NCPA - National Center for Policy Analysis

Ending Double Taxation

September 16, 2002

Strong White House support for a new tax package would at least ensure unified Republican support in Congress. However, the White House has yet to put forward an actual plan. A tax package aimed at the Investor Class would be of great benefit to Republican candidates in November, notes Bruce Bartlett.

  • President Bush has suggested double taxation of corporate profits should be relieved.
  • Economists have complained for decades about how corporate profits are taxed once at the company level and again when paid out to shareholders.
  • The result is that businesses organized as "C" corporations pay an extra tax of 35 percent that is not paid by sole proprietorships, partnerships or "S" corporations.

As a consequence, the number of "C" corporations has been falling as a share of all businesses in the U.S.

  • Between 1978 and 1998, the number of nonfarm businesses roughly doubled from 12.5 million to 24.1 million.
  • However, the number of "C" corporations increased by just 363,000 -- meaning almost all of the growth was in businesses that do not face double taxation.

The administration will probably go with a plan to allow shareholders to receive dividends tax-free, though critics will still claim any reduction in taxes on dividends is a giveaway to the rich. However, IRS data show that in 2000, taxpayers with less than $20,000 in income received more than $10 billion in dividends --16 percent of all dividends received. Those with incomes under $30,000 represent 30 percent of all taxpayers with dividend income (see figure).

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, September 16, 2002.

 

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