Question

6.  a) How to the personnel income tax and corporate tax cause economic double taxation?

b) How to eliminate the economic double taxation? Explain the corporate tax systems.

Answer 1

6a. Corporates and Individuals are subject to tax for single money earned twice! Firstly a corporate pays its taxes on its income. Such income in form of dividends when distributed to share holders are again taxed in their hands. Thus same income is taxed at two levels. Moreover capital gains on sale of shares in corporates are subject to taxes again.

6b. The best way to eliminate such cascading affect of double taxation on same income can be made by following a corporate integration. This can be done in following ways:

• Dividends can be allowed as deduction in the hands of only the corporate for income tax purpose. Such dividends received by shareholders can be fully taxed.
• Dividends should be made subject to tax only in the hands of corporate and exempt them wholly in the hands of shareholders.
• Dividends may be taxed in corporate as well as individuals, provided the individuals get tax credit for the amount of taxed paid on dividends received by the company.
• Exempting Capital Gains subject their Investment duration or type of industry.