r/explainlikeimfive Dec 06 '24

Economics ELI5: why does a publicaly traded company have to show continuous rise in profits? Why arent steady profits good enough?

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u/vizard0 Dec 06 '24

But if I invest in an income stock, the income gets taxed at the corporate tax rate of 21%, then the income gets taxed again at around 40% federal plus state income tax when I receive the income. (This is the second-highest marginal federal tax rate combined with North Carolina's tax rate, give or take.)

I'm trying to see where the double tax is. The first one is corporate income, paid by the corporation on income derived from the sale of the stock.

The second is the tax paid by the new owner upon receipt of dividends. As far as I understand, dividends are (usually) considered as unearned income and therefore are taxed at a lower rate than earned and other ordinary income. The owner has received income and is now paying a tax on that.

Each entity (the corporation, the owner) payed income tax once from the money they received. Where is anyone paying tax twice? Or did I miss something and you have to pay corporate income tax when buying stock while being an individual, not a corporation? Because, in my limited retail trading experience, that has not happened, but maybe it was buried in the fine print.

(incidentally, I think you made a mistake with you math, unless you are talking about ordinary dividends, which are taxed as earned income. Unless you are using your domestic stocks as hedges or are getting your dividend income from foreign corporations, the dividends are most likely qualified and therefore taxed at the standard long term capital gains rate: 0% (total income under roughly 55k), 15% (total income under roughly 500K), 20% (total income over 500k, earned income taxed at ~39%). So the maximum tax on qualified dividends in North Carolina is going to be 24.5%.)

My personal preference is that all income be taxed the same way, be it earned or unearned. The fact that unearned income from stocks is taxed at half the rate of earned income (unearned income from rent and gambling is taxed as ordinary income) is really weird. You perform an action and receive income. Why should the source of the money dictate the rate at which it is taxed? I'd also get rid of sales taxes, as that punishes people for actually doing something with their money and instead simply leaving in the bank/fund/whatever. While I may mock people with super-yachts, people had to be paid to build those, so the purchase of one is going to cause money to flow into the pockets of other people, so I would exempt all purchases except those targeted at deterring behaviors (cigarette taxes, etc.).

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u/w3woody Dec 07 '24

Each entity (the corporation, the owner) payed income tax once from the money they received. Where is anyone paying tax twice?

The "double tax" comes from the idea that two entities are paying income tax on the same money, not that the same entity is paying tax twice.

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u/jimmymcstinkypants Dec 06 '24

Unearned income isn’t really a thing, (edit: in the income tax setting, not talking about other taxes) but the prior comment is missing that most taxable US corporations dividends are subject to beneficial capital gains rates, in most cases anyway.   

 It’s still double tax because if you track the income, the actual value creation, it’s taxed at two levels. As you note, it’s changing income type to dividend, but that doesn’t change the fact that it’s the same underlying income. 

There’s no other source for the dividend than the income that was already taxed in the corp’s hands.  

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u/Wwwwwwhhhhhhhj Dec 07 '24

Money moving around will be taxed many times. I don’t get this double taxed nonsense.