Which scenario best describes double taxation?

Double taxation refers to a situation where the same income is taxed multiple times by different entities. The scenario of income being taxed upon earning and again upon distribution accurately captures this concept, as it typically occurs in the context of corporations. A corporation pays taxes on its profits at the corporate tax rate. When these profits are distributed to shareholders as dividends, the shareholders must pay taxes on that income again at their personal tax rates, hence experiencing double taxation.

Other scenarios, such as income being taxed at both federal and state levels or being subject to local and national taxes, illustrate multiple layers of taxation but do not represent true double taxation. These situations involve different jurisdictions taxing the same income but do not imply that the same taxable event is being taxed twice. Additionally, different rates in multiple states may create a heavy tax burden, but this scenario does not constitute double taxation in the classic sense since each state is taxing income earned within its jurisdiction independently rather than the same income being taxed twice for the same purpose.