Tax Tricks: Is Corporate Income Taxed Twice?

06/20/2010 05:12 am ET | Updated May 25, 2011

Conservatives claim that income from corporate dividends is "taxed twice" -- first when the corporation pays its taxes (if it does pay taxes), and then when the recipient of dividends pays taxes on that income.

They don't claim, however, that when you pay your plumber the plumber shouldn't have to pay taxes because you already paid taxes on your income. That's different, I guess, because you and your plumber both have to work. Income from working has no such considerations of favor.

This "taxed twice" argument was used by George W. Bush as a reason to reduce the tax rates on income received from corporate dividends. (He also said that taxing dividends is a tax on retired people. Heh.) This "taxing twice" is unfair, they say, even though owners of corporations receive many special advantages under our laws. One such advantage is limited liability, meaning that the owners are not liable to pay the company's debts, fines if the company violates rules or laws or court judgments if the company harms anyone. But Congress fell for it, possibly because of the amazing power of alliteration, and reduced taxes on the income from corporate dividends to no more than 15%. Fortunately this tax cut -- which mostly applies to the very rich -- expires soon.

Meanwhile the income that regular people receive from actually working is taxed at the rate of regular old income taxes. That's right, income from working is taxed at a higher rate than income from not working, with conservatives arguing that it shouldn't be taxed at all! In fact, in some areas they have completely succeeded; if your income comes from inheriting money in 2010 you won't pay any income tax at all!

Another huge tax break that is mostly just for rich people is the capital gains tax rate. The claim is that income that comes from selling an investment (rather than from working) should have a vastly lower rate as an incentive to invest. That rate currently tops out at 15%. There is no explanation why 15% is optimal for providing such an incentive, and not some other rate lower than regular income taxes, like maybe 5% less than your regular income tax. Apparently the reasoning is that only getting a 5% tax break if you make a fortune from an investment isn't enough to make the investment worthwhile. Of course potential huge profits from a successful investment are not sufficient reason to invest so the rich must be bribed further to open their wallets. (I guess the rich really are different from you and me.)

Tax breaks like these -- once again, only on income that is received for not working -- free the rich from concern and worry that they might be asked to pitch in and pay for the infrastructure that enabled their wealth -- and give them more energy to complain about the terrible budget deficits caused by people who worked for a living collecting the Social Security they paid into all of their working lives once they retire.

This post originally appeared at Campaign for America's Future (CAF) at their Blog for OurFuture. I am a Fellow with CAF. Sign up here for the CAF daily summary.