Double tax is the taxing of the same income twice. The most common example of this tax policy is with corporate dividends. As the corporation generates a profit, it pays income taxes at the corporate level. These profits sit in retained earnings until the corporation decides to distribute some of them to the shareholders in the form of a dividend. The dividends given to the shareholders are then taxed as personal income to the individuals. Thus, the profits from the corporation are taxed twice. Another common example is when the same income is taxed in two different countries during international trade. Double taxation is unique to C-corporations because of the entity structure. C-corporations are established as separate entities from their owners, the shareholders, and must pay their own income taxes on the profits they generate. When a C-corp passes these profits to its shareholders, the government recognizes that as income to the owners because they are a separate entity from the company. Thus, the shareholders are also required to declare this as income and pay income taxes on it as well.
In a nutshell :
- Double taxation refers to income tax being paid twice on the same source of income.
- Double taxation occurs when income is taxed at both the corporate level and personal level, as in the case of stock dividends.
- Double taxation also refers to the same income being taxed by two different countries.
- While critics argue that dividend double taxation is unfair, advocates say that without it, wealthy stockholders could virtually avoid paying any income tax.