Hacker News Reader

Comment by pinky1417 | Hacker News Reader

One aspect I haven’t seen mentioned in the comments or in the article: double taxation. One of the drawbacks of structuring a business as a c-corp is that you have double taxation: once, at the corporate rate then again at the individual income tax rate if the corporation distributed earnings to shareholders. An advantage of that, however, is that if you’re investing for the future, double taxation can be more efficient. If my business makes $100 before taxes, I can reinvest about $80 for future growth if it’s a c-Corp but if it’s a pass-through entity (like an LLC or S-Corp designated as a pass-through), I may only be able to invest $60 because I pay ordinary income rates on earnings.

Put another way: in the steady-state, corporate shareholders end up paying big taxes because distributions are taxed once again at ordinary income rates.

View on HN

That's the price of using a fictional entity to shield one from liability.

Both entities provide liability protection. And the taxes are simply differed not omitted.

This is always brought up but it isn't double taxation, the individual is paying income tax and that has nothing to do with the corporation tax.

The government takes tax from the same amount of money twice. How is that not well described by the term "double taxation"?

The government also collect payroll tax on the employee income from the employer. So it double-taxation+

Money is not taxed [1], transactions are taxed.

[1] At least, not yet. Elizabeth Warren would like it to be.

Edited for formatting

The entire concept of "double taxation" is BS. All money is taxed multiple times as it moves around.

If I get paid a wage, my employer pays payroll tax, then I pay income tax. Then when I buy something with it, I pay sales tax. Then the company I bought it from pays payroll tax on it when they pay it out to an employee, then the employee pays income tax on it. Then they pay sales tax when they buy something with it, and so on.

You have a point in that money does get taxed multiple times as it moves around. But I don’t believe that makes the term “double taxation” BS. It’s a useful term in a world where there are two structures for business entities (a) the “double taxation” corporate structure where lower corporate taxes allow increased investment at the expense of less efficient shareholder distributions or (b) the “single taxation” structure of partnership-type entities where earnings are only taxed once, but at the higher rate.

I don’t use the term “double taxation” to imply corporations are necessarily a worse structure compared to partnerships; that depends on context. But it’s a useful descriptive term.

The concept of double taxation is incredibly important. When you pay income and payroll taxes on your wages, its important to understand what your real tax rate is, and its a lot higher than either individually.

So what's the real tax rate in investments in the U.S? Well it's the corporate tax rate. Plus the investors capital gains or dividend tax rate. Plus the state corporate income tax rate. And the investors state income tax rate.

All these layers of taxation means it's almost impossible for taxes on profits to be less than 40% for an investor, and can reach 60%.

And sales tax isn't part of the double taxation layer, because it's voluntary. You could have spent your net earnings on things that don't have a sales tax, or saved it. And sales tax applies equally to the investor receiving a dividend.

Reply on news.ycombinator.com