Because the opportunity cost of a corporate equity is not tax deductible, the corporate income tax encourages borrowing, which allows interest cost to be deducted from corporate income.

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The statement is true. The opportunity cost of a corporate equity is the return that shareholders could have earned if they had invested their money elsewhere. This cost is not tax deductible because equity financing does not involve any interest payments. On the other hand, borrowing allows companies to deduct the interest paid from their taxable income, which reduces their tax liability. As a result, the corporate income tax can encourage companies to rely on debt financing rather than equity financing.

Because the Opportunity Cost of a Corporate Equity Is Not