If one uses after-tax income to buy a television, there is no additional tax on the purchase of the TV or the stream of entertainment it provides. The income is taxed when first earned. If the saver puts his or her income into a bond or bank account, the interest earned is taxed. If the saver invests directly in a small business, his or her investment income from the proprietorship or partnership is taxed. If the saver buys a share of corporate stock, he or she is in fact buying a share of the company, a claim to a share of its income, and his or her share of the corporate income tax on the corporate earnings.
Shareholders face triple taxation.
In addition to the original tax on the saving and the tax paid by the corporation, shareholders must pay personal income tax on any dividends that the corporation distributes out of its after-tax income. There is a third layer of income tax even if the corporation does not pay a dividend. If the owner or shareholder sells the business or the shares, the increase in value is taxed as a capital gain. Capital gains can arise whenever a business's prospects improve, not just because of reinvestment of previously-taxed earnings. The development of a successful new product, or a discovery such as a new wonder drug or a new oil field, can the boost the after-tax earnings outlook of a business and increase its current market value.