Double Taxing

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.

Article Sources
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  1. Internal Revenue Service. "Publication 542: Corporations," Page 5. Accessed Feb. 6, 2020.

  2. Internal Revenue Service. "Topic No. 404 Dividends." Accessed Feb. 6, 2020.

  3. Internal Revenue Service. "Individual Income Tax Rates, 2017," Page 28. Accessed June 17, 2020.

  4. Internal Revenue Service. "2017 Instructions for Form 1120, U.S. Corporation Income Tax Return," Page 18. Accessed June 17, 2020.

  5. Tax Foundation. "Double-Taxing Capital Income: How Bad Is the Problem?" Accessed Feb. 6, 2020.

  6. U.S. Congress. "H.R.1 - An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018." Accessed June 17, 2020.

  7. Internal Revenue Service. "Qualified Business Income Deduction." Accessed Feb. 6, 2020.

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