Double Taxation

Loading the player...

DEFINITION of 'Double Taxation'

A taxation principle referring to income taxes that are paid twice on the same source of earned income.

Double taxation occurs because corporations are considered separate legal entities from their shareholders. As such, corporations pay taxes on their annual earnings, just as individuals do. When corporations pay out dividends to shareholders, those dividend payments incur income-tax liabilities for the shareholders who receive them, even though the earnings that provided the cash to pay the dividends were already taxed at the corporate level.

BREAKING DOWN 'Double Taxation'

The concept of double taxation on dividends paid to shareholders has prompted significant debate. While some argue that taxing dividends received by shareholders is an unfair double taxation of income (because it was already taxed at the corporate level), others contend that this tax structure is fair.

Proponents of keeping the "double taxation" on dividends point out that without taxes on dividends, wealthy individuals could enjoy a good living off the dividends they received from owning large amounts of common stock, yet pay essentially zero taxes on their personal income. As well, supporters of dividend taxation point out that dividend payments are voluntary actions by companies and, as such, they are not required to have their income "double taxed" unless they choose to make dividend payments to shareholders.

RELATED TERMS
  1. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends ...
  2. Dividend

    A distribution of a portion of a company's earnings, decided ...
  3. Income Tax

    A tax that governments impose on financial income generated by ...
  4. Conduit Theory

    A theory stating that an investment firm that passes all capital ...
  5. Double Taxing

    A tax law that causes the same earnings to be subjected to taxation ...
  6. Franking Credit

    A type of tax credit found in countries such as Australia that ...
Related Articles
  1. Stock Analysis

    The Biggest Risks of Investing in SandRidge Stock

    Learn about the significant risks of investing in SandRidge. Read how the company may not be able to service its substantial debt load.
  2. Taxes

    Explaining Double Taxation

    Double taxation refers to income taxes being imposed twice on the same source of earned income.
  3. Taxes

    Dividend Tax Rates: What Investors Need To Know

    Find out how legislation enacted in 2003 is benefiting both investors and corporations, and when it's scheduled to expire.
  4. Active Trading

    Finding The Best Yields

    Using yields to supplement earnings can mean big bucks, with the right strategy.
  5. Investing Basics

    How Dividends Work For Investors

    Find out how a company can put its profits directly into your hands.
  6. Mutual Funds & ETFs

    The 3 Best T. Rowe Price Funds for Value Investors in 2016

    Read analyses of the top three T. Rowe Price value funds open to new investors, and learn about their investment objectives and historical performances.
  7. Tax Strategy

    Profit from Art with a Charitable Remainder Trust

    With a CRUT, art collectors can avoid capital gains taxes on the sale of art– while also leaving their favorite charity a legacy.
  8. Active Trading Fundamentals

    4 Stocks With Bullish Head and Shoulders Patterns for 2016 (PG, ETR)

    Discover analyses of the top four stocks with bullish head and shoulders patterns forming in 2016, and learn the prices at which they should be considered.
  9. Fundamental Analysis

    3 Reasons To Not Sell After a Market Downturn

    Find out the reasons that it is not a good idea to sell after a market downturn. There are lessons to be learned from the last major market downturn.
  10. Fundamental Analysis

    HF Performance Report: Did Hedge Funds Earn Their Fee in 2015?

    Find out whether hedge funds, which have come under tremendous pressure to improve their performance, managed to earn their fee in 2015.
RELATED FAQS
  1. What are the differences between an MLP exchange traded fund (ETF) and an MLP exchange ...

    The main difference between a master limited partnership (MLP), exchange-traded fund (ETF) and an MLP exchange-traded note ... Read Full Answer >>
  2. What are the advantages to structuring a business as a master limited partnership ...

    A master limited partnership (MLP) offers tax benefits for corporate entities that can reduce the cost of capital for capital-intensive ... Read Full Answer >>
  3. How is taxation treated for both the parent and subsidiary company during a spinoff?

    A common separation strategy used by corporations includes divestiture activities that segment a portion of a company's operations, ... Read Full Answer >>
  4. Why would a company make drastic cuts to its dividend payments?

    A dividend cut occurs when a dividend paying company either completely stops paying out dividends (a worst-case scenario) ... Read Full Answer >>
  5. What is the double taxation of dividends?

    After all is said and done, companies that have made a profit can do one of two things with the excess cash. They can (1) ... Read Full Answer >>
  6. How does a stock split affect cash dividends?

    When a company decides to issue a stock split (or stock dividend), a couple of possibilities could occur concerning what ... Read Full Answer >>
Hot Definitions
  1. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  4. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  5. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
Trading Center