American Dream

Corporate Income Tax: How Double Taxation Affects Americans

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People tend to assume that corporations are large, money-hungry conglomerates that are willing to quickly shed employees to save their sizable bottom lines. Another common misconception is that corporations are more than capable of absorbing any financial burden, such as the corporate income tax rate, which varies between 15 and 35 percent

Many Americans, however, are unaware that corporations have employed about 45 percent of the workforce and contributed 65 percent of American jobs created since 1990, according to The Washington Post. Younger, smaller companies are often given credit for being the job-creation engines of our economy, but the jobs they create are more volatile in nature and pay an average of half as much as corporations.

In light of this, let’s take a look at how double taxation on corporate income is affecting Americans.

How the Corporate Income Tax Equals Double Taxation

In the eyes of the IRS, corporations have two separate tax-paying entities: the corporation itself and the shareholders. Corporations pay taxes on their profits before the money is given to shareholders, and once the money is given to the shareholders (in the form of dividends or capital gains), it is taxed again as personal income.

Dividend payouts to shareholders are voluntary and not required, but shareholders prefer to invest money in companies who pay steady dividends. By not paying out dividends, the stocks held by shareholders may also increase in value. Then when shareholders eventually sell them, they owe capital gains taxes on the amount of increased profit.

Proposals for Eliminating Double Taxation

Many economists believe that eliminating double taxation would help create sustainable jobs. They propose integrating the corporate income tax and the individual income tax, offering several options for doing so:

  • Option #1: Corporate income is fully taxed at the entity level and is then tax-exempt for shareholders.
  • Option #2: Corporations are given a deduction for dividends passed to their shareholders (where shareholders pay full tax).
  • Option #3: Shareholders are given a deduction for dividends passed to them (where corporations pay full tax).

The Effects of Eliminating Double Taxation

Eliminating double taxation could do a bit of good for both the economy and personal bank accounts. Possible benefits for you and your family include:

  • Higher Dividend Payout: Do you own stock from corporations that pay dividends? With the elimination of the corporate income tax, you could experience higher dividend payouts.
  • Higher Wages: Anything that cuts corporate costs has the potential to lead to higher worker wages.
  • More Chances to Purchase Stocks: Right now it makes sense for corporations to invest in projects through loans because they get to deduct interest payments made on loans before calculating corporate income tax due. So, theoretically, eliminating the tax could open up more investment opportunities.
  • More Jobs: One of the reasons corporations shift jobs overseas is because of the relatively high corporate income tax in the U.S. Eliminating double taxation should increase the jobs on home soil.

Corporations will have to wait and see if the tax code will remain as is, loopholes and all, or if wide-sweeping changes will be made to address this issue directly. If the proposed solutions are put into place, corporations — and middle-class Americans — could reap the benefits.

Amanda L. Grossman is the creator and owner of FrugalConfessions.com -- live a VIP life on an average paycheck -- where she shows hard-working people how to end anemic savings account syndrome and pay off debt years earlier than your creditors want you to without getting a second job or eating ramen noodle dinners. Amanda's area of expertise is in personal finance, and she has authored several personal finance articles for the Houston Chronicle, is a featured blogger at the Houston Chronicle, and has staff written for ReadyforZero.com Blog and RelayRides.com Blog (several of which have been syndicated to LifeHacker, Business Insider, and Yahoo Finance). She has a knack for taking seemingly complex, and irrelevant financial topics and making them accessible and meaningful to the average person. She, her husband, and their two cats (Lyla Bear and Danny Boy) live in a fixer-upper in Houston TX.