Double Taxation

Just as it sounds, double taxation refers to taxing the same money twice. Specifically, though, double taxation normally refers to taxation of the same funds at two different levels. Most commonly, double taxation occurs when corporate earnings might be taxed once at the corporate level and again when paid as dividends to stockholders. The reason double taxation is possible is that corporations are considered separate legal entities from their stockholders.

Double taxation has caused controversy; some claim that it’s unfair to tax the same earnings twice. Proponents of double taxation, however, note that without it, wealthy individuals who make much of their earnings from stock dividends could live virtually tax-free. In addition, it’s worth noting that not all corporations are subject to double taxation: S class corporations are able to distribute profits to shareholders without paying them as dividends.