When a firm retains cash,it pays corporate tax on the interest it earns and the investor will owe capital gains tax on the increased firm value-in essence the interest on retained cash is taxed:

Question

Quizplus · Accepted Answer

Retained cash, or earnings that a firm chooses to keep rather than distribute as dividends, is subject to corporate tax on the interest earned. If the increased value resulting from the retention of cash is later realized through a sale of stock or other means, investors will owe capital gains tax on that value, thus leading to double taxation. Therefore, the interest on retained cash is taxed twice, both at the corporate level and the investor level.

When a Firm Retains Cash,it Pays Corporate Tax on the Interest