It has often been pointed out that corporate profits are double taxed when a corporation pays income tax on its profit and then shareholders pay income tax on that same profit when it is distributed as dividends.
Depending on your tax bracket, you will generally pay tax on the dividends of either 15 or 20 percent—just like the tax on other long-term capital gains. There is also an additional 3.8 percent surtax on net investment income for taxpayers that have net investment income above applicable threshold amounts.
There is another example of double taxation that is currently in the limelight.
After the Trump administration recently proposed eliminating the tax deduction for state and local taxes paid, seven major organizations that represent state and local governments at the federal level sent a letter to all members of Congress urging them to preserve the state and local tax deduction along with the tax exemption for municipal bond interest. I wrote about that here.
What I found interesting is this statement in the letter about double taxation:
Gun Control and the Se... Buy New $5.39 (as of 03:40 EST - Details) We are extremely concerned that President Trump’s proposal includes eliminating the deductibility of state and local taxes. Eliminating or capping federal deductibility for state and local property, sales and income taxes would represent double taxation, as these taxes are mandatory payments for all taxpayers. We fundamentally believe that Americans’ income, property and purchases should not be taxed twice.
If only Americans were double taxed! The truth is, Americans are quadruple taxed.
First there is the federal income tax. The tax rates and income thresholds of each bracket for tax year 2016 are as follows:
- 0% $0 to $9,275
- 15% $9,276 to $37,650
- 25% $37,651 to $91,150
- 28% $91,151 to $190,150
- 33% $190,151 to $413,350
- 35% $413,351 to $415,050
- 39.6% $415,051 or more
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- 0% $0 to $18,550
- 15% $18,551 to $75,300
- 25% $75,301 to $151,900
- 28% $151,901 to $231,450
- 33% $231,451 to $413,350
- 35% $413,351 to $466,950
- 39.6% $466,951 or more
A taxpayer is entitled to a personal exemption of $4,050 for himself, his spouse, and each of his dependents, as well as a standard deduction of $6,300 ($12,600 for married filing jointly). Although tax credits and other deductions are also available to taxpayers who qualify, certain ones exemptions, deductions, and credits begin to be phased-out as one’s income rises. There is also an additional 3.8 percent surtax on net investment income for taxpayers with adjusted gross incomes over $200,000 ($250,000 for married filing jointly).
Second, there is the Social Security tax. All employees pay Social Security tax of 6.2 percent on the first $127,500 of income. The same income is taxed upon which they already pay federal income tax. And according to the Social Security Administration:
Some people who get Social Security must pay federal income taxes on their benefits. But, no one pays taxes on more than 85 percent of their Social Security benefits.
You must pay taxes on your benefits if you file a federal tax return as an “individual” and your “combined income” exceeds $25,000. If you file a joint return, you must pay taxes if you and your spouse have “combined income” of more than $32,000. If you are married and file a separate return, you probably will have to pay taxes on your benefits. War, Empire, and the M... Best Price: $16.00 Buy New $9.95 (as of 03:10 EST - Details)
Third, there is the Medicare tax. All employees pay Social Security tax of 1.45 percent on every dollar of income. The same income is taxed upon which they already pay federal income tax and Social Security tax. There is an additional Medicare tax of .9 percent that applies to income (including non-cash fringe benefits and tips) over $200,000 ($250,000 for married filing jointly).
And fourth, there is state income tax in every state except Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming (New Hampshire and Tennessee do tax residents on income from dividends and investments). The same income is taxed upon which residents of these states already pay federal income tax, Social Security tax, and Medicare tax. Eight states tax income at a flat rate: Colorado (4.63%), Illinois (3.75%), Indiana (3.23%), Massachusetts (5.10%), Michigan (4.25%), North Carolina (5.499%), Pennsylvania (3.07%), and Utah (5.0%). Vermont has five tax brackets ranging from 3.55 to 8.95 percent. Georgia has six tax brackets ranging from 1.0 to 6.0 percent. Connecticut has seven tax brackets ranging from 3.00 to 6.99 percent. New York has eight tax brackets ranging from 4.00 to 8.82 percent. Hawaii has nine tax brackets ranging from 1.40 to 8.25 percent. California has ten tax brackets ranging from 1.0 to 13.3 percent. It also has the dubious distinction of having the highest state income tax rate.
There are, of course, many other taxes that Americans pay to federal, state, and local governments, but they are not based on income.
My point is that most Americans are quadruple taxed on their income. Therefore, any decrease in any tax rate by any level of government is always good and any increase in any deduction or credit by any level of government is likewise always just as good because the result of either one of these things is that Americans get to keep more of their money in their pockets and out of the filthy, blood-drenched hands of Uncle Sam.
Any tax reform measure that continues to double, triple, and quadruple tax Americans on their income should be rejected outright.