Certified Financial Management Specialist Practice Exam

What term is used to describe taxation on both corporate income and shareholder dividends?

1. Double Taxation

2. Tax Evasion

3. Progressive Taxation

4. Flat Tax Rate

The correct answer is: Double Taxation

The term that describes taxation on both corporate income and shareholder dividends is double taxation. This concept arises in a scenario where a corporation pays income taxes on its profits, and then when those profits are distributed as dividends to shareholders, those dividends are taxed again at the individual level. This situation can be particularly impactful for investors as it affects the overall return on their investment in the corporation. Double taxation is a fundamental characteristic of the corporate structure in many jurisdictions, particularly in the United States, where corporations are treated as separate tax entities. In contrast, tax evasion refers to illegal practices to avoid paying taxes, which is entirely different from the legitimate taxation process discussed. Progressive taxation involves a system where higher income levels are taxed at higher rates, whereas a flat tax rate applies a single tax rate to all levels of income. Neither of these terms applies to the specific context of taxing corporate income and shareholder dividends. Thus, double taxation is the correct term that accurately encapsulates the scenario described.