Double Taxation of Shareholders

Double Taxation

The author of this report has been asked to define and discuss what it means when referring to "double taxation" with a corporation and its shareholders. Some examples of this will be provided as well. After that is established, comments about all of the above will be offered by the author. Double taxation is an interesting condition with some (but not all) corporations whereby the Internal Revenue Service gets two proverbial bites of the apple. While this may seem improper to some, it is part of doing business for these specific types of corporations.

As implied in the introduction, double taxation is something that is very real to shareholders that own a stake in a C-Corporation. What is meant by the term is that income is taxed at the corporate level when it is earned. After that, there is money eventually shifted to the shareholder. When this shift occurs, the money is taxed again. This occurs because when one is speaking of a corporation like a C-Corporation, the shareholder and the business are considered separate entities. As such, they are taxed separately and each in their own way. Also as implied in the introduction, many say that the double dip is unfair because the stakeholders of a company are technically getting hit twice. Others counter that by asserting that the rich not paying any personal income taxes on the income they receive from the business is not fair and thus the double taxation is just. Further, the dividend payments that are the subject of the taxation are not required by law and the business could always incorporate in a way that does not involve double taxation (e.g. S-Corp). The above obviously lends credence to the idea that the way in which shareholders are paid and the way in which a company is structured should be planned and thought out carefully because there are implications for any choices made (Investopedia, 2007).

As for one comment that can be made about the double taxation argument, the fact of the matter is that double taxation happens all of the time. It is not universal and absolute, but it is quite common. For example, a person's paycheck is usually entirely post-tax. This would mean it has been taxed for Social Security, Medicare and income taxes, at the very least. If a person then takes that money and goes to the store, they will be charged sales tax of roughly five to ten percent. If that same person buys gasoline for their vehicle, they will pay gas taxes as part of the per gallon price. In short, shareholders of businesses are not being singled out or "picked on" when it comes to double taxation. That does not make the practice just, but it is what it is.

The second comment about double taxation is that is just another example of a tax code that is entirely too complex, entirely too imbalanced and entirely too silly. While many scoff at the idea of a consumption tax or a flat tax, there is great promise in constructing such a tax system because it would make compliance and enforcement so much easier. However, it probably will not happen because the IRS (and its associated agencies) are intoxicating to politicians and power-brokers because of the power they can yield. Even so, a consumption tax that taxes only new durable goods at a high rate would be a good way to go. The taxes on groceries, gas and any used item can be foregone in favor of a single pot of money that is easy to regulate and manage if there are deficits or gluts of tax funds.