Double Taxation

A taxation principle referring to income taxes that are paid twice on the same source of earned income.

Double taxation occurs because corporations are considered separate legal entities from their shareholders. As such, corporations pay taxes on their annual earnings, just as inpiduals do. When corporations pay out pidends to shareholders, those pidend payments incur income-tax liabilities for the shareholders who receive them, even though the earnings that provided the cash to pay the pidends were already taxed at the corporate level.

The concept of double taxation on pidends paid to shareholders has prompted significant debate. While some argue that taxing pidends received by shareholders is an unfair double taxation of income (because it was already taxed at the corporate level), others contend that this tax structure is fair.

Proponents of keeping the "double taxation" on pidends point out that without taxes on pidends, wealthy inpiduals could enjoy a good living off the pidends they received from owning large amounts of common stock, yet pay essentially zero taxes on their personal income. As well, supporters of pidend taxation point out that pidend payments are voluntary actions by companies and, as such, they are not required to have their income "double taxed" unless they choose to make pidend payments to shareholders.