Presumptive Democratic Presidential Nominee Joe Biden would like to raise corporate taxes to 28% from 21%. Scary, right? Well, that depends on what type of investor you are.
First, any profit-generating company in this scenario would see lower earnings. However, we have to see if we get a split Congress, Republican or a Democratic Congress. That will play an important role in whether the tax rate actually moves up to 28% or if there’s some compromise.
But let’s say the tax rate really does go that high. Here’s the important thing to remember: Only profitable companies are taxed on profits.
Sure, if you hold one of the FANG stocks or Microsoft (MSFT) - Get Report or Nvidia (NVDA) - Get Report, your earnings stream will get hit. But there are a slew of promising growth companies not yet profitable, but growing revenue and moving towards profitability, that you could tap into. Those largely don’t get taxed at all, as there are no profits to tax.
Uber (UBER) - Get Report, Lyft (LYFT) - Get Report, Snap (SNAP) - Get Report, Twillio (TWLO) - Get Report (sometimes profitable), Pinterest (PINS) - Get Report and Slack (WORK) - Get Report are all growth tech. In biotech, there are small, unprofitable names out there that, if one of them hits it big on the right drug, could see big stock gains. Two examples are BioNtech (BNTX) - Get Report and RAPT Therapeutics (RAPT) .
There may not be a day of reckoning when the entire market jolts downward because investors expect higher taxes, but if that outcome looks more and more likely by the month, it’s a substantial enough development to weigh on stocks. During that time, owning these growth names will help an investor avoid the negative impact.