What does double taxation mean?

Double taxation refers to the taxation of the same income or financial transaction in two different jurisdictions or levels. In the context of corporations, this typically means that a corporation first pays taxes on its profits at the corporate tax rate. Afterward, when the remaining profits are distributed to shareholders in the form of dividends, the shareholders also have to pay taxes on those dividends as personal income. This results in the same income being taxed twice: once at the corporate level and again at the individual level when dividends are received.

This structure is particularly relevant to corporations because they are treated as separate legal entities for tax purposes. While individual taxpayers pay taxes on their income only once, corporate profits face this double layer of taxation. Therefore, option A correctly captures the essence of double taxation in the context of corporate earnings and shareholder dividends.

The other choices do not accurately describe the concept of double taxation. For instance, stating that only employees must pay taxes on their earnings ignores the fact that corporations also face taxation on their profits. Similarly, claiming that only state taxes are applicable to corporations does not encompass the full scope of taxation, including federal taxes, that corporations face. Lastly, indicating that corporate profits are exempt from taxation contradicts the fundamental principle of corporate taxation, making that option