"Double Taxation"

Inspired by the comments after the Death Taxes post, I checked a couple of sources about "double taxation". Although we use this term rather loosely, it actually refers to a very specific situation occurring when taxes are paid twice on the same source of income. There are only two solid examples of this.

The first example involves the taxation of dividends. A corporation earns profit which is taxed as income. If that corporation decides to pay a dividend to shareholders, the shareholder receiving the dividend must also pay tax on the dividend as income. The profits of the company are thus taxed twice- first as corporate income and secondly when paid to the owner despite being the exact same source of income. This is as if you picked up your paycheck at work net of taxes and then took it to the bank to cash. The bank then withheld even more taxes from your already shrunken check for the privalege of taking the money home from work.



The second example is when taxing jurisdictions overlap. You may have an investment in a foreign company for example. Your profit could be taxed in your home country as well as in the foreign country resulting in the exact same income being taxed twice. (There are reciprocol tax treaties between countries to avoid this).

Now, say you earn income from work and pay income tax on it. Then you take part of that after tax income and save it to buy a bond. The bond pays you interest which is then taxed as income when received. Is this a double-tax? Technically, it is not: the bond generated additional income which was then taxed, it was not the original income stream being taxed twice.

Income is not the only way to distribute the tax burden. "Consumption" taxes such as sales tax and gasoline taxes are taxing the consumption or spending of wealth rather than strictly income or earning of wealth. Imagine two people, each with an income of $10,000, but one has $1 million in municipal bonds yielding $50,000 per year in tax-free interest. They both pay tax on the $10,000 in income, but is their ability to pay the same? Will they consume the same amount of resources and public goods provided by tax dollars? For example, the wealthier person probably consumes more and has more to protect (in property at least) from invasion, so shouldn't they contribute more to the common defense? One way to help balance the inadequacy of income only taxation is to tax consumption through a sales tax or use tax (e.g. toll road). Spend or consume more and you pay more.

Another means of taxing progressively is to levy a tax on property. If you own a home, you pay property taxes. (If this post accomplishes nothing else, at least it completely disproves anyone who claims the rich don't pay taxes. If I had a nickel every time I heard heard someone say that... They may not pay enough in someone's opinion, but they certainly pay significant taxes.)

Should consumption and property taxes can be considered double-taxes? After all, you are buying something with income you already paid tax on; that would be taxing the same income twice. Honestly, I don't know where you draw the line here. One could accept this as double-taxation or one could argue that it is the purchase of something else which is being taxed, not the original income again.

Getting back to the estate tax, Misanthrope observantly pointed out that "if double-taxation is seen as a bad thing", then we should probably be supportive of getting rid of it wherever we get the chance. Perhaps double-taxation is not a "bad" thing though. When someone transfers a huge amount of wealth to another generation and that wealth was accumulated after paying income taxes (not universally true though), then there would be a double tax presumably. Is preventing dynasties a bad thing? If not, then double-taxation is not always bad.

You can clearly see that taxation principles are heavily ideological. Progressive vs regressive is at the core of the matter. In a broad sense, there are no right or wrong answers and it is all a matter of opinion. The more you think or dwell on tax implications, the more you peel off additional layers of nuance. And there are the endless unintended consequences of tax policy which we haven't even mentioned.

Frankly, I have come to accept the current complicated system because it generally works. Consider that despite all the taxes, whether income, consumption, property or death, the government only collects 15%* of all the goods and services produced in a year as tax. Personally, I tend to think of tax policy as a sort of philosophy. One thing I can guarantee though, is that you can't escape death or taxes.

*see comments below