Category Archives: Taxes

Fiscal Cliff Continued…

Posted January 4, 2013 by admin. tags:
The Fiscal Cliff

Written by Dave Young, President of Paragon Wealth
Management

The financial world was about to go over the fiscal
cliff.  Our world was ending as we know
it.  But then, our trusty politicians
came back to save us.  At the very last
minute, they came to an agreement.
President Obama even came back from his vacation in Hawaii to be
there.

Everyone cheered.  The
stock market jumped 300 points the next day.

We followed our models and our portfolios performed well
through all of the stress and uncertainty.

So what really happened?

Not much.  Payroll
taxes were put back to what they were before the payroll tax holiday – which
will cost average wage earners somewhere between $500 and $2000 per year,
depending on your income.

Of course, the rich, who are regularly told don’t pay their
fair share, were mandated to pay more.
Their top marginal rate was increased from 35% to 39.6%.  I guess they can feel grateful that their tax
didn’t go up to 40%, just 39.6%.  It’s
kind of like when they price gas at nine tenths of a cent so you feel better
about it.

The definition of rich was changed again.  For at least the next few months, single rich
people earn $400,000 and married rich people earn $450,000.  I guess it’s important to define who is “rich”
so that we know who should pay everyone else’s bills.

The estate tax exemption was set at $5,000,000 per
person.  That was relatively positive
because for the first time in a decade there will be some certainty around
estate planning.  Unfortunately, for
planning purposes, it’s nice to know how much more the government will take
when you die…

At the end of the day, nothing has really changed.  We are still 16+ Trillion in debt and going
further into debt every day.  There were
virtually no cuts made to government spending in this agreement.  Forty two cents of every dollar that the
federal government spends is still borrowed from your kid’s and grandkid’s future.

So, for now – until the next politically induced crisis – we
should have some stability in the market.
That crisis will be the debt ceiling debate.  It should occur between now and March.

The fundamentals of the market actually look fairly positive
for 2013.  Based on our models and the
economic trends, I am positive on the economy and the market for the next
couple of years.  The issue is whether or
not our leaders will continue to create unnecessary uncertainty.

In summary, over the short term, market conditions look
good.  Over the long term, I have some
serious concerns.  Based on current
policy, our 16 Trillion dollar debt isn’t going to magically disappear.  At sometime in the future it will have to be
addressed.  If it isn’t then we will
experience a real cliff.  That is the one
that we will be watching out for.

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.

Investing Under Obama- Part II

Posted November 15, 2012 by admin. tags:
Rolling hills

Written by Dave Young, President of Paragon Wealth Management

After a
seemingly endless campaign, we now know who will be in charge for the next four
years. I believe that keeping the money you earn and investing it successfully will
be more difficult than ever.

In the 26
years that I have managed money I have never seen government affect the free
market in the negative way that it does now.
Unfortunately, every investment decision we make is affected by politics,
government policies and regulations.

Going
forward, what does this mean for investors?

The first
problem is the uncontrolled spending in Washington that shows no signs of
slowing.  Obama ran up the national debt
from 9.6 Trillion to over 16 Trillion dollars, a 66% increase, in just four
years.  His rate of spending is incomprehensible
and dangerous.

To put this
in context, $16,000,000,000,000, with one dollar bills stacked flat would go
out of the stratosphere, around the moon and back, twice.  That is almost a million miles of bills. Put
another way, to pay back just the 6.4 Trillion dollars that Obama spent during
the past four years, at a dollar a second, would take over 202,000 years.

The second
concern is that interest rates are temporarily forced to all time lows.  Low rates have kept the interest on the debt
manageable.  If rates increase only one
percent then the interest cost on $16 Trillion will increase by $160 Billion
per year.  If rates go up two percent
then the increased cost is $320 Billion.
A three percent increase would be $480 Billion, and so on.  When rates go up our debt will become more
unsustainable than it is now.

From an
investment perspective, these are troublesome and potentially hazardous
problems. Maybe this is why several polls show 80%+ of financial advisors were
not in favor of Obama.

Problem
#3:  Obama seems to believe that the only
way to balance the budget is to tax the “rich” more.  Never mind that the top 5% of taxpayers  already pay 60% of the income taxes.     He demonizes “millionaires and billionaires”
but in reality there is a target on the back of anyone who makes over
$250,000.  This continues to be his
focus, even though taxing job creators (the rich) more will only bring in about
FIVE PERCENT of the revenue needed
to balance the budget over the next decade.

