Ruken,
Interesting tutorial on corporate accounting practices. But, dividends are still income to the recipient.
I am retired and receive income from dividends, rentals and social security. All are investments and all are taxed.
Why should dividends be different?
Crane
What Crane said in the previous post. You have yet to demonstrate why a person receiving dividends should logically be exempt from taxation.
How they should be treated is a matter of policy. They should be treated in a way that maximizes policy goals. Those goals will vary, and we’ll ague about how different treatments affect those goals.
What is fact is that those dividends are from profit from a company that you own. Profit is usually taxed once for most companies. It can be taxed twice. Maybe someone could concoct a way to tax it three times. But in the the case of dividends from a C corp, your profits are being taxed twice. IME, the net tax is still less than most people’s marginal personal income rate because C corps are very good at not paying taxes.
Just because you are in theory a part owner of a company doesn’t mean that you’re paying the taxes. The company as one entity pays tax on its profits. After paying tax on that profit, it may pay a dividend to you. You receive that dividend, and it’s income for you. You pay tax on it. No double taxation.
This has been addressed. Which part of my explanation of corporations (i.e. the “drivel”) shall I clarify?
I understand what you wrote, I disagree that it constitutes double taxation.
Ruken,
Profit is an accounting construct. So too is the definition of double taxation. It’s all in the game.
Is the income tax on Social Security a double tax?
Crane
I see. In that case I am sure that readers of the SDMB will be compelled to immediately dismiss my claim and take any other claims I make with great skepticism. After all, drivel.
As to more interesting matters that are not hindered by needing to count to two. Crane earlier asks, why? And I replied that this is a policy matter. As is the OP. Taxing profits once or twice is not a good argument for our current policy or for a competing one. It’s just a thing you do or don’t do.
The OP doesn’t offer much analysis, but seems to be looking for it. Let us assume that we are discussing shifting corporate taxes to other sources in a revenue-neutral way. Remember that this is just looking at C corps, because S corps (most corporations) already do not pay federal income tax on their profits.
Assuming we are holding most things the same and just eliminating C corp taxes and maybe increasing dividend tax rates, what will that do? Taxes do affect behavior. I know very well how they affect mine, but I know less well how they affect Jane Billionaire or XYZ Corp or Joe Retiree. This shift may affect dividend payout ratios, favoring reinvestment vs distribution, and thus decreasing tax revenue.
As mentioned, many claim that C corporations avoid repatriating funds because of our current setup. Although there are other ways to encourage that.
Also mentioned, is that taxes cost the government money to collect. They cost companies money to file. And our current policy encourage Martin Hyde’s shell games, which cost money to carry out and result in decreased tax revenue. Good luck trying to quantify it. Of course, this applies to individuals as well, so we may just be moving the shells.
Is anyone aware of any natural experiments in this area? That is, countries that have made simple changes to corporate tax rates, with observable changes in corporate behavior? It’s going to be difficult to deconvolute.
I’m not sure why so much of the argument revolves around whether double taxation exists or not. Corporations pay taxes on their profits. Their profits are distributed to owners, who pay tax on the dividends, but dividends do not reduce corporate taxable income the way most other payments do. Thus, the profits are taxed twice, once when earned and again when distributed. Period. The term double taxation was invented to describe this scenario.
Even if you think this is a feature, arguing that it doesn’t exist makes no sense. You might as well argue that cats don’t exist because they are felines.
Still not willing to answer Crane’s question? Or how about this- I pay income tax and with the money I have left I buy something. I pay sales tax. Am I allowed to say “WAAAAAAAH!!! DOUBLE TAXATION!!!”?
I’m not the only one not buying into the myth of double taxation.
Ruken,
Of course, that’s the problem - making the tax code a vehicle for shifting funds and behavior. That’s very inefficient and subject to bias. Technically speaking - it sucks!
All systems accommodate change in ways that are not predictable. So, I doubt you will find relevant examples. Kansas perhaps?
Regardless of the policy we wish to implement, all earning entities should have the same rules. I pay taxes on gross income, a corporation pays no taxes or taxes on ‘profit’ only. Essentially that is a tax on labor and no tax on capital. Such policies eventually result in some form of revolution.
Relative to the OP - no, there is no benefit to eliminating corporate taxes.
Crane
And then you spend it, incurring sales taxes, and then the merchant pays taxes on it, and then the suppliers, and the employees, and etc. Every dollar is taxed over and over.
Ruken - and everyone - please dial back the hostility and casual insults.
