MITT AND DOUBLE TAXATION: I addressed double taxation in a very elementary form a few days ago. Whether specific dollars are double taxed may fit in with discussions of religion or politics. Mitt argues that profits of a corporation are taxed at 35%. Should that company declare a dividend, and distribute two-thirds of that profit to the shareholders, the shareholders then pay tax on the same money. Mitt is correct that somewhere in time Congress believed the dividend funds have already been taxed – thus must be taxed at a much lower rate to the recipient. Thus Mitt says HE actually pays a 50% tax – 35% on the corporation plus 15% personal. Where to begin. First – the effective corporate tax rate is about 16%. But regardless of what rate the corporation pays, the question here is – “is it double taxed”. The entire tax code, and the concept of taxation in the U.S., centers around WHO receives the income.
At some point a business is incorporated. The owners do that for many reasons – but they make a decision that being incorporated is to their advantage. At the time, these owners do, or should, understand that taxation is part of the equation. So the ABC Corporation is born. It prospers. After a couple of years, the retained earnings look very good – so a dividend is declared. The corporation files its return and pays whatever IT owes. The dividend is received – yes out of the same pot – and THAT recipient takes it into income as such. The 1040 is filed and the amount of the dividend is reported. A tax is applied. Double taxation? Absolutely not. Were one to accept the double taxation myth – why not take it to its logical conclusion? That is – if you had any way to trace the life of the one-hundred dollar bill in your pocket – you would find that it has been taxed before. To someone else. At some time. Dollars rotate. Your employer earns the income which is paid to you as a salary or wages. Both pay taxes on their RESPECTIVE incomes. (By the way, we don’t hear the shareholders complain about the many advantages a corporation enjoys – limited liability being among them.)
The only “point” the double taxation folks may have is this: Your salary is paid out of gross income, whereas the dividend is paid from net income. That is a difference without a distinction. Corporations which are so fortunate to build a good retained earnings and pay a dividend, should count their blessings. The double, or triple taxation bucket definitely has a hole in it.
