Our weekly explainer on economics using lessons from popular culture. In Installment 51, there’s Double Taxation in 30 Rock.
In an episode of 30 Rock, the wife of one of the stars of the show is trying to figure out their family’s financial wellness in case of her husband’s death. Upon learning that the government taxes all the property owned by a person at the time of their death, she exclaims in horror, “But that’s double-taxation!” It is indeed.
Taxation itself can be viewed as you owning a bakery and for every cake you sell, you have to give a piece of the pie (metaphorically) to the state so that it can (ideally) provide you with access to public goods such as proper roads leading to your bakery, assurance that no hostile nation will attack your surroundings and the like.
Double Taxation occurs when a tax is charged more than once on the same income, asset or financial transaction. There are two types of Double Taxation: economic and juridical.
Economic Double Taxation is the taxation of business profits twice: once in the corporation tax computation, and the other in the computation of income tax, once dividends have been paid to shareholders. (There may also be more tax in the forms of capital gains when shares are sold.) In India, dividend received from an Indian company is exempt from income tax up to Rs 10 lacs in aggregate, but the companies are liable to pay a dividend distribution tax of 12.5% of the total dividend declared. In essence, this is putting a penalty on companies that want to share the wealth it has created with the people who made it possible.
Juridical double taxation occurs when a person or business entity is liable to pay tax on the same income, capital or transaction in more than once jurisdictions (countries or states). Its akin to paying taxes in your own country for selling a cake but also having to pay it the other country where you’re selling it since your income was derived out of that nation’s spending. This is also a major reason why a lot of money sits idle in overseas accounts instead of being invested or spent in our country.
As a nation where only 1.7% of the total population pays income taxes, the reliance on corporate tax is monumental. According to research by Ajay Shah and Vijay Kelkar at the National Institute of Public Finance and Policy, in the last decade, corporate income tax and the dividend distribution tax added up to 35% of total tax collection. Instead of increasing this base by putting in place business-friendly policies and removing the extant Kafkaesque roadblocks, the government takes to milking the existing corporate taxpayers by piling more and more taxes onto them.
As for juridical Double Taxation, it arises out of overlap of taxation laws in two or more countries. Also, some countries have taxes on the basis of nationality while some on the basis of residency. So if you’re a baker in a country that’s not your domicile, you may be liable to pay taxes twice over. India has historically tried to amend this form of double taxation by entering into Double Taxation Avoidance Agreements (DTAA). These agreements aim to put forth equitable basis and means of allocating tax liability in case of individuals who have earned their incomes in a country that’s different from their residence. India has comprehensive DTAAs with 88 countries, out of which 85 have entered into force. Additionally, the government aims to provide tax neutrality (charging on the basis of economic merits and not solely for “tax purposes”) to residents and non-residents whose incomes arise from the countries not included in the DTAA.
Double Taxation occurs rampantly along production chains. If the chocolate is prepared by a chocolatier and the final cake made by our bakery, the taxation of both these transactions results in a double taxation. We would then want to make our own chocolate and the cake. This is called vertical integration, which is MBA-speak for making in-house components along a production line. However, most developed economies are also highly productive, and this is because they have learnt to specialize. Not everybody can make everything, as trying the sandwiches at any CCD across the country will tell you. The essence of a developed economy is trading between a large number of highly specialised firms.
While 30 Rock might be a hilarious show, nothing about double taxation is.