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.
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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 is double taxation Quizlet? ›
It occurs when earnings are taxed once at the corporate level and then taxed a second time as personal income.
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.
Why is double taxation a problem? ›
Without double taxation, many argue, that individuals could own large amounts of stock in corporations and live off of their dividends without ever paying taxes on what they are individually earning.
Is double taxation illegal? ›
Fair or not, double taxation is allowed under US law.
Which of the following best describes double taxation? ›
Answer and Explanation: The answer is c. Corporate income is taxed when earned by a C corporation and then a second time at the shareholder level when distributed as a dividend.
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 a double taxation agreement? ›
A DTA is therefore a contract signed by two countries (referred to as the contracting states) to avoid or alleviate (minimise) territorial double taxation of the same income by the two countries. Any amendment or addition to such an agreement is known as 'a protocol'.
Which of the following is an example of double taxation? ›
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.
Double taxation is when you pay taxes twice on the same source of income. When it comes to double taxation on business income taxes, the company is taxed at the personal and business level. Some business structures are double taxed because they are considered separate legal entities from their shareholders.
What is double and triple taxation? ›
Thus, "double taxation" refers to the idea that income earned by a corporation is taxed once at the corporate level and once at the shareholder level. Triple taxation is a possibility when one corporation (the "Parent") owns stock in a second corporation (the "Subsidiary").
What is the meaning of double taxation relief? ›
Double tax relief in a nutshell
If a person has income or gains from a source in one country and is resident in another, that same income or gain can suffer tax twice. Double Tax Relief (DTR) is designed to alleviate this double charge on the same source of income or gain.
What is the quote about double taxation? ›
We are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly.
What is a double taxation in corporate taxes? ›
A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders. The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax.
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.
Is double taxation an advantage or disadvantage? ›
Double taxation is a disadvantage of a corporation because the corporation has to pay income taxes at twice the rate applied to partnerships.
What is an example of a corporation double taxation? ›
The corporation first pays taxes on its profits, but then stockholders must pay personal income taxes on the dividends paid from the company's profits. For example, if your corporation had $100,000 in profits last year and the corporate tax rate is 21%, your business owes the IRS $21,000 in taxes.
