Final answer:
When dividends and long-term capital gains are taxed at the same rate, the overall tax rate on corporate income remains the same whether the corporation distributes its after-tax earnings as a dividend or reinvests them to increase the value of the corporation.
Step-by-step explanation:
The statement is true when dividends and long-term capital gains are taxed at the same rate. The overall tax rate on corporate income remains the same whether the corporation distributes its after-tax earnings as a dividend or reinvests them to increase the value of the corporation.
For example, let's say a corporation earns $100 in profit and the tax rate is 20%. If the corporation distributes the after-tax earnings as a dividend, the shareholders would receive $80 in dividends, and the corporation would pay $20 in taxes. If the corporation reinvests the after-tax earnings, the value of the corporation would increase by $80, and the corporation would still pay $20 in taxes. In both cases, the overall tax rate on the corporate income is 20%