Yes, earnings from mutual funds are usually taxed, even if they are used to buy more shares of the mutual fund. When dividends are retained, they are used to buy more shares of the fund, just as if they had been paid out in cash. Because of this, they still have to pay taxes.
Mutual fund earnings are taxed differently depending on whether they are in a taxable account or a tax-advantaged account like an Individual Retirement Account (IRA) or 401(k).