So what is an investor to do?

First,
investors must be aware and take advantage of every legal method available to
reduce their taxes.  In order to fund their
out of control spending, the government will be raising taxes any way they can.
In order to make forward progress you
need to avoid unnecessary taxes, so that you can keep and grow your money.

Second, you
must be aware of our nation’s fiscal mess and monitor it going forward. If
spending continues at the current rate, then we may arrive at a tipping point
sometime in the future.  If we cross that
tipping point the government will have to take action to deal with the debt.

At Paragon,
we are watching for signs of inflation, hyper-inflation or currency
devaluation.  Traditional buy and hold, diversified
investing will not work in this scenario.  Also, conservative areas such as bank CD’s and
bonds provides no protection from the ravages of inflation.

You or your
advisor must be aware of what is going on so that you can monitor and adjust
your investments accordingly.  If the
inflation scenario plays out then investors need to reallocate their
investments into areas that will be protected from or even benefit from
inflation.

Over the
next four years, these are scenarios that any serious investor needs to be
aware of and have a plan to deal with.  Watching
passively and hoping – is not a plan.

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. 

Why Warren Pays Less in Taxes than his Secretary…

Posted October 6, 2011 by admin. tags:Tags: , , , ,
How Warren Buffett pays taxes


Photo credit:  Connected

Written by Dave Young, President of Paragon Wealth Management

President Obama says that his most important priority is to create jobs. With that priority, it does not make a lot of sense that he relentlessly attacks those who create most of the jobs in America, i.e. “the rich”.

For the past couple of weeks the president – and his new helper, Warren Buffett- have campaigned endlessly against the job creators who he says do not pay their fair share of the tax bill.

I agree that everyone should pay their fair share. That is common sense. However, I do not believe that Warren Buffett or the president should make up facts to mislead the public that the rich are not paying their fair share.

I work with wealthy people. Regardless of what the president says, these people pay a lot of taxes. It could easily be argued that they pay much more than their fair share.

As a matter of fact, the top 10 percent of earners pay 70 percent of all  federal income taxes. 

According to the Tax Policy Center, the average person making:

  • $50,000 pays $6,250 in Federal Income Taxes.
  • $75,000 pays $11,250 in Federal Income Taxes.
  • $1,000,000 pays $291,000 in Federal Income Taxes.

So if you make 20 times more than $50,000, or in other words $1,000,000, then you will pay 46 times more in taxes.

So you make 20 times more but pay 46 times more, and that is considered unfair? You are endlessly attacked and told you are not paying your fair share when in reality you should be getting a “thank you” card.

Do the rich get to use the roads more or do they get better police and fire protection? Do they get better protection from the military? I know they get much more attention from the IRS.

These are the actual numbers. The real numbers don’t back up the populist picture that the rich do not pay their fair share. They actually show the opposite.

So what about Warren Buffett? Why is he helping to distort the facts?

I’m only speculating, but he owns several large insurance companies. It is very much to the benefit of his insurance companies to have high tax rates. Because of the tax preferential treatment that insurance products receive, those companies  would benefit significantly from higher tax rates. In that way Buffett would benefit from higher tax rates.

Or maybe, Buffett is right that his secretary pays a higher rate than him. I would imagine she gets paid more than your typical secretary and is in a fairly high tax bracket.

Buffett built his reputation as a legendary investor in the 70’s, 80’s, and 90’s. However, for the past 13 years he hasn’t done much at all.

From June 30, 1998 to August 31, 2011 he has returned only 2.6 percent compounded to his investors in Berkshire Hathaway. That is 2.6 percent compounded over 13 years.

Maybe that is why he has been paying less in taxes than his secretary.

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.

Thoughts on the Debt Ceiling Mess

Posted July 28, 2011 by admin. tags:

Several of our clients at Paragon have been asking us how we got into the debt ceiling mess. This Wall Street Journal article gives a good summary of what has brought us to this point.

THE ROAD TO A DOWNGRADE
A short history of the entitlement state.
Taken from the Wall Street Journal online

Even without a debt default, it looks increasingly possible that the world’s credit rating agencies will soon downgrade U.S. debt from the AAA standing it has enjoyed for decades.

