on multiple taxation

A recurrent theme in US tax reform proposals is to eliminate the "double taxation" of corporate profits and individual dividends.  The idea here is that the same money is taxed twice while fulfilling the same value transfer function; that is, the profits of a corporation are also really the dividends of the investor, and therefore should not be taxed both at the corporate level and at the individual level.

But are they really the same?  United States law, as well as the laws of many other countries, treat a corporation as a separate entity, a "legal person".  Value — that is to say, money — is being transferred, in legal theory as well as in legal fact, to two different individuals.

An article in the February 3, 2003 issue of BusinessWeek magazine addresses the restructuring of the US Steel industry.  Largely designed by a union leader, the survival of the industry is being supported by, among other things, sharply cutting retiree benefits.  I am not criticizing the actions of Mr. Gerard, the president of the United Steelworkers; within the current economic structure, he has made the hard choice of half-a-loaf as opposed to none.  However… why are the retiree benefits tied to current profitability?  Why have many of the benefits been picked up by the Pension Benefit Guaranty Corporation, a Federal Government insurer of last resort for pensions?  Millions of dollars in profits were paid to investors in the past from the work of these retirees.  Why not require the investors to return the money, which should not have been paid in dividends but rather should have been used to fund the pensions correctly?

The answer is, of course, rhetorical:  the steel corporations are separate legal entities and their investors are not liable for the debts and obligations of the corporations.  If investors bear no responsibility for the corporations, I see no reason why the corporations' tax payments should suffice for the investors' responsibility to pay their fair share of taxes. 

In a way, taxation at the corporate level of corporate profits followed by taxation at the individual level of individual earnings can be seen as a fee for escaping the liability of the corporation.


There is, however, a situation in US tax law where an individual entity - a working person - is subject to triple taxation of the same money.   This is the situation of Social Security ("FICA") taxation.  As Donald Barlett and James Steele point out, the earnings of a worker are taxed for Social Security and Medicare; and then the worker must also pay general income tax on the monies that are forcibly taken for Social Security and Medicare.  In some cases — cases that will increase in number unless indexing is introduced — that same worker is taxed yet a third time on the benefits received from Social Security.  This is a situation where the law deals with a single legal entity which is taxed multiple times.


It could still be argued, of course, that — unfair or not — if increased investment will end the current recession (or "jobless recovery"), then it still might be a good idea to give investors the additional subsidy of immunizing them from corporate losses and obligations while not taxing them on corporate gains.  The continued deflationary pressures on prices (see statistics at http://www.bls.gov/cpi/home.htm ) indicate, according to basic capitalistic market theory, an oversupply of goods and services.  Clearly what is needed is not more investment to produce more things; what is needed is more buying power to consume more things until supply shrinks further to balance the economy.  A quick way to increase buying power across-the-board would be to give the average worker more buying power — and it seems to me that the obvious way to do that, quickly and fairly, would be to stop all income taxation assessed on wages seized for Social Security and Medicare.