The double taxation canard

I’ve never understood the argument that corporate equity is taxed twice.  It seems to be based on simplistic economic models where the owners of the firm are identified with the firm itself, but bankruptcies never take place.

Of course, corporations exist mostly because they grant the owners limited liability in the event of bankruptcy — so it’s pretty clear that any economic model that does not have corporate bankruptcies in equilibrium does not actually have anything to say about corporations.  Limited liability is possible because corporations are persons under the law.  For the same reason corporations have to pay their own taxes and economic models that confound the corporation with its owners fail to capture what a corporation is.  Equity owners who want to avoid “double taxation” have always had the option of forming a partnership.

Double taxation is a canard that exists mainly because economic models don’t capture the costs and benefits of corporations.


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