Corporate income is taxed twice—once in the form of corporate income tax and the second time when the owner must pay income tax on dividends. What are the effects of this double taxation?

What will be an ideal response?

In equilibrium, investors do not lose by choosing to invest in a corporation. The risk-adjusted return must be the same for both types of investments. Corporations will be forced to avoid some investment opportunities that partnerships or proprietorships can consider. By avoiding opportunities with a positive but low expected return, corporations earn a higher return on their funds. Further, the prices of other investment opportunities will adjust to reflect the double taxation of corporate income. One can expect, therefore, no difference in the return on either type of investment.