Bush and "Double Taxation" - refute this

[Hermann_Cheruscan]

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.

Disingenuous. Bush can’t do a damn thing about sales taxes, as they are collected at the State and local levels. Bush is Chief Executive of the Federal Gov, which does not charge sales tax.

[light_strand]

astorian, indeed you have a Roth IRA, as do I along with my 401k and stock holdings. However, if one is concerned about “double taxation” should one not also care about the double taxation that happens on the poor and elderly in regards to Social Security?

[december]

*Originally posted by light strand *
**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. **

Half of the SS assessment is paid by the employer.* The employee does not pay income tax on this portion. IIRC only 50% of SS benefits are taxed, so there’s a match.

[sub]*Actually, the employer may pay more than half, because the assessment rate is applied to the full salary, with no limit.[/sub]

[MSU_1978]

Social security benefits are income and should be taxed. You do not get your own money back, you get that which is coming in from current workers. Every bit of income you make should be taxable, whether it be in dividend receipts or SS benefits. There is no such thing as double taxation.

[Mike_H]

I look at this way (back to the OP). Say your sole source of income was the dividends you earn on your investments, under Bush’s proposal * you would pay no taxes whatsoever * no matter how many millions of dollars that might be. Is that fair? What difference does it make how much in taxes the * company* pays before giving you your dividend? They don’t keep to the dividend anyway. You as a shareholder also don’t share in the comapny’s expenses (other than your inital investment to buy the shares; which would be calculated in determining your capital gains anyway; and would be offset against the company’s income to determine * their * profits), so its not like you are participating with the company to generate some “common” income which is being taxed twice.

[Dewey_Cheatem_Undhow]

Mike H: you’re right that the most logically consistent way to eliminate double taxation would be to eliminate it at the corporate level, which mean corporations would essentially be given pass-through tax treatment similar to LLCs or LLPs. But good luck passing that reform in the face of professional class warriors.

[Stoid]

Well, I’ve actually gotten some education here. Thanks.

[asterion]

*Originally posted by light strand *
**astorian, indeed you have a Roth IRA, as do I along with my 401k and stock holdings. However, if one is concerned about “double taxation” should one not also care about the double taxation that happens on the poor and elderly in regards to Social Security? **

Honestly, I’m at the point where I’d be happy for Social Security to be done away with. I’m going to spend the next 40 years paying into a broken system when I would much rather be making my own investments of the SS tax I pay.

[light_strand]

MSU I happen to agree with you, but I just wanted to point out the fallacy of this “double taxation” BS. Double taxation is only a concern when it concerns the wealthy, it is not important when it concerns the lower/moderate income people.

december, you are taxed at an 85% level on SS if you make over $34,000/yr. Which I think we can agree is not a tremendous amount of income.

[MSU_1978]

light strand please explain the 85% on SS income, that seems high to me.

[light_strand]

I wasn’t very clear there. Sorry about that.

It means that a person receiving SS and their total income is greater than $34,000/yr than 85% of their Social Security benefits received are taxed. The remaining 15% are essentially tax free.

[Mike_H]

the most logically consistent way to eliminate double taxation would be to eliminate it at the corporate level, which mean corporations would essentially be given pass-through tax treatment similar to LLCs or LLPs.

Dewey, you mean its not that way already? (Forgive my ignornace on this matter), Corporations have to pay taxes on the capital they receive through issuing of stock? Again i’m not talking about the * shareholders *, who (may very well be officers and/or other employees of the company) , but the corporation as an entity.

For instance, let’s say the company issues $100M in stock, has gross revenues of $1B selling widgets, for a net profit of say $75M after salaries,operating expenses, materials, other tax deductible items etc. The amount that the company gets taxed is $75M, not $175M, right?
After taxes , the company profits say $52M. This is what goes to the shareholders.

The point I was originally making was that the company, as an entity, invests over $900M (not including $100M it got issuing stock, but salaries etc.) to make $75M profit.
The shareholders, on the other hand, invest $100M (the issuing of shares) to receive a profit of $52M.
Why do the two have anything to do with one another? I think they do not- other than the fact that as I said that some of the major shareholders are likely to be company officers or other employees. But they are also likely to be a large section of the public as well, who have nothing to do with the company’s efforts to generate its income

[Hermann_Cheruscan]

There is no such thing as double taxation

What about when I pay sales tax on the full price of gasoline,which includes state and federal excise tax?

What about when I pay income tax on that part of my salary which the Feds took SS and medicare taxes from?

[Dewey_Cheatem_Undhow]

Mike H: No, corporations do not pay tax on initial contributions of capital (as when the corporation initially sells shares to the investing public).

