Is the Capital Gains Tax Double Taxation?
Editor’s Note: Reed Davis has returned with another of his U.S. Budget and Economy articles. As always, we welcome your OpEd submissions.
My prior post looked at the calculations behind Warren Buffett’s claim that he paid a lower tax rate than any of the other people in his office. Specifically, Buffett claims that he paid about 17 percent of his taxable income in tax and his office staff paid percentages somewhere in the 30s. A number of articles disputed this claim, stating that, due to the double taxation of capital gains, Buffett actually paid a much higher rate. For example, a Wall Street Journal editorial states the following:
This is because wealthy tax filers make most of their income from investments. Such income is taxed once at the corporate rate of 35% and again when it is passed through to the individual as a capital gain or dividend at 15%, for a highest marginal tax rate of about 44.75%.
This rate of 44.75 percent equals the top corporate tax rate of 35 percent plus 15 percent (the capital gains rate) of the remaining 65 percent. However, the 35 percent figure is the top statutory corporate tax rate. The effective or average corporate tax rate is well below that. In fact, a recent story in The Business Review references another Wall Street Journal article as follows:
A business tax break meant to spur corporate investment has dropped the effective corporate tax rate to the lowest level in 40 years, The Wall Street Journal reported, citing data from the Congressional Budget Office.
Total corporate federal taxes paid fell to 12.1 percent of profits earned from activities within the U.S. in fiscal 2011, which ended Sept. 30. That is the lowest level since at least 1972, and well below the 25.6 percent companies paid on average from 1987 to 2008.
Also, a number of sources suggest that the burden of corporate taxes do not fall fully on shareholders. For example, a paper from the Federal Reserve Bank of Kansas City states:
Corporations are responsible for remitting corporate taxes to the state, but the actual burden of the state corporate tax falls elsewhere — on shareholders, consumers, workers, or some combination of the three.
Further on, it states:
The most recent economic research suggests that labor bears the majority of the corporate tax burden at the national level. In response to higher state corporate tax rates, corporations may lower wages, thereby passing the burden onto workers.
Another source, an American Enterprise Institute article, states the following:
In this article, we argue that neither of the agencies’ assumptions — that capital bears 100 percent or that no one bears the tax — is valid. Both approaches fail to reflect recent empirical and theoretic research that finds workers bear a large portion of the burden of the CIT. In particular, the empirical studies suggest that distribution tables that allocate 50 percent or more of the burden to labor may be closer to the truth.
Following is an excerpt from an article by Dean Baker regarding the argument that paying taxes on dividends amounts to “double-taxation”:
The trick in this argument is that it ignores the enormous benefits that the government is granting by allowing a corporation to exist as a free standing legal entity. The most important of these advantages is limited liability. If a corporation produces dangerous products or emits dangerous substances that result in thousands of deaths, shareholders in the corporation cannot be held personally responsible for the damage. The corporation can go bankrupt, but beyond that point, all the shareholders are off the hook, the victims of the damage are just out of luck.
This goes along with the argument that the corporation and the shareholders are separate entities receiving separate benefits and government services. The government helps create the environment in which the stock market can function, to the benefit of the shareholder. It likewise helps create the environment in which corporations can flourish and provides corporations with the benefit that Dean Baker describes above. It can be argued what level of taxation these services merit. But the above arguments suggest that the taxes on capital gains and dividends do not qualify as double taxation.
- Is Romney Double Taxed? (economistsview.typepad.com)
- Mitt Romney’s True Tax Rate: 44.75% (taxprof.typepad.com)
- Dividend and Capital Gain Taxes: A Comparative View (taxprof.typepad.com)
- Dividends and taxation (marginalrevolution.com)