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1 Patrick Fleenor, Double-Taxing Capital Income: How Bad Is the Problem 1 (2006)

handle is hein.taxfoundation/ffhbxz0001 and id is 1 raw text is: r:OuU NDAT10N. November 15, 2006 Double-Taxing Capital Income: How Bad Is the Problem? by Patrick Fleenor Fiscal Fact No. 71 Introduction Double taxation is a common and often misused expression in tax policy discussions. It is not the number of tax layers that matters, but the total effective tax rate-that is, the percentage of each income stream taken as tax. One of the best-known cases, and one of the most critical problems in public finance, is the double tax on capital income. Corporations pay the federal corporate income tax, and then with their remaining after-tax income, they pay dividends to their shareholders. Those individuals then must pay an additional, individual-level tax on those amounts. The essential question is whether the resulting total tax rate on capital income from corporations is substantially higher than the rate on other types of income. There are several types of income that it should be compared to: income from sole proprietorships, partnerships, S corporations and other business entities that are by law exempt from the corporate income tax, and finally, wage income. Under an ideal income tax, all income would be taxed at the same rate. In current law, the statutory federal rate on corporate income is 35 percent. In the simplest type of comparison, then, this corporate rate is added to the statutory rate on individuals' capital income, currently 15 percent, for a total tax rate of approximately 50 percent in the U.S., while it is significantly lower in many other nations (see Table 1).