It sounds like you’ve got a handle on it, so maybe I just misunderstood your post. But just to be sure:

Company has profits of $75M, pays taxes on that amount. $52M after-tax profits left. Company distributes the full $52M to shareholders, which is again taxed at the individual shareholder level.

Contrast to an LLC or LLP, which get pass-through treatment: No tax is paid by the LLC or LLP on its profits; tax is only paid by the individual shareholders when distributions are made (IAAL, but not a tax lawyer, but IIRC there are regulations preventing a LLC/LLP from “hoarding” the cash to prevent taxation).

But I do disagree that the investment of capital “has nothing to do” with the company’s profits – clearly, it does. The capital markets exist so companies can raise funds to start or expand businesses, such as raising funds to buy a new factory. A company doesn’t issue stock for the fun of it – it issues stock to finance its operations.

Another point not raised in this thread is how double taxation distorts the capital markets by making debt more favorable than equity. Say you’re a company looking to raise capital. You can issue $100M in stock or issue $100M in bonds. If you issue the bonds, you can deduct the interest payments to bondholders, but if you issue stock you can’t deduct the dividends paid to shareholders. Thus, debt becomes a tax-favored financing strategy, and distorts decisionmaking away from substantive legal, economic and business considerations.

[Apos]

—Investments produce unearned income. Wages - working for pay - produce earned income.—

I object to the idea that investment is unearned income. It’s not as if it falls in your lap. You choose not to consume when you choose to invest: you’re definately doing something in order to earn a return.

[Mike_H]

** Herman**, you could just as easily ask “What about the State income tax on that part of my salary which the Feds took from me etc. etc.?” .Income Taxes are assessed on your whole income not “parts of it”. There’s no pecking order here: First there’s a 20% (or whatever),Fed. Income Tax on your AGI then 6.2% SS tax on what remains, then a 1.45% Medicare tax on that. Instead think of it as a * combined* tax of 26.6% on your gross income (outragegous , I know), and higher than that when you add in state taxes. Of course certain taxes are deductible (e.g., state taxes)are deductable when calculating your AGI federal taxes, but as far as I know SS and medicare are not.

Just be thankfull they don’t take it all

** Dewey **, I guess what I’m getting at is the company is not getting taxed on the fruits of the $100M investment (as you just confirmed) (the shareholders are) , and the shareholders aren’t being taxed for the fruits of the expenses and labors of the company (the company is). Where’s the double taxation?

[jshore]

*Originally posted by december *
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.

Well, these are the rates in theory. In practice, a lot of this money isn’t even taxed once. This Brookings Institution article argues that the President’s proposal is a tax giveaway rather than true tax reform:

In the United States, some corporate income is never taxed, some is taxed once (either at the individual or the corporate level), and some is taxed twice. Many economists — ourselves included — would prefer a system that taxed all corporate income, but taxed it once and only once, at nonpreferential tax rates. Such a system would modify the tax incentives for various types of corporate behavior in important ways. In this article, we focus on two crucial dimensions of corporate incentives affected by the tax system: The incentive to shelter corporate income from taxation and the incentive to retain corporate earnings rather than pay dividends.

We show that the administration’s recent tax proposal does not eliminate, and may not even reduce to
a significant degree, the incentives that exist under the current tax system to shelter corporate income from taxation and then to retain the earnings. Thus, in our judgment, despite the administration’s rhetoric to the contrary, its proposal does not represent tax reform. The administration’s proposal does the “easy” part of tax reform: It cuts taxes. It fails, however, to do the difficult part of any serious tax reform effort: Broadening the tax base and eliminating the share of corporate income that is never taxed (or taxed at preferential rates). That difference is what distinguishes “tax reform” from “tax cuts.”

Also, see page 2 of this Citizens for Tax Justice report:

In defense of his plan to exempt dividends from tax, President Bush claims he’s merely serving tax equity. Corporate profits are unfairly “double-taxed,” he says, first when companies earn them and second when they’re distributed to shareholders as dividends. This argument, however, has two defects: it’s conceptually unsound and factually untrue.

When you think about it, the number of times something is taxed isn’t an enlightening concept. Instead, it’s the total amount of taxes, whatever the number of levels, that matters. Who wouldn’t feel better, for instance, about paying two taxes of 10 percent each rather than a single tax of 40 percent? So the real question is: does the so-called “double tax” on corporate profits cause them to be overtaxed compared to other kinds of income? It sure doesn’t look that way.

…

Here’s the bottom line: last year, barely over half of corporate profits were subject to tax at any level. In other words, the so-called “double tax” doesn’t come close to taxing corporate profits even once.