A downgrade isn’t catastrophic because global financial markets decide the creditworthiness of U.S. securities, not Moody’s and Standard & Poor’s. The good news is that investors still regard Treasury bonds, which carry the full faith and credit of the U.S. government, as a near zero-risk investment. But a downgrade will raise the cost of credit, especially for states and institutions whose debt is pegged to Treasurys. Above all a downgrade is a symbol of fiscal mismanagement and an omen of worse to come if we continue the same habits.

President Obama will deserve much of the blame for the spending blowout of his first two years (see the nearby chart). But the origins of this downgrade go back decades, and so this is a good time to review the policies that brought us to this sad chapter and $14.3 trillion of debt.

FDR began the entitlement era with the New Deal and Social Security, but for decades it remained relatively limited. Spending fell dramatically after the end of World War II and the U.S. debt burden fell rapidly from 100% of GDP. That changed in the mid-1960s with LBJ’s Great Society and the dawn of the health-care state. Medicare and Medicaid were launched in 1965 with fairy tale estimates of future costs.

Medicare, the program for the elderly, was supposed to cost $12 billion by 1990 but instead spent $110 billion. The costs of Medicaid, the program for the poor, have exploded as politicians like California Democrat Henry Waxman expanded eligibility and coverage. In inflation-adjusted dollars, Medicaid cost $4 billion in 1966, $41 billion in 1986 and $243 billion last year. Rather than bending the cost curve down, the government as third-party payer led to a medical price spiral.

LBJ launched other welfare programs—public housing, food stamps and many more—that have also grown over time. Last year, the panoply of welfare programs spent about $20,000 for every man, woman and child in poverty, according to Robert Rector of the Heritage Foundation.

Social Security’s fiscal trouble began in earnest in 1972 with bills that increased benefits immediately by 20%, added an annual cost of living adjustment, and created a benefit escalator requiring payments to rise with wages, not inflation. This and other tweaks by Democrat Wilbur Mills added trillions of dollars to the program’s unfunded liabilities. Believe it or not, these 1972 amendments were added to a debt-ceiling bill.

None of these benefit expansions were subject to annual budget review and thus they grew by automatic pilot. They are sometimes called “mandatory spending” because Congress is required by law to make payments to those who meet eligibility standards, regardless of other spending needs or tax revenues.

According to the most recent government data, today some 50.5 million Americans are on Medicaid, 46.5 million are on Medicare, 52 million on Social Security, five million on SSI, 7.5 million on unemployment insurance, and 44.6 million on food stamps and other nutrition programs. Some 24 million get the earned-income tax credit, a cash income supplement.

By 2010 such payments to individuals were 66% of the federal budget, up from 28% in 1965. (See the second chart.) We now spend $2.1 trillion a year on these redistribution programs, and the 75 million baby boomers are only starting to retire.

We suspect that in the 1960s as now—with ObamaCare—liberals knew they had created fiscal time-bombs. They simply assumed that taxes would keep rising to pay for it all, as they have in Europe.

On Monday night Mr. Obama blamed President George W. Bush’s “two wars” for the debt buildup. But national defense spending was 7.4% of GDP and 42.8% of outlays in 1965, and only 4.8% of GDP and 20.1% of federal outlays in 2010. Defense has not caused the debt crisis.

Many on the left still blame Ronald Reagan, but the debt increase in the 1980s financed a robust economic expansion and victory in the Cold War. Debt held by the public at the end of the Reagan years was much lower as a share of GDP (41% in 1988 and still only 40.3% in 2008) compared to the estimated 72% in fiscal 2011. That Cold War victory made possible the peace dividend that allowed Bill Clinton to balance the budget in the 1990s by cutting defense spending to 3% of GDP from nearly 6% in 1988.

Mr. Bush and Republicans did prove after 9/11 that the Washington urge to spend and borrow is bipartisan. Republicans launched a Medicare drug benefit, record outlays on education, the most expensive transportation bill in history, and home ownership aid that contributed to the housing bubble. The GOP’s blunder was refusing to cut domestic spending to finance the war on terrorism. Guns and butter blowouts never last.

Then came Mr. Obama, arguably the most spendthrift president in history. He inherited a recession and responded by blowing up the U.S. balance sheet. Spending as a share of GDP in the last three years is higher than at any time since 1946. In three years the debt has increased by more than $4 trillion thanks to stimulus, cash for clunkers, mortgage modification programs, 99 weeks of jobless benefits, record expansions in Medicaid, and more.

