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2021: The Year of Rebalancing

Taxes are coming. It’s no longer a question of “if”, but “when”. 2020 was the year of the crash and rapid recovery from Covid-19. 2021 will be the year of rebalancing for upcoming 2022 taxes.

At the height of the initial panic in March of 2020, governments and central banks across the world implemented extraordinarily loose policies to keep the global economy afloat. These policies have continued for roughly a year, so far. During 2020, US debt expanded from $23.2T on 12/31/19 to $27.7T on 12/31/20. On the monetary side, US M2 Money Stock (the Fed’s replacement for M2 Supply) ballooned from $15.3T to $19.1T. Finally, the current unaccounted deficit sits at $2.3T.

M2 Money Supply Yearly Growth vs. Inflation

Source: LongTermTrends.net 

In just 12 short months, $8.3T flooded into the US Economy and the country is spending much more than current tax revenues allow. The bill will come due, and it will begin to come due soon. 2022 now appears to be the most likely start for tighter policies. The Biden administration has already hinted at a few shifts, including:

-Increasing the top federal tax rate to 39.6%
-Taxing capital gains as ordinary income for individuals meeting income thresholds
-Instituting a wealth tax on individuals meeting income thresholds
-Changes to the amounts on which social security is collected from income
-Increasing the corporate tax rate from 21% to 28%

Three things remain uncertain at the moment:

1) Whether some or all of these items could pass.
2) If these measures pass, will they be enough to balance spending.
3) How the market will respond if/when a 28% tax goes into effect for corporations.

Given the rapid recovery in equity markets over the last 12 months, it’s likely that many investors have built up large amounts of capital gains. While Applied Finance does not specialize in tax advice, we strongly recommend that advisors review their current positions in individual equities, ETF’s and mutual funds. In particular, realizing gains prior to December 31st of 2021 could be a huge value-add for clients.

Other advisors are already making plans:
Tax Hikes Are Coming. Here’s What Top Advisors Are Telling The Ultra Rich

For updates on our investment strategies and more articles like this, join our Valuation Edge™ newsletter.


  • John Holt, CFA joined Applied Finance in 2014 and is involved in the management of both quantitative strategies and analyst driven strategies.


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