Business Income Taxes

Abstract

Governments tax production, and they tax consumption. This note is concerned with the taxation of income from production in the U.S. The goal is to make sense, if possible, of special features of the taxation of the securityholders of open corporations. The special features are as follows. (i) Interest payments on bonds are tax deductible at the corporate level, which means they are only taxed at the personal level and at personal tax rates. (ii) Dividends are not tax deductible at the corporate level, which means the income that produces them is subject first to the corporate tax and then to personal taxes – double taxation. (iii) Retained earnings are subject to the corporate tax, and they are subject to personal tax but at rates below ordinary income rates (at least historically) and only when eventually realized as capital gains.