Double taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income.
Examples of Double Taxation
The United States’ tax code places a double-tax on corporate income with one tax at the corporate level through the corporate income tax and a second tax at the individual level through the individual income tax on dividends and capital gains. For example,when capital gains accrue from stock holdings, they represent a second layer of tax, as corporate earnings are already subject to corporate income taxes.
Additionally, the estate tax creates a double tax on an individual’s income and the transfer of that income to heirs upon death.
Corporate integration and the removal of the estate tax would address these instances of double taxation.
Businesses and individuals that reside in one country but earn income in other countries could also face double taxation if more than one country taxes their earnings. Credits for foreign taxes, territorial taxation, and tax treaties can minimize the likelihood of double taxation of foreign income.
How Does Double Taxation Occur?
Generally, the income tax attempts to tax the creation of new income once, as it happens. Take the example of a business that produces a good and sells it to a customer, who buys that good with after-tax income. The business then pays tax on the income generated from that sale.
We do not consider the taxation of that business income to be a double-tax of the customer’s income simply because the customer paid taxes on their wages. Rather, this transaction is due to the generation of new income attributable to the business, from a new good or service. This new income should be taxed.
However, a transaction that is the result of a new good or service is distinct from transactions in which no good or service is produced. Money changes hands in the economy all the time without the creation of a new good or service. Alimony is a good example of this. Under current law, the receipt of an alimony payment is considered taxable. However, alimony does not result in new income, because it is simply the transfer of money from one person to another. So, to prevent double taxation, the payer of alimony can deduct it from their taxable income. Transfers like these are generally exempt from additional taxation, in order not to tax the same income twice. The tax code makes a similar adjustment—allowing deduction for payment, but taxing receipt of income—for several other transfers between parties: business interest expenses, payroll expenses, costs of goods sold, and home mortgage interest, to name a few.
Stay updated on the latest educational resources.
Level-up your tax knowledge with free educational resources—primers, glossary terms, videos, and more—delivered monthly.
Subscribe
FAQs
Double taxation refers to the imposition of taxes on the same income, assets or financial transaction at two different points of time. Double taxation can be economic, which refers to the taxing of shareholder dividends after taxation as corporate earnings.
What is double taxation group of answer choices? ›
Double taxation refers to income tax being paid twice on the same source of income. This can occur when income is taxed at both the corporate level and the personal level, as in the case of stock dividends. Double taxation also refers to the same income being taxed by two different countries.
What does double taxation mean in Quizlet? ›
Corporate earnings are subject to double taxation on their income to the extent they are distributed to shareholders in the form of dividends. First, corporations pay income taxes on their corporate income. Then, stockholders pay income tax on the cash dividends received from corporations.
What does the term double taxation mean ____? ›
double taxation. Occurs when governments tax profits at the corporate level and dividends at the personal level. The primary goal of a publicly owned corporation should be to. Maximize the price per share.
What is an example of double taxation in real life? ›
Most commonly, double taxation happens when a company earns a profit in the form of dividends. The company pays the taxes on its annual profits first. Then, after the company pays its dividends to shareholders, shareholders pay a second tax.
Why is double taxation bad? ›
Opponents of double taxation on corporate earnings contend that the practice is both unfair and inefficient, since it treats corporate income differently than other forms of income and encourages companies to finance themselves with debt, which is tax deductible, and to retain profits rather than pass them on to ...
Which of the following best describes double taxation? ›
Double taxation occurs when a corporation pays taxes on its profits and then its shareholders pay personal taxes on dividends or capital gains received from the corporation.
What are the benefits of double taxation? ›
Benefits of the double taxation treaty
For international businesses, a double taxation treaty helps reduce additional tax burdens. Without this type of treaty in place, income could be taxed both in the country of earnings as well as after it's been repatriated to the home country.
What is double taxation Chegg? ›
Companies have to pay both sales taxes and income taxes. Companies must pay taxes on their earnings, and then stockholders pay taxes on their dividends. Suppliers tax their customers, and in turn these businesses tax the ultimate consumer.
What is the main disadvantage of a corporation is double taxation? ›
Double taxation is a disadvantage of a corporation because the corporation has to pay income taxes at twice the rate applied to partnerships.
Double taxation occurs when the same income is taxed twice. Triple taxation is when it is taxed three times. For example, a corporation is required to pay taxes on its profits.
Which of the following companies typically are subject to double taxation? ›
C Corp Double Taxation
A c corporation is a type of company that is taxed twice, at the corporate level and at the individual shareholder level. This happens because there are multiple legal entities receiving the business profits as income.
How do you use double taxation in a sentence? ›
Double taxation Sentence Examples
You receive some of the benefits of Nevada corporation filing without being hit by the double taxation common in S corporations. Even worse, in some circ*mstances, double taxation may arise.
What percent is double the tax? ›
Method 2: Multiply the tax of the bill by two.
Another way to calculate a tip for a bill is to double the tax of the bill. This calculation should give you a tip of roughly 15% to 19%.
What are the two benefits of entrepreneurship? ›
Benefits of becoming an entrepreneur or entrepreneurship are as follows:
- Freedom to work.
- Flexibility in schedule.
- Getting to learn new things everyday.
- Financial independence.
- Boosts self confidence.
- Provides opportunities for self growth and development.
- Generating wealth for self as well as business.
An example of this is the case where both city and county have code enforcement services, but the county provides code enforcement almost exclusively in the unincorporated area - even though funds to support the county code enforcement come from property taxes which are paid by county residents inside as well as ...
What is an example of a double taxed income? ›
For example, when capital gains accrue from stock holdings, they represent a second layer of tax, as corporate earnings are already subject to corporate income taxes. Additionally, the estate tax creates a double tax on an individual's income and the transfer of that income to heirs upon death.
Why is social security taxed twice? ›
The Introduction of Taxes on Benefits
The rationalization for taxing Social Security benefits was based on how the program was funded. Employees paid in half of the payroll tax from after-tax dollars and employers paid in the other half (but could deduct that as a business expense).
