About Half of Dividend Payments Do Not Face Double Taxation

William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

November 11, 2002

The United States is often said to maintain a classical tax system, under which corporate profits are subject to double taxation, once at the corporate level when they are earned, and again at the individual level when they are paid out as dividends. The Bush administration is reportedly considering corporate tax reform options in part because of concerns about double taxation.

Dividends are not taxed twice if they are paid to nonprofit institutions or foundations; federal, state or local governments; public or private pension funds; and 401(k) plans or Individual Retirement accounts. (Pensions and tax deferred saving plans face double taxation in a mechanical sense, since the funds are taxed when eventually withdrawn. But the effective tax rate at the individual level on the income earned in those plans is typically zero or negative because contributions are deductible and taxes on earnings are deferred.) 

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