What do you like about Singapore's taxes?

What is the full effect of double taxation?

• One could consider taxes like capital gains tax and corporate tax double taxes--the individual already paid income taxes on the money she invested in the asset that produced capital gains (except in special circumstances), and the corporation's dividends (when returned to the shareholders) are taxed, as are its employees' incomes. While I sympathize with the progressive nature of these taxes, the fact that they tax the same thing multiple times--leading to some perverse effects like the interest tax shield that increase leverage beyond an efficient rate--bothers me as an economist. What are the effects of this double taxation? -- decreased investment, capital flight, more progressive income distribution, greater tax revenues? I'd like to weigh the costs and benefits of double taxation using some measure of "efficiency" (Pareto efficiency) and perhaps "fairness".

• Answer:

  The only double taxation that occurs in your example is the corporate and individual tax paid on corporate dividends.  Corporations are not allowed a deduction for normal dividends paid to shareholders and dividends received by the shareholders are taxable income. In the case of capital gains, yes you pay tax when you earn the money used to invest in an asset, but you only pay capital gain tax on any increase in value of the asset.  The original purchase price (the money you paid tax on) is deducted from the selling price to arrive at taxable capital gains. Corporations don't pay tax on the funds they receive from issuing stock. In the example of employee wages, the employees pay tax on their income, but with very few exceptions the business gets to take a tax deduction for the amount it pays in wages, so there is only one level of tax on those funds. Now as for the full effect of double taxation on dividends, you essentially have two buckets of corporations which have different impacts from tax on dividends: Small closely held businesses-It is less desirable for closely held businesses to operate as a corporation which is why they often choose S Corp or partnerships to operate in.  In my opinion the availability of alternative forms of tax entities for small businesses sufficiently mitigates the effect of tax on dividends for all but the most uninformed small business owners. Large publicly held businesses-It depresses the value of dividend paying or high yield stocks.  Although this has been mitigated in recent years by the qualified dividend provisions that allow many dividend payments to be taxed as capital gains rather than ordinary income, but should that provision lapse growth stocks will again become more favorable from a tax perspective, assuming we also continue to have favorable capital gain tax rates.