“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.