NCPA - National Center for Policy Analysis

GOING AFTER DOUBLE TAXATION

January 15, 1996

When the tax commission headed by former Congressman Jack Kemp releases its report later this week, it is expected to recommend elimination of the corporate income tax as a separate layer of taxation. Advocates of such a move have long pointed out that the federal government double taxes corporate profits.

  • First, corporations pay 35 percent on their gross profits.
  • Then when net profits are distributed to shareholders, they are taxed again at rates as high as 39.6 percent.
  • Thus, the total federal tax on corporate profits can be as high as 61 percent.
  • No other major country penalizes profits this way.

Double taxation is both unfair and inefficient, critics point out.

  • It is unfair because the dividends of all shareholders, regardless of their income, are net of the same 35 percent income tax paid at the corporate level.
  • Moreover, shares held by IRAs and 401(k) plans pay the corporate tax as well -- even though they are supposed to be tax-exempt.
  • This double taxation is inefficient because it raises the cost of capital -- resulting in reduced investment, less growth, fewer jobs and lower wages.
  • It also encourages excessive borrowing, because interest -- in contrast to dividend payments -- is tax deductible.

It has been suggested that corporate managers are not unhappy with the present system because it encourages corporations to retain a larger share of earnings -- which can be used to build empires and expand power.

Source: Bruce Bartlett (National Center for Policy Analysis), "Seeking to Pull the Plug on Double Taxation," Washington Times, January 15, 1996.

 

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