Four Layers of Taxation
From Stephen Entin at the National Center for Policy Analysis:
...[P]eople who save and invest find their income subject to four layers of federal tax (versus one layer for consumption).
First, the income is taxed when it is earned. Second, when after-tax income is saved, the returns on the saving are taxed -- double taxation. For example, if the saver puts his income into a bond or bank account, the interest earned is taxed. If the saver invests directly in a small business, his investment income from the proprietorship or partnership is taxed. If the saver buys a share of corporate stock, he must pay personal income tax on any dividends that the corporation distributes to him, and a capital gains tax on any increase in the share value (as occurs when income is retained for reinvestment) when he sells the asset.
Third, even before the shareholder receives his dividend, or the corporation retains income to reinvest, there is the corporate tax that must be paid on the corporate income, which is really the income of the shareholder.
Fourth, if any unspent assets remain above a modest exempt amount, the federal unified transfer (estate and gift) tax imposes another layer of federal tax on the already multiple-taxed saving. This added layer of tax is also imposed on tax-deferred savings, which are subject to the estate tax and are taxed again as income to non-spousal heirs.
