I just ran across a cartoon which sums up exactly my point of view on this whole "“double taxation” bullshit.
It is here
I think it applies the same to the estate tax argument.
Anyone care to explain how it is not so?
Since you have to pay to get it, no.
I didn’t have to pay to get the carton. I didn’t really understand what it was trying to say.
Perhaps you could just tell us your point of view and we can work from there?
The point of the cartoon was that everything is “double taxed.” Transactions between individual entities are taxed, that is the nature of the beast. To single out dividend tax as being a “double tax” is disingenuous, because income tax and sales tax are also “double taxes” by that logic.
I, personally, agree with the cartoon. Unless someone can prove that the transaction that takes place between a corporation and a shareholder is any difference between the transaction that takes place between an employer and an employee, I’m going to continue to call “sack of shit” on the whole deal.
Ah, sweet nostalgia, when we could worry about Fearless Misleader lying to us about money. Good times, good times!
Thanks McDuff for a clear explanation. I see two possible answers. The primary one is that a corporation is an economic construct, from the POV of its owners. E.g., suppose my wife and I start a business. We could form a partnership or a corporation. Either way we control it and do the work. But, by calling it a corporation, the income gets taxed twice.
The second reason is that income tax is so high. Corporate income tax rate goes is around 35% and personal income tax rates go to about 40%. That’s just federal. In addition, there are state, federal and some local income taxes. So, the combination is much bigger than adding, say, a 6% sales tax on money spent.
The chief difference is that dividend taxes affect only the middle to upper income groups, therefore they are of concern to Shrub Lite. Athough sales taxes are as much a “double taxation” as dividend taxes, since they impact the poor disproportionately they are of no concern to W.
There has always been a distinction between different types of transfers of money. Wages are treated differently than interest and dividend income, which are treated differently than gifts.
The tax code theoretically exists to both provide a source of revenue to the government and for the government to tweak the economy by encouraging or discouraging certain types of behavior. When personal interest (credit card interest, etc) was an allowable deduction, it presumably encouraged more people to incur personal unsecured debt. Today, interest paid on a home mortgage is deductible; this presumably encourages home ownership.
There is a rational distinction to be drawn between earned and unearned income.
If you wish to argue that it’s unwise to reward behavior that produces unearned income, that’s perfectly valid. But it’s not accurate to argue that the two are precisely identical. Investments produce unearned income. Wages - working for pay - produce earned income. They are different.
- Rick
The problem with this is that a “corporation” is legally a separate entity. The advantages of forming a corporation rather than a partnership include vastly lowered personal risk, because you are not considered to be the corporation. If you and your wife run a business as a partnership and call yourselves the company, all the capital is yours, but also all the debt, and all the risk. By creating another entity and transfering risk and ownership to this, you create another layer of transaction. The advantage is that you have less exposure to risk. The disadvantage is that you are taxed.
Why does this address the question? Why is the transaction between a company and a shareholder different from ANY OTHER TRANSACTION?
No, everything isn’t double taxed.
Companies don’t pay their employees out of after tax profits. They get a tax deduction for the payment.
The bank doesn’t pay tax on the entire loan repayment it receives. Part of the repayment is capital, which goes directly tax-free to the depositors (coz it was their money to start with). The rest of the repayment is interest, which is income for the bank, but from which has to be deducted the bank’s payment of interest to the depositors, and the bank’s operating expenses.
Dividends to shareholders are treated differently. The company paying them doesn’t get a tax deduction for them. That’s where the double taxation comes from.
FWIW, Australia eliminated the double taxation of dividends in 1987. The world didn’t end. What did arguably happen was that companies were encouraged to pay greater dividends to stockholders.
IMHO, the double taxation of dividends in the US gave an excuse for companies to reduce dividends and favor retention of earnings. That boosted stock prices. The retained earnings were used largely to redeem stock options held by the companies’ executives. Major rip-off of stockholders resulted.
In a broad sense, yes.
But there are advantages to choosing the corporate structure. For one, it shields you from liability. As a general partner, you are jointly and severally liable should your business be sued. Your personal assets are at stake. As owners of a corporation, your liability is limited to the corporate assets. If you wish to gain the advantage of a corporate persona that won’t starve the children if it goes belly-up, you may have to pay for the privilege by that corporate persona being taxed.
There are a million details left out of this oversimplification.
- Rick
The cartoon is free here.
The difference between Item E and the other Items in the cartoon is not that it “involves the taxation of wealthy people” but rather the fact that it’s the only step where value-adding activity does not take place. Consider:
A: Employee gets paid. His labor is a value-add.
B: Employee pays Plumber. Plumber’s services are a value-add.
C: Plumber buys DVD. DVD Shop’s provision of goods are a value-add.
D: DVD Shop owner makes car loan payment to Bank. Bank’s lending activities are a value-add.
E: Bank dividends out profits to Stockholder. This transaction involves no value-add; it is just the movement of funds from one place to another. Taxing it would be a little like taxing you for moving your checking account from Bank A to Bank B.
F: Stockholder tips Caddy. Caddy’s services are a value-add.
But the best argument against double taxation is one december pointed out: it creates an artificial economic distortion, forcing decisionmaking for tax reasons rather than substantive legal reasons. Why should the corporate form carry this penalty when a LLC or LLP does not?
First of all, this depends heavily on state law; some states treat a general partnership as a separate legal entity whose assets must first be exhausted before the personal assets of the partners may be pursued.
Secondly, a better comparison would be with a limited liability partnership (LLP) or a limited liability company (LLC), both of which potentially have the advantages of perpetual life and limited liability found in corporations but which also have the pass-through taxation treatment of partnerships.
Thanks for the link Dewey. No wonder I was confused. I could only see the “A” part of the cartoon.
No, you don’t. Form an LLC. 
Didn’t I say “general partner” and “may” above? Huh?
Thanks for the link. In addition to DCU’s points, note that the cartoon is not quite accurate. [list=A][]Employee is taxed on his income. TRUE[]Plumber is taxed on his payment from Employee. PARTIALLY TRUE. Plumber is taxed on his net profit, after deduction of all expenses and overhead. Overhead might be around half the gross income, so the plumber is taxed on half of the payments he receives.[]Shopowner is taxed on his sales. BASICALLY FALSE. He’s taxed on his profits, which may be only 1% to 10% of sales.[]Bank is taxed on car payment. FALSE. The bank is taxed on its net profits, which may be less than 1% of car payments. As Desmostylus pointed out, much of the payment is return of capital. Also all bank expenses are deducted.[]Bank stockholder is taxed on his dividends. TRUE (and the list left out the bank first paying income tax on its own income.)[]Caddy pays tax on his tip income. TRUE[/list]
The cartoon is piffle. There is, however, plenty of doubt about whether dividend relief is a good idea. Due to the workings of capital markets, it’s unclear whether the double tax on dividends has any bad effects. I outlined the opposing cases in this post a while back.
I wonder why there isn’t an outcry about the double taxation on SS benefits. This is clearly the most egregious case of double taxation as I am taxed on that money when I earn it, and then again when I collect it.
I don’t know, but that’s why I have a Roth IRA.
There are many things I don’t agree with of Bush’s economic ideas. However, I do agree with the elimination of the dividend tax.