them be taxed at the current dividend rate of 15%, rather than next
year’s rate of up to 43.4%—an increase to 39.6% as the Bush-era rates expire
plus another 3.8% from the new ObamaCare surcharge.

More striking is that
Costco also announced that it will borrow $3.5 billion to finance the
special payout. Dividends are typically paid out of earnings, either current or
accumulated. But so eager are the Costco executives to get out ahead of the tax
man that they’re taking on debt to do so.

Shareholders were happy
as they bid up shares by more than 5% in two days. But the rating agencies were
less thrilled, as Fitch downgraded Costco’s credit to A+ from AA-. Standard
& Poor’s had been watching the company for a potential upgrade but pulled
the watch on the borrowing news.

We think companies can
do what they want with their cash, but it’s certainly rare to see a public
corporation weaken its balance sheet not for investment in the future but to
make a one-time equity payout. It’s a good illustration of the way that Federal
Reserve Chairman Ben Bernanke’s near-zero interest rates are combining with
federal tax policy to distort business decisions.

One of the biggest
dividend winners will be none other than Mr. Sinegal, who owns about two
million shares, while his wife owns another 84,669. At $7 a share, the former
CEO will take home roughly $14 million. At a 15% tax rate he’ll get to keep
nearly $12 million of that windfall, while at next year’s rate of 43.4% he’d
take home only about $8 million. That’s a lot of extra cannoli.

This isn’t exactly the
tone of, er, shared sacrifice that Mr. Sinegal struck on stage in Charlotte. He
described Mr. Obama as “a President making an economy built to last,”
adding that “for companies like Costco to invest, grow, hire and flourish,
the conditions have to be right. That requires something from all of us.”
But apparently $4 million less from Mr. Sinegal……

To view the rest of the
article please visit: wsj.com

Disclaimer
Paragon Wealth Management is a provider of managed portfolios for individuals
and institutions. Although the information included in this report has been
obtained from sources Paragon believes to be reliable, we do not guarantee its
accuracy. All opinions and estimates included in this report constitute the
judgment as of the dates indicated and are subject to change without notice.
This report is for informational purposes only and is not intended as an offer
or solicitation with respect to the purchase or sale of any security. Past
performance is not a guarantee of future results. 
 

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