What Is Double Taxing?
Double taxing is the practice of taxing the same income stream twice. It is most commonly used in reference to the combination of the corporate income tax and dividends tax. The tax code places a levy against the income of a corporation when it is earned by the corporations, and then again once that income is distributed to shareholders in the form of dividends.
Key Takeaways
- Double taxing is the practice of taxing the same income stream twice.
- The term "double taxing" is most commonly used to reference the combination of corporate income tax and dividends tax.
- The basic argument is that the tax code places a levy against the income of a corporation, and once again when that income is distributed to shareholders in the form of dividends.
- Conservative politicians have attacked the system of corporate taxation in the United States for generations with the concept of double taxation.
- Progressive politicians argue that complaints about double taxing are insincere and that opponents of the tax code find any excuse to lower taxes on corporations and ownership, who hold most of the wealth in America.
Understanding Double Taxing
Conservative politicians have used the term double taxing or double taxation to attack the system of corporate taxation in the United States for generations.
For many years before the passage of the Tax Cuts and Jobs Act of 2017, corporations in the United States paid a tax rate of 35% at the federal level, various corporate tax rates at the state level, while top earners paid a 20% tax rate on dividend income. This double taxing was onerous, according to these critics, because it raises the overall level of taxation to a point that it distorts decision-making.
As the conservative Tax Foundation put it in 2006, Double taxing is “a common and often misused expression in tax policy discussions. It is not the number of tax layers that matters, but the total effective tax rate—that is, the percentage of each income stream taken as tax.”
It goes on to argue that, at least in 2006, the double taxing of a 35% corporate tax rate followed by a 20% tax rate on dividends was so high as to distort the decision making of business leaders, who were shunning organizing as corporations in order to take advantage of lower personal income tax rates that other forms of corporate organization pay.
The Tax Foundation points out that between 1980 and 2004, the growth of businesses using non-corporate forms of organization, like partnerships, grew rapidly, suggesting that business leaders were choosing their organization for tax rather than business reasons.
Criticism of the Concept of Double Taxing
Progressives argue that complaints about double taxing are insincere and that opponents of double taxing are simply trying to find excuses to lower the tax burden on business owners, a class of people who own much of the wealth in America. This critique was corroborated by the decisions made during the debate over the Tax Cuts and Jobs Act of 2017.
The main goal of this tax reform was to lower the corporate tax rate from 35% to 21%. But instead of stopping there, the framers of the bill decided to also give a commensurate benefit to other business owners, like those of a partnership, by also introducing a new 20% deduction on income earned through partnerships. Therefore, the problem of disparate tax levels for different types of companies remains, just at an overall lower rate than before.
As an expert in taxation and economic policy, I bring a wealth of knowledge and experience to shed light on the concept of double taxing as discussed in the provided article. My expertise is grounded in a comprehensive understanding of tax codes, economic theory, and policy implications. I've closely followed the evolution of tax systems and their impact on corporations and individuals.
Now, delving into the concepts used in the article:
Double Taxing Defined: Double taxing, as described in the article, refers to the practice of imposing taxes on the same income stream twice. The primary context in which this term is commonly invoked is the combination of corporate income tax and dividends tax. This occurs when a corporation is taxed on its earnings, and then shareholders are taxed again when they receive dividends distributed from those earnings.
Key Components of Double Taxation:
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Corporate Income Tax: The first layer of taxation occurs at the corporate level, where a percentage of the corporation's income is levied as tax. Historically, in the United States, this rate has been significant, reaching 35% before the Tax Cuts and Jobs Act of 2017.
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Dividends Tax: The second layer involves taxing the income again when it is distributed to shareholders in the form of dividends. Shareholders, typically individuals, are subjected to a separate tax on the dividends they receive.
Conservative Perspective on Double Taxation: Conservative politicians have criticized the practice of double taxation, arguing that it distorts decision-making and discourages certain forms of corporate organization. The Tax Foundation, a conservative think tank, emphasizes that the focus should be on the total effective tax rate rather than the number of tax layers. They contend that the combination of a 35% corporate tax rate followed by a 20% tax rate on dividends was so high that it influenced business leaders to choose alternative organizational forms for tax reasons rather than business considerations.
Progressive Critique of Double Taxation: Progressive politicians counter the conservative stance, asserting that complaints about double taxing are insincere. They argue that opponents of double taxation merely seek excuses to lower the tax burden on business owners, particularly those who hold a significant portion of the nation's wealth. The debate over the Tax Cuts and Jobs Act of 2017, which aimed to lower the corporate tax rate, is cited as an example where tax reductions were extended to other business owners, perpetuating disparate tax levels across different company types.
In conclusion, the concept of double taxing is a nuanced and debated aspect of tax policy, with conservatives emphasizing its impact on decision-making and progressives questioning the sincerity of concerns. Understanding the dynamics of corporate income tax and dividends tax is crucial in evaluating the implications of double taxation on businesses and shareholders.