They also point out that our corporate taxes, while once relatively high compared to some other western countries, are now amongst the lowest:

Back in 1965, U.S. federal and state corporate taxes, at 4.1 percent of our GDP, ranked 3rd among all OECD nations. But that’s only a distant memory. By 2000, the latest year with complete OECD data, our corporate income taxes were down to only 2.5 percent of GDP. Meanwhile, in the other OECD countries, corporate income taxes went in the opposite direction, jumping from 2.4 percent of GDP in 1965 to 3.4 percent in 2000. As a result, by 2000 U.S. corporate taxes had dropped to 22nd among the 29 reporting OECD countries. And lately, with the ever-growing torrent of offshore tax shelters and President Bush’s huge corporate loophole package enacted in January of 2002, things have gotten even worse. In fiscal 2002, U.S. federal and state corporate income taxes plummeted to only 1.5 percent of our GDP, less than the amount collected in 2000 by every other OECD country except Iceland.

So, what we have on our hands is indeed a corporate tax system in need of reform. What we get from Bush instead is a give-away to the wealthy.

[Scylla]

One of the other arguments to repeal the taxation of dividends is to encourage a saner and more realistic stock market.

Valuing stocks by the dividend discount model produces more tangible valuations than through earnings growth expectations. it is much harder for a company to pay out a dividend that it doesn’t have, than it is for that same corporation to modify it’s accounting to inflate its earnings.

An incentive for higher dividend paying stocks is a disincentive for speculative growth stocks as it changes their relative values. One might suppose it would be a factor in reducing damaging bubbles of speculation like we recently just had, and hence protect people’s investment nest eggs.

As for double taxation, a stock owner is in actuality the owner of the corporation in proportion to the amount of stock he owns. That dividend is simply the stockowner taking posession of an asset he already owns. It should no more be taxed, than you should be taxed simply for taking money from your checking account and putting it in your savings account.

If the taxation of corporations is currently improper than that should be addressed, but it should not be addressed by allowing a further impropriety to perpetuate itself.

IIRC we are the only country which currently double taxes dividends.

It is also unfair because there are certain other entities which are allowed to pass on their earnings to the beneficial owner without incurring further taxes, such as REITS. They are afforded a relatively unfair advantage.

[Fear_Itself]

What is wrong with double taxation? Property taxes are assessed on the same piece of land, every year you own it, and no body is saying that is unfair.

And if anybody insists it is not the same, yes, it is.

I see no reason why dividends shouldn’t be taxed.

[Kimstu]

DCU: …the most logically consistent way to eliminate double taxation would be to eliminate it at the corporate level, which mean corporations would essentially be given pass-through tax treatment similar to LLCs or LLPs. But good luck passing that reform in the face of professional class warriors.

Scylla: As for double taxation, a stock owner is in actuality the owner of the corporation in proportion to the amount of stock he owns. That dividend is simply the stockowner taking posession of an asset he already owns. It should no more be taxed, than you should be taxed simply for taking money from your checking account and putting it in your savings account.

Actually, I thought that the difference between a “partnership” and a “corporation” was that the former is not considered a legal entity separate from its human owners (and thus is not separately taxable) while the latter is so considered. The principle seems to be that if you’re a separate “legal person” (human or corporate), you’re subject to separate taxation.

If that’s true, then it’s actually the “pass-through” tax-free status of the Limited Liability Company—which is AFAIK legally considered a separate entity—that is inconsistent, not the tax-paying status of the regular corporation. Instead of ceasing to tax corporations, shouldn’t we be taxing LLC’s?

I don’t see what’s “class warfare” about the principle that if you’re considered a legal person, with separate rights and all, you have to pay taxes on your income. Seems only reasonable.

Certainly, it doesn’t make sense to me to compare a corporation paying out dividends to stockholders with an individual transferring money between different bank accounts. In the latter case, the money belongs to the same individual all along. In the former case, the money starts out belonging to one entity (the corporation, in the form of profits, in which case the money is not yet available to the individual) and ends up belonging to another entity (the stockholder, in which case the money is no longer available to the corporation).

And I’m not sure I entirely buy the argument about taxing only transactions that involve “value-add”, either. Aren’t, say, lottery winnings taxable? Where’s the “value-add” in that transaction? Aren’t there various student scholarships and fellowships that are not taxable? Does a student or scholar’s educational or research work not count as a “value-add”?

Doesn’t sound to me as though there’s anything like a clear and convincing case for saying that investment dividend payments are uniquely, and unfairly, “double taxed”.