Misunderstanding Corporate Taxes

We regularly hear certain types of commentators admonish tax policies. For example, I just read “the federal corporate tax rate is 35%, the second-highest in the world.” That statement is inevitably followed by this one “We’ll probably never know how many businesses never started up or took root in the US because tax rates are too high”. (For the record, these are real quotes but I will abstain from naming the source because although they are severely misguided on certain things, they do good, honest research on other things which I respect.)

This sort of corporate tax rate whining is ignorant and ideologically driven. It is ignorant because someone making this claim does not understand how taxes work. Alternatively, if they do understand this, then they assume their readers don’t and are using this informational sleight of hand to fool readers into supporting their agenda. In effect, their mantra is usually “anyway to lower any and all taxes, facts be damned, let misinformation fly, as long as taxes get lowered.” So, let’s examine the facts:

“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 Truth About Social Security

It’s an election year which means speeches, commercials and news banter about political issues and the candidates’ respective stances.  In the interest of public relations, candidates’ views on Social Security are diced into sentence fragments and sound bites which does little to address the real issue.  Compounding the problem is that few people understand how the system works and where the funds go leading to all sorts of myths, misperceptions and exaggerations.  Let’s examine how the system works so you can make your own decisions about the best approach to fixing it.