SOMETHING TO THINK ABOUT

With all the talk about tax reform and reducing the corporate tax rate I have not heard anyone propose a “dividends paid” deduction for corporations.

 

Corporate profits are taxed twice – on the corporate return, and then again on the individual income tax return when dividends are paid to shareholders out of corporate profits.  On the individual level there is some relief via the reduced tax rates on “qualified” dividends – 0%, 15% and 20%.  But, except for the lowest level, there is still double taxation.

 

Instead of reducing the corporate tax rate to 15% why not just allow corporations to deduct from net taxable income dividends paid to shareholders.  And on the individual level tax all dividends as ordinary income, like interest income.  There would no longer be “double-taxation” of corporate income and basic investment income – interest and dividends - would be taxed the same as earned income.

 

On the corporate level I would also suggest removing all industry-specific tax “loopholes”, and tax corporations on net book income less dividends paid.  I would also do away with the deduction for depreciation on real property (buildings) and true capital improvements thereto – both on the corporate and individual tax return.  Generally, in reality, the value of investments in real estate do not “depreciate” over time.

 

Under my suggestion “C” corporate income and pass-through corporate income would be taxed in a similar method.  Dividends paid from a “C” corporation, not taxed on the corporation level, would now be taxed to the shareholder at ordinary income rates, and “S” corporation profits, an equivalent of dividends, would continue to be taxed at ordinary income rates.

 

My proposals would result in both corporations and individuals being taxed on the net “cash in pocket” economic result of their activities.

 

What do you think?

 

TTFN