OPTION CHARACTERISTICS OF CORPORATE INCOME TAX.

The conventional wisdom has been that lowering the corporate tax will enhance economic growth and hence create more jobs. If merely lowering the tax rate can accomplish this, then elimination of corporate tax should create an economic boom. However, despite this possibility, the United States has yet to make a shift to Value Added (VAT) tax system. Moreover, one of the popular criticisms of the corporate form of business organization is the "double taxation" of dividends. Even though this concept assumes that taxes follow the money rather than the economic unit, policy makers tend to advocate elimination of the tax on dividend income. In addition, elimination of corporate tax according to the stance of these advocates should spur economic growth and avoid the perceived double taxation of dividends. Yet, no probusiness entities have proposed the elimination of corporate taxes. The objective of this paper is to demonstrate that the corporate tax system provides an option contract on the earnings of the corporation. The corporation is the seller of the contract, while the government is the holder of the call option contract. Thus the existence of corporate tax in and of itself has value to the corporation and hence the shareholders. [ABSTRACT FROM AUTHOR]