The forecast is for $8 trillion to $10 trillion more in red ink through 2021. Mr. Obama hinted in a press conference earlier this month that if it weren’t for Republicans, he’d want another stimulus. Scary thought: None of this includes the ObamaCare entitlement that will place 30 million more Americans on government health rolls.

This is the road to fiscal perdition. The looming debt downgrade only confirms what everyone knows: Congress has made so many promises to so many Americans that there is no conceivable way those promises can be kept. Tax rates might have to rise to 60%, 70%, even 80% to raise the revenues to finance these promises, but that would be economically ruinous.

Yet Mr. Obama and most Democrats still oppose any serious reform of Medicare, Medicaid and Social Security. This insistence on no reform reinforces the notion that our entitlement state is too big to afford but also too big to change politically. This is how a AAA country becomes AA, the first step on the march to Greece.

Images:
1- Associated Press:  With former President Truman at his side, LBJ signs the Medicare bill into law, July 30, 1965.
2- The Obama-Pelosi Blowout:  *2011 estimate. Source:  Office of Management and Budget.
3- Entitlement Nation:  Source- Office of Management and Budget

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. 

 

Unusually Uncertain?

Posted July 22, 2010 by admin. tags:Tags: , , , ,
Protest Sign

 Photo By Shutterstock

Written by Dave Young, President of Paragon Wealth Management

Yesterday, Federal Reserve Board Chairman Ben Bernanke said that the outlook for the economy is “unusually uncertain”.

He stressed that the economy was growing at a moderate pace. He mentioned that employment and consumer retirement sentiment were weak.

When he said, “unusually uncertain” the market sold off. What a surprise.

So why is this recovery “unusually uncertain”? What is unusual about it?

I’ve been through a few economic cycles and have never heard the fed chairman use those words.

I don’t know what he was thinking, but I’ll take a guess. After an economic slowdown/meltdown “usually” the economy goes through a normal cycle of recovery. He said this one is “unusually uncertain” indicating it is not “normal”.

What is “unusual” this time?

I believe it is the impact that politics is having on our economy and the markets. Usually politics do not have that big of an effect on the economy. This time is different.

Is it unusual for government to completely overhaul the private sector health care system, which makes up around 17 percent of our economy? Is it even more unusual to do it during such difficult economic times? Maybe it’s unusual to do it when surveys show that most Americans oppose it.

Or maybe it’s embarking on a complete overhaul of the financial system? Maybe it’s that the financial overhaul is based on the theories of senators like Chris Dodd and Barney Frank that have no “real world” financial experience and therefore those living in the “real world” have no confidence in them. Maybe it is because congress passes these monster bills (2500+) pages on a purely partisan basis without reading them.

Why as he said, is unemployment high and why are consumers scared?

If you are a business that needs to make a profit, (unlike a government agency), there are costs and risks involved in hiring new employees. Maybe you aren’t sure how much the new health care regulations are going to cost your company. Possibly you aren’t sure how much of your money you will still have left to pay a new employee with after the upcoming new tax proposals are implemented. Now that unemployment costs go on for 99 weeks, maybe you don’t want to accept that unknown liability you have if you need to lay someone off in the future. Or maybe it’s simply because as a business owner you have a target on your back that says “Need Money? Tax Me!” and you don’t feel comfortable with that.

Why would you hire a new employee?

Why would you take the risk? You wouldn’t. And most employers aren’t. They are making things work with the employees they have. The government tells us every day they are saving us, but they are actually having the opposite effect. They have created incredible uncertainty. That uncertainty translates into high unemployment and low consumer confidence.

Not to worry.

Today congress cleared the way to spend another $33,000,000,000 (that’s billion) of our grandchildren’s money, and extend unemployment benefits once again. This administration seems to be taking the law on unintended consequences to a whole new level. Maybe higher tax rates and permanent government expansion are not the solution after all.

Maybe we’ll have a chance in the voting booth to start repairing this mess in November. Time will tell. 

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.

Stop Spending Now!

Posted April 22, 2010 by admin. tags:Tags: , , ,
Real American Money

photo by photos8.com

Written by Dave Young, President of Paragon Wealth Management

In the past we have written about the negative impact of politics on our economy and how politics impact the investment markets.

Political meddling affects the markets in several ways. It creates a host of problems, with slower long-term growth being directly affected.

The problem is fairly simple.

Every couple of years politicians run for office. In order to get elected they make all kinds of promises to those who give them money and votes. In order to pay back their supporters they pass laws and spend money to benefit them. That translates into massive unnecessary spending, which costs everyone but only benefits a few.

