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January 06, 2003

Myth of "Double Taxation" and Dividends

Suddenly a new horror stalks the land-- "double taxation" of corporate profits. The solution-- tax-free dividends in Bush's new "stimulus" plan.

Aside from the fact that double taxing profits just means establishing a reasonably progressive tax on high profits, the very idea is a myth. Many corporate profits, because of corporate tax loopholes, go untaxed. If dividends are untaxed, that just means that large chunks of corporate income will go completely untaxed.

For example, see this older story from the Christian Science Monitor. The article is based on a report by the Institute on Taxation and Economic Policy from 2000 that detailed tax avoidance by corporations in the 1990s.

"Uncle Sam sent Texaco a $67.7 million tax refund check in 1998. Though it declared $182 million in profits, the giant oil company paid no corporate income tax.

PepsiCo got $302 million from Washington. It, too, paid no corporate tax that year on $1.6 billion in profits.

Cisco Systems, the second most valuable company in the US, paid no federal income taxes in its latest fiscal year. That despite making $2.7 billion in net earnings."

Note WorldCom's rip-off of the federal treasury.

In fact, Texaco paid $982 million in dividends in 1998 (see here for their annual report), which had little relation to either declared profits or profits for which it paid tax.


Here is a quick table I made of a few other companies who paid no or very little taxes in 1998, yet paid significant dividends. Note that the company of Bush's own new Treasury Secretary, CSX, paid no taxes in 1998, yet paid significant dividends to its shareholders. Maybe Bush should ask his Secretary for an explanation of how shareholders can receive dividends even when the company itself may never have been taxed on the income dispersed to its shareholders.

All amounts are in millions of dollars. The numbers may be approximate since I am not an expert in reading annual reports, but it reflects the basic lack of relationship between corporate taxes paid, dividends dispersed and corporate profits. A reminder that all numbers are from 1998.




Taxes Paid









































* (A negative number under taxes paid means the company received a tax refund from the government and paid no taxes in 1998)

The rhetoric of "double taxation" has no relation to the reality of how corporate profits are measured, what amount gets taxed, and how much is paid in dividends. The three numbers have little relationship, so the rhetoric is just specious.

Little remembered is Bush's last "stimulus plan" which called for massive corporate tax loopholes which would have left even more corporations untaxed with huge profits. See this piece.

The bottom-line is that Bush's plan to leave dividends untaxed has one goal-- to help the wealthy who receive the overwhelming propotion of dividend payments.

If Bush wants to play this rhetoric, progressives need to pound on the issue of untaxed corporate profits and outrageous corporate loopholes.

Update: See this additional post on Bush's Trick Rhetoric- Dividends vs. Capital Gains on the sleight-of-hand rhetoric being used to sell this plan.

Also, see this post on the complications of the Bush plan in trying to deal with untaxed corporate profits under his plan.

Posted by Nathan at January 6, 2003 03:46 PM

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Not to mention that many of those who proclaim to be outraged at double taxation have little problem with raising revenue through a regressive sales tax.

Posted by: Ben at January 6, 2003 04:15 PM

Great post. Perhaps we can jeer a little louder when the Republicrooks start whining about "tax burden."

Why don't you send this out to all the editorial boards at the major papers? We could ask them why THEY don't think this is important?


Posted by: Emocrat at January 6, 2003 05:58 PM

If Congress really wanted to help people how about helping senior citizens by removing the income tax from Social Security. Talk about double taxation! First you send in the Social Security TAX from your paycheck all of your life, then when you receive the meager amount back upon retirement from Social Security they tax the funds you had taxed already. No wonder seniors are filing bankruptcy in record numbers. And seniors have been the category that has been spending the most until they got hit with 1.5% interest on savings, a down market, etc. This group has been hit the hardest (but they vote in the most numbers!)

Posted by: Henry at January 7, 2003 12:29 PM

If major corporations pay no taxes, then why care about yet another (evidently redundant) tax break? Why would they want it, and why would you want to stop it?

