Mitt and double taxation going around the winger webs

[Narkos]

I keep hearing this whole business of "well Mitt already paid 35% corporate tax and then was taxed again on his investments". Can anyone educate me about this?

[PETRUS]

1. Okay...

Corporations pay taxes on profits, so the assumption is that whatever gains accrue to shareholders have already been taxed. There are a lot of problems with this logic.

On edit: I'm heading out for dinner, but I can give you a few ways to rebut the "double taxation" complaint when I get back if you're interested and if nobody else supplies the same arguments while I'm gone.

[gateley]

3. I'm interested, so do come back. Bon Appetit! nt

[PETRUS]

20. Thank you!

Salmon.... yum.

Posted my further thoughts.

[Narkos]

4. Yes, I'm interested....thanks!

[PETRUS]

19. Hello again!

I glanced at the resources you posted below, and it appears that at least one of my points was covered there - i.e., it's not unusual for money to be taxed at various times as it changes hands. You pay income tax, and you pay tax again when you use some of your net pay to fill your gas tank or whatever. This is probably the most important thing to recognize.

There's another point, which I rarely hear anyone make but it is valid. Strictly speaking, corporate taxes are voluntary. If you want to run a business, nobody forces you to incorporate. You could run your business as a partnership and avoid paying corporate taxes at all. Incorporating grants you special privileges, notably limited liability. Corporate status is a legal structure created by government - i.e., "we the people" - and if you think the corporate tax isn't worth it and that you can fare just as well in the "free market" (ha, take that!) without the added protections guaranteed by the state that come along with incorporation, then do that.

The last thing I like to mention when this comes up is that the same people that complain about double taxation will fight the idea of raising corporate taxes on the grounds that they aren't being selfish in their objections, it's just that those costs will just be passed on to employees and customers. Well, which is it? Are taxes coming out of the pockets of employees and customers or are they coming out of the pockets of shareholders? You can't have it both ways.

[FrenchieCat]

2. Ask them to show you those corporate tax Returns that they are talking about.....

and then remind them that many corporations pay ZERO taxes, so till you see those documents, you ain't buying what they are selling!

[julian09]

7. He paid taxes on his income leaving him so much in the bank

whatever he had in the bank and investments after taxes paid, EARNED MONEY in the following year. That is what he has to pay taxes on. The interest he earned that year is taxable.

[metalbot]

5. The argument is essentially this

You and I own a corporation. Our corporation makes $1 million in profits. This is taxed at 35%, so we pay ourselves the remainder as capital gains, for $350k each. Each of us pays 15% income tax on our investment profits, even though another entity (our corporation) has already paid income tax on the same money.

(not supporting the argument, just explaining it)

[Narkos]

8. Thanks for simplifying that eom

[railsback]

9. After all the loopholes

Corporations can pay virtually nothing in taxes. And the reason why these guys pay themselves in stock options is that they can borrow against it, thus paying no taxes at all, since the stocks are only taxable when cashed out.

[Fool Count]

12. That would be dividends, not capital gains.

Capital gains is when you sell stock in a corporation for $100 a share which you acquired
for $1 a share. No one paid any prior tax on that. Even for dividends the argument is not as
straightforward as it seems. Corporations sometimes pay dividends to shareholders even when
making no taxable profits just to keep the stock prices firm. So those dividends were not
previously taxed either.

[Sgent]

15. One more thing

Corporate dividends are taxed differently depending on whether they are qualified or not.

Qualified dividends are those which have been subject to corporate income tax, and the maximum individual tax rate is 15%.

Non-qualified dividends are those which avoided corporate taxation, and are subject to the ordinary tax rates (up to 39%).

[Narkos]

6. Found two excellent resources

http://blogs.reuters.com/felix-salmon/2011/08/17/the-dual-taxation-meme/

http://www.ctj.org/pdf/corporatetaxreform.pdf

[annabanana]

10. oh fer cryin' out loud. . this again?

[Travis_0004]

11. Read post below

Salaries are not taxed on the corporate level.

Lets say a company makes 100 dollars, and pays a 35% tax rate.

They choose to pay a dividend of 30 dollars.

First they pay 35 in tax, based on 100 in net income, then they pay the 30 dollar dividend. The individual pays 4.50 in tax, so total tax paid is 39.5.

Lets say they instead paid a salary of 40.00. They now have 60 in net income, so pay a corporate tax of 21 dollars. Assuming the person who received the income has a marginal tax rate of 35%, the individual tax paid is 14.00 for a combined total of 35.00, so a total savings of 4.50.

This logic applies to C corporations. (where they is double taxation).
The same logic does not work in flow through ententes such as S corps, since there is no double taxation. In an S corp, dividends result in a lower overall tax rate (15% vs your marginal tax rate)

[Curmudgeoness]

13. But dividends are taxed at the same rate as salary.

It is capital gains that are taxed at 15%. Capital gains are the amount you sell stocks for above the price you paid for them.

Aren't we talking apples and oranges here? Capital gains have nothing to do with corporate profits. Or am I misunderstanding?

[Fool Count]

14. No, they are not. Qualified dividends are taxed at the same 15%.

[Narkos]

18. Did Romney not pay twice on his taxes? Read this argument

The Double-Taxation Argument

Some cap-gains opponents say it's unfair to tax the fruits of a person's investments, considering they are investing after-tax dollars. But this isn't double-taxation, because capital gains are new income. If government was taxing the principle on your investments, that would be double-taxation.

I can remember years ago when we didn't have to pay taxes on our savings account interest, but we have to now. Same thing. The interest has not been taxed, so it is considered new income. I think it's wrong, but that is the way it is.

[Narkos]

16. A winger's argument on FB

"He invest money in a company, they use that money to turn a profit. That profit is taxed once at 35% then the profit us taxed again as a capital gain at 15%. The company pays once, the investor pays again. It's not the same as income tax which is the most progressive in the world. Every time capital gains tax has been raised govt revenue has gone down. Even Obama admitted this in an interview but said he would raise them anyway to be more fair"

[Honeycombe8]

17. If you own any stocks (do you have a 401K?), then you pay twice, too.

It goes like this:

Mitt owned part of a big corporation that paid taxes.

Mitt got paid dividends from that corporation. Because that's his PERSONAL income (form 1099 I think), he has to pay capital gains taxes on that (the rate is 15%).

If you have a 401K, you probably own shares in stocks. That makes you a part owner of that corporation (the same as Mitt).

When you draw money out of your 401K, YOU will pay taxes on that money, at a personal income tax rate (20% to 30%).

So anyone who owns shares in a corporation pays double taxes, if you want to look at it that way.

But that's not correct, of course. The corporation is a separate entity from Romney. My stocks in my 401K are in corporations that are a separate entity from me.

[PETRUS]

21. The corporation is a separate entity.

That is a key point. Thanks for mentioning it.