RESEARCH Business Government

TAX REFORM
Multiple taxing of income and wages unfair, expert says

Mark Reutter, Business Editor
(217) 333-0568; mreutter@uiuc.edu

2/1/03

Photo by Bill Wiegand Richard L. Kaplan, an Illinois law professor who specializes in tax policy, says the multiple taxation of individual wages and salaries should be outlawed.

CHAMPAIGN, Ill. — If double taxation is wrong, as President Bush said in proposing to end the shareholder tax on corporate dividends, then the multiple taxation of individual wages and salaries should also be outlawed, an expert at the University of Illinois at Urbana-Champaign says.

Applying a tax on already taxed income — "which is what double taxation is all about" — begins with the payment of Social Security and Medicare taxes by individuals, said Richard L. Kaplan, an Illinois law professor who specializes in tax policy.

"Say you earn $50,000 a year," he explained. "You pay Social Security and Medicare taxes of 7.65 percent on your $50,000, or $3,825. The federal government then imposes an income tax on the very same $50,000, after a personal exemption and some deductions perhaps, but with no recognition that $3,825 of tax has already been collected. Now that is real double taxation: The same income is being taxed twice by the same government."

In states with income taxes, total individual earnings are again taxed "with no recognition that federal income tax and Social Security and Medicare taxes have already been imposed," Kaplan said. "Then go to your local K-Mart, and the already taxed money in your pocket is taxed yet another time with state and local sales taxes at the check-out counter."

And that’s not all. Gasoline taxes, property taxes and utility taxes – plus special taxes on alcohol and tobacco, hotel and vacation rooms, airplane tickets, imported goods and other items – take additional bites out of an ordinary family’s taxed earnings. "No wonder that the single largest household expense for most Americans is the cost of government at all levels," Kaplan said.

Bush, however, chose to address only the double tax of corporate dividends, a focus that is overstated, if not misleading, Kaplan said. "To begin with, corporations are allowed to shield from taxes all of their ‘trade or business’ expenses, including some of the generous perks handed out to today’s executives."

After paying taxes on the balance of reported income, a corporation might channel some profits to shareholders as dividends. But with more than half of all stock held by tax-exempt entities (pension plans, university endowments, charitable foundations and the like), "the bulk of corporate dividends face no tax at the shareholder level because these shareholders don’t pay taxes."

Likewise, much of the corporate stock owned by individual Americans is held in 401(k) plans, 403(b) plans, IRAs and other retirement savings accounts. The main feature shared by these plans is that the accountholders pay no tax on the income that they receive, including corporate dividends.

These funds are instead taxable when the person retires and withdraws money from the plans, a situation that Bush’s proposal would not change.

"Double taxation is indeed frightful," Kaplan said, "but its true victims are ordinary people working for a living rather than corporate shareholders."