Posted by: Scott Cattanach at January 7, 2003 06:06 PM

Scott, I can't tell if you are asking a serious question, but the answer should be obvious. Taxing individual dividends is not redundant, especially if the corporate revenue from which they derive was untaxed.

Wages are inescapably taxed-- directly with payroll taxes and with income taxes. Why conservatives think it is fair for stock owners income to be untaxed when the hard labor of average people is taxed just never ceases to baffle me.

Posted by: Nathan at January 7, 2003 06:29 PM

So why is it that, as an individual tax payer, when my deductions add up to more than my tax obligation, the government doesn't send me any money?

There's always that little bit in the instructions where they say that if your obligations minus your deductions is less than zero, enter zero were it says taxes owed.

Why doesn't it say that on Texaco's tax return?

Posted by: TC MITS at January 7, 2003 06:38 PM

I believe that a tax credit or rebate can give a company a negative tax owed, but a deduction (for dividends or anything else) cannot, which makes my question still valid. If this deduction would just make corporate paper loss bigger and therefore have no impact on their (zero) taxes, why should _either_side_of_the_argument_ (you or them) care?

Wages are one of the things deducted from revenues to calculate profit or loss, so they are not double taxed.

I had been assuming that the plan was for the companies not to pay taxes on dividend expenses, but stockholders would pay taxes on dividend income. You seem to be saying that "untaxed dividends" would not be taxed on either end (or jumping back and forth as needed between corporations not paying and stockholders not paying).

So what about those companies that do pay taxes (your blurb above give 10 companies that don't)? Could we eliminate double taxation in those cases where it actually happens? Basically, either dividends are taxed twice (which discourages dividends, which are how stocks are supposed to be evaluated, and encourages debt, since interest is deductable) or not (when profits are zero, which makes the deduction meaningless).

Posted by: Scott Cattanach at January 7, 2003 11:11 PM

The double taxation occurs at the corporate income tax level, and the individual level. Individuals will no longer pay this tax, under the proposal. Since for many corporations the effective income tax rate is 0 or less, it would not be taxed at all.

Corporations want more corporate tax cuts to make the rebates even bigger, to get more money from the government, ie your pocket and mine.

Posted by: Adam at January 8, 2003 02:06 AM

First, who cares if there is "double taxation"-- which just means higher tax rates on stock income? Wages already are taxed at a much higher rate than stock income-- with income taxes added on top of payroll taxes.

Nothing forces companies to issue dividends (and about a third of companies never do), which just keeps the value of the cash within the company, increasing the stock price. So people can still recoup income by selling off stock and paying lower capital gains taxes.

Since wages for many people are taxed at a marginal rate of 41% (27% income tax plus 14% payroll taxes on the employee and employer side), why does the Bush administration start with relief for stock income which already is taxed at a lower rate than wages?

Posted by: Nathan Newman at January 8, 2003 06:26 AM

Eliminate double taxation on wages - end Social Security and the payroll tax.

"Companies can keep cash instead of paying dividends to prop up the stock price" encourages the sort of stock market manipulation we saw during the Clinton years, and is now coming home to roost.

Posted by: Scott Cattanach at January 8, 2003 07:53 AM

Another interesting bit of info, if anyone is still reading this thread, is that payroll tax (FICA) is not deducted on income above $84,000 as I understand it.

But Nathan gets to the heart of the matter originally, which is corporate welfare.

Posted by: Eric Bruce at January 9, 2003 11:07 AM

I agree with the conclusion of your post (due to this measure's deleterious effect on low income housing tax credits), but isn't it inaccurate to state that "If dividends are untaxed, that just means that large chunks of corporate income will go completely untaxed"?

The reason I ask this is because it is my understanding that dividends would only be tax free when paid from earnings that have in fact been already taxed at the corporate level.

Ryo T.

Posted by: RyoT at January 28, 2003 08:09 PM


You are perpetuating the ignorance of the American public. Take a b-school class and you will learn the difference between cash accounting and accrual accounting. Also, you will learn how to read an annual report.

Posted by: Johnny at February 3, 2003 02:32 AM

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