Myth Buster #1: Dividends are considered a deduction to corporations
The following was stated in a The FairTax Book review: “found on Page 33 - the author’s describe a fictional corporation paying $100,000 in corporate income tax and begin to consider the possibilities. In their first possibility (#1.), they say the $100,000 income tax could be paid out of the $2 million profit, but “see who’s picking up the income tax now? The shareholders, not the corporation.” FLAWED. If this fictional corporation had pretax profits of $2 million, it would have to do one of two things: 1) pay corporate income tax, at a maximum rate of 35% (you can do the math here), or 2) pay it to the shareholders in the form of dividends, in which case the shareholders pay 15% income tax (tax on dividends is qualified at 15% for individuals), AND pay corporate income tax (since dividends are considered a deduction to corporations).”
The reviewer’s above claims are wrong.
1) At the $2,000,000 profit level, a normal company’s appropriate tax rate is 34%, which results in a $689,998.33 tax bill. An explanation of the stated $100,000 tax bill could be the aggressive use of federal tax credits. Such aggressive use of credits would provide support for the claim that companies and the rich don’t pay taxes, they find loopholes. I would see this as a strong reason to support tax reform. Could the book’s example be clearer? Yes. Does that make FairTax wrong? No.
2) The statement that “since dividends are considered a deduction to corporations” is DEAD WRONG. The normal company with $2,000,000 in profits would pay $689,998.33 in taxes and then pay $1,310,001.67 in dividends. The dividends would then be taxed at the assumed individual 15% rate, resulting in $196,500.25 of additional income taxation on income that was already taxed once. Total taxes paid would be $886,498.58 or 44.3% of the original profit. When people talk about double taxation on dividends, this is what they are talking about.
There is nothing wrong with our present tax system other than the fact we treat earned income, interest income, dividend income, and capital gains income in different ways. All we have to do is add up a person’s income from all sources, take a ’standard’ deduction, no itemizing, and pay a progressive tax on that income.
A sales tax will absolutely ruin our economy because buying will come to a standstill. China will go broke.
I am almost 83 years of age. I have already bought most of the things I am going to buy. Young people are going to spend 100% of their income. Rich people are going to spend a small percentatge. You call it ‘fair’. I call it “Hucking thy neighbor”. Huckabee claims to be a Baptist minister. Shame on him.