How the New Tax Plan Will Impact the Economy

President Biden, like all presidents before him, has announced his plan to drive the economy. Regardless of your personal persuasion on politics, he has every right to lead this country as he sees fit. He released his spending plan last week and it most surely will have a significant impact on the economy. Here are just a few things to look for as you prepare for the upcoming changes.

First things first - nothing will change in 2021. The markets and businesses should continue to soar to new heights. Prices have risen steadily over the past few years. So your expectation for 2021 should be rather positive. As a business owner, though, this is something you should be focused on. 2021 should be the year where you really increase your cash position and reduce the amount of spending on large asset purchases. Your goal needs to be to walk out of 2021 with a six months stockpile of fixed expenses and payroll. If you can't do that, at least try to get to three months. If you can save more than six months, by all means you should.

2022 will be a tough year for the poorly-executing CEO. So much of the market is based on direction and momentum. In 2016, the worst CEO was praised for his performance because there was such a break in their taxes that their profit was immediately 7-8% better without changing their approach to business. Now, however, it will be the other way around. Those same CEOs will have to find a way to overcome losing 7-8% and even the largest companies might have to overcome a tax minimum. In other words, to get back to the same results they’ve enjoyed in the current economic climate, they will have to double their current profitability to maintain the same results. This reality will truly trip up the executive that isn't planning ahead this year and then goes into next year with the utmost confidence in themselves only to be caught blind-sighted. Moral of this story? Be humble and be prepared.

Around April of next year, first quarter earnings will start to emerge. It will be at this time that a lot of companies will begin to show the lack of growth in earnings because of a higher tax to overcome. With the lower earnings, the markets will start to slow down. In second quarter you will see more of the same. By then we will most likely have slid into a recession. Though they have such negative connotations, recessions are a necessary part of the economic cycle. It is good to go through them so that our economy can reset and correct the overpricing of equities. That doesn't make them easier, of course, but it is good to view them as a growth opportunity. This impending recession is the reason that it’s imperative to be prepared walking into 2022. If you go into 2022 with that three to six month stockpile, the upcoming correction really will help you as a small business owner.

In 2023, things will go back into growth mode. Once the market has had a year to adjust and make alternate plans, you should start to see a slow and steady growth over the following years. The goal is to take your emotion and politics out of the reality we are facing and simply strive to run a great business. There are only so many things we can control during an economic shift and one of them is strategically preparing for the inevitable slow down we will face next year. If you work to have a good 2021 with some awesome retained earnings, you will be prepared to weather the storm and come out stronger on the other side. I once had a great mentor say that, when the water is low, get rid of all the stumps so that when the water is high you won’t hit those stumps with your boat.

2022 will be a time full of stump clearing. The best way to succeed and not be capsized is to grind as hard and as efficiently as you can to grow this year. With that proper preparation you’ll be ready to cruise through stump-free waters once the tides rise again.

Enjoy,