The Triple Taxation of Corporate EquityProfits

Abstract

In the absence of liquidations and share repurchases, the value of corporate equity is the net present value of all future dividends. This net present value is subject to three taxes: the corporate income tax, the dividend income tax, and the capital gains tax. Algorithms are developed for calculating the aggregate tax rate on corporate equity net present value. Although the lowest aggregate tax rate occurs when all earnings are paid as dividends, corporations increase shareholder value by reinvesting earnings whenever the after-tax returns of doing so exceed the discount rate. It is these high return investments that are subject to the highest aggregate tax rates, potentially exceeding 90 percent of pre-tax value under current law.