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 incomefor 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:
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.
Double taxation?
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:
Single taxpayers
·
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
Married
taxpayers
·
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.
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.
Laurence M.
Vance [send
him mail] writes from central Florida. He is the author of The War on Drugs Is a War on Freedom; War, Christianity, and the State: Essays on the Follies of
Christian Militarism; War, Empire, and the Military: Essays on the Follies of
War and U.S. Foreign Policy; King James, His Bible, and Its Translators, and
many other books. His newest book is Gun Control and the Second Amendment.
Visit his
website.
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