Double taxation of dividends?

California CPA, Dec, 2004 by William McNairn

In exposing the falsity of the claim of "double taxation of dividends," one may note that such a claim is on its face literally unsupportable since there is absolutely no evidence in the federal tax codes that dividends are taxed twice to the same taxpayer.

And, if these codes do not provide for double taxation of dividends, the claim must evaporate as a stated reality and have no plausible life except, possibly as a semantic mirage from the world of economic theory.

The vague view, often advanced as support for the double tax claim, is that because a corporation pays income taxes on its net profits and later a shareholder of that corporation pays income taxes on any dividends received from those profits, a kind of double taxation exists. But this view fades into nullity when one examines the numerous facts that expose its lack of substance. To name a few:

1. The corporation and any one shareholder are established in law as different taxable entities, subject to different tax rates and regulations, having different kinds of revenue and costs and serving entirely different operational functions;

2. Many corporations never declare dividends, so for these corporations there are no dividends to be taxed twice;

3. Through the judicious use of offshore tax sites and special corporate allowances many corporations pay no income taxes at all on their earnings (60 percent according to a recent Wall Street Journal report) and hence for this large percentage of corporations one-half of the claimed double taxation couldn't occur; and

4. All taxable income is repeatedly taxed to taxpayers as it flows through the economy, but no one taxpayer (whether a corporation or a shareholder) pays taxes twice on the same income, be it from dividends or other sources. For example, if I pay a plumber from my after-tax funds to unclog a pipe, he cannot claim that he is being double taxed when he pays taxes on his receipts because I have previously paid taxes on the funds from which I paid him.

As one examines the apparent assumptions underlying the "double taxation of dividends" claim, it's clear that there is no real basis in fact for such a claim and it is much more a figment of conventional wisdom than an accounting or legal fact.

A forum for your comments, suggestions and reactions. Fire off your succinct missive to: editor@calcpa.org.

William McNairn, CPA (retired)

Palos Verdes Peninsula