The politicians are happy to spend endlessly because they figure that someone else – in the future – will pick up their tab and pay the bill. In other words, there is no accountability or responsibility for their spending because they don’t have to pay for it.

On a national level, the debt they have created has become enormous. The numbers are so huge that most people just glaze over them. In other words, if something doesn’t make sense to us then it doesn’t sink in, and we don’t really understand it. We just ignore it, and we don’t worry about it.

It is time to worry about it.

If this financial mess and its damage is going to be stopped, it is up to the people to get involved and elect people who will stop the out of control spending once and for all.

George Bush was fiscally irresponsible and spent far more than he should have when he was president.

With his promise of “change” Barrack Obama is on track to create a debt in 20 months equal to the debt that it took George Bush eight years to create. After that his own projections show it getting worse.

The short video below puts the debt in perspective. It also shows how insignificant the $100 million dollars that the White House is going to “save” is. It is time to get serious about the debt.

The time for political games is past.

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.

Some Thoughts on One of Life

Posted January 31, 2008 by admin. tags:Tags: , , , , , , , , , ,
Taxes

Written by Dave Young, President

For people who invest (and even people who don’t), taxes have always been a hot topic. Unfair taxation caused many of our forefathers to abandon England and start their own country—and eventually hold a certain famous tea party in Boston Harbor.

Fortunately, we don’t have to resort to such drastic measures today, but taxes are still an emotional issue. Just look at what you’re up against: You work hard to earn a paycheck. But before you ever see the check, you give a portion of it to pay state and federal income taxes. Then you pay social security and Medicare. After you deposit the rest in your bank account, you still have to pay sales tax on anything you buy. Then, you’ve got property taxes, taxes on your cars, taxes on gasoline, and the list goes on and on. Finally, when you die, you get taxed on whatever is still left of your estate. In other words, you get taxed when you earn it, spend it, and ultimately die with it.

We’ve all participated in more than a few heated debates about who should pay more taxes and who should pay less. The only agreement I’ve ever heard regarding taxes is that someone else should pay them. With all of the rhetoric and emotions surrounding taxes, I decided to find out who really pays the most taxes. Here’s what I found out:

The Top 1% of income earners pay 34 % of all taxes
The top 10% of income earners pay 66 % of all taxes
The bottom 50% of income earners pay 3 % of all taxes

Studies by the Tax Foundation show that about 136 million income tax returns were filed in April. Of these, about 43 million families will show no tax payable. Since another 15 million families file no returns at all, about 58 million Americans will pay zero tax.

This means that 40 percent of all Americans pay zero taxes.

I found this interesting, because many popular media outlets love to preach about how the rich are not paying their fair share of the taxes in this country. There has also been a great deal of discussion about how recent tax cuts are unfair, because they benefit the rich. The reality is that they do benefit the rich, but that is only because the so-called rich (anyone with a middle-class income or better) already pay the bulk of all of the taxes.

This write-up from Growth Stock Outlook reprinted in The Chartist service was an interesting presentation. I hope you find it entertaining.

Let’s put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this. The first four men — the poorest — would pay nothing: the fifth would pay $1; the sixth would pay $3; the seventh $7; the eighth $12; the ninth $18. The tenth man — the richest — would pay $59. That’s what they decided to do.

The 10 men ate dinner in the restaurant every day and seemed quite happy with the arrangement — until one day, the owner threw them a curve. “Since you are all such good customers,“ he said, “I’m going to reduce the cost of your daily meal by $20.” So now dinner for the 10 only cost $80. The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. But what about the other six — the paying customers?

How could they divvy up the $20 windfall so that everyone would get his ‘fair share’? The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would end up being “paid” to eat their meal. So the restaurant owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so the fifth man paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of his earlier $59.

Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings. “I only got a dollar out of the $20, “ declared the sixth man. He pointed to the tenth. “But he got $7!” “Yeah, that’s right, “ exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got seven times more than me! “ “That ‘s true!” shouted the seventh man. “Why should he get $7 back when I got only $2?” The wealthy get all of the breaks! “

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!” The nine men surrounded the tenth and beat him up. The next night he didn’t show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something important. They were $52 short!

It’s an interesting story that provides food for thought. The one positive takeaway from this article is that if you are paying too much in taxes, then you must be doing something right.

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