CPA Tax Accountant here - It really is double taxation, as long as you consider the same profit being taxed two different times by the same entity to the same person or people as double taxation. Here is an easy example to follow for the difference between an S and a C Corporation to show how C Corporations have a double taxation issue - there is only one owner of the corporation in the below example (Which is not uncommon for a lot of small businesses).
After all income and expenses, a corporation shows $200,000 of net taxable profit for the year. That $200,000 is then distributed to the sole owner as a distribution/dividend.
If the corporation is an S Corporation, the $200,000 in profit is taxed at the marginal individual tax rate of the owner, as all income and expenses of the S-Corp pass-through to the sole shareholder to their individual return. The $200,000 in dividends are not taxable to the owner (in cases where the owner has positive stock basis at the end of the year). For a single taxpayer, given the above income, they will likely be around the 28% to 33% marginal brackets (depending on other income / itemized deductions, etc) so let us assume 30% effective rate on the profit of the corporation passed through to the individual, for a federal tax bill of $60,000.
If the corporation is a C Corporation, the $200,000 in profit is taxed at the corporate rates - for 2015, $200,000 in taxable income for the C Corporation results in a federal tax bill of approx. $61,250 to the corporation. On top of this, the $200,000 in dividends distributed to the owner is then taxed at the capital gains rate of the owner (let’s assume 15%, but could be as high as 20%), so another $30,000 in federal tax is due from the owner with their individual return for total federal taxes paid of $91,250.
In both of the above cases, the owner of the corporation owns all of the assets of the company and is the sole shareholder, so all profits and dividends are attributable to him alone, yet as a C Corporation, he has to pay additional taxes on the $200,000 profit earned by his company simply because he transferred money from the corporate bank account to his personal account.
I think some of the confusion with this issue is that people usually see corporations as large public faceless entities that pay their own corporate taxes and then the shareholders as individuals who pay separate taxes. But when you reduce down the number of shareholders, people can usually see how the same individual(s) are responsible for taxes for both the corporation and personally.
Firstly, SCOTUS is a poor yardstick of constitutionality–they’ve been flouting the Constitution themselves for 200 years. Secondly, there are lots of other unconstitutional programs and departments – OSHA, the EPA, HUD, etc., etc. – basically, if a program, office, or department was created by FDR or a later president, there’s roughly a 90% chance that it’s unconstitutional. The only clear exception to that is the VA.
Even if they are the same person, the corporation is an artificial being. That artificial being pays tax. Real people, who may be the same person, pays tax. Even if the same person in effect pays twice, they are separate creatures each paying only one tax.
Got a better one? Sure, you can say that your interpretation is a better yardstick, but then, I can say the same about my own interpretation, with just as much justification. And in my interpretation, most defense spending is unconstitutional, because it doesn’t provide for the common welfare like Congress is obligated to do, but that Social Security is just fine.
Making it a vehicle for shifting funds and behavior is absolutely subject to bias. Whether it is inefficient or not depends on definitions, but in most cases, yes. “Sucks”, as you say (I’m now being careful to use quotation marks when repeating other posters’ words, lest I move farther up on the naughty list), is a good word for it. But regardless of whether shifting funds and behavior is the purpose, tax policy does both.
Ultimately the individuals who are the owners pay the taxes on the profits one way or another. What is the best way to do it? We could tax S corps the way we tax C corps and have approximately the same net tax rate on profits as we do now. That will shift funds and behavior. Or we could tax C corps like we tax S corps, which *seems *to be what the OP is suggesting (?) and which is how most corporate profits are currently taxed in the US. That could be done in such a way that profits are taxed approximately at the same rate as they are now. This will also shift funds and behavior. But do we know how? Whether we tax those profits once, twice, thrice, all at the same total rate (e.g. 15%, 7.8% and 7.8%, etc.) is going to make a difference both in cost of compliance/collection, and in behavior as incentives shift.
Thus far I’ve not found examples of corporations changing their behavior there. Kansas sure looks like a boondoggle.
This is a somewhat separate matter from the “what happens” that I think is trying to explored here. I encourage you to pursue this thought experiment. Another thread might be a better venue. I would be happy to participate.
Double taxation is usually meant to specifically mean “federal income tax is paid twice on the same income.” It is not usually meant to refer to all taxes that might be paid. If it did then everything would be double/triple/quadruple taxed. State/city income tax, state/city excise taxes, estate tax (state and federal), sales tax and so on.
I don’t understand why you’re deliberately misinterpreting a phrase and then arguing that this misinterpretation means it’s wrong.