Three-Way Distribution

• Corporate Profits Taxes: This is the share of corporate profits that are paid to the government. Corporate profits taxes are collected only from corporations, and not from businesses that are proprietorships or partnerships. Because corporate profits taxes are income that is earned by the shareholders, sawdust, they also fall in the general category of income earned but not received (IEBNR), and are subtracted from national income in the derivation of personal income.


• Undistributed Corporate Profits: Commonly termed retained earnings, these are corporate profits that are neither paid as corporate profits taxes nor paid to shareholders as dividends. Undistributed corporate profits are important for the derivation of personal income from national income. Because undistributed corporate profits are income that is earned by the shareholders, but not received, they fall in the general category of income earned but not received (IEBNR), and are subtracted from national income in the derivation of personal income.


• Dividends: Also termed distributed corporate profits, these are corporate profits paid to shareholders or owners or the corporation. Corporate managers usually try to pay the shareholders a dividend that is comparable to returns from other financial markets--such as the interest on government securities or corporate bonds--to keep the owners from selling off the company's stock. Dividends are income earned by the factors of production, and are thus part of national income. They are also income received by members of the household sector, and are thus part of personal income.

Two Issues

• One issue is double taxation. Corporations pay a hefty share of their profits in corporate profits taxes right off the top. After-tax corporate profits are then divided between dividends and retained earnings. Dividends received by shareholders are then subject to personal income taxes. Taxes are paid on the dividends portion of corporate profits once when in the hands of the corporations then again when received by shareholders.


• A second issue is the share of after-tax profits paid to shareholders as dividends. Dividends, of course, represent income in the hands of shareholders that they can use as THEY see fit. Retained earnings, however, are kept under the direct control of the corporate managers. For large corporations, owners are often distinct from managers. The managers might, in principle, work FOR the shareholders, but they do not necessarily do what is BEST for the shareholders. One contention is that managers pay only enough dividends to keep the shareholders "satisfied," even though the shareholders "deserve" more.