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Bank-Tax Conformity for Corporate Income: An Introduction to the Issues

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Author Info
Michelle Hanlon
Terry Shevlin
Abstract

This paper discusses the issues surrounding the proposals to conform financial accounting income and taxable income. The two incomes diverged in the late 1990s with financial accounting income becoming increasingly greater than taxable income through the year 2000. While the cause of this divergence is not known for certain, many suspect that it is the result of earnings management for financial accounting and/or the tax sheltering of corporate income. Our paper outlines the potential costs and benefits of one of the proposed "fixes" to the divergence: the conforming of the two incomes into one measure. We review relevant research that sheds light on the issues surrounding conformity both in the U.S. as well as evidence from other countries that have more closely aligned book and taxable incomes. The extant empirical literature reveals that it is unlikely that conforming the incomes will reduce the amount of tax sheltering by corporations and that having only one measure of income will result in a loss of information to the capital markets.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11067.

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Date of creation: Jan 2005
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Handle: RePEc:nbr:nberwo:11067

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Find related papers by JEL classification:
K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law
M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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  1. Brown, Stephen & Lo, Kin & Lys, Thomas, 1999. "Use of R2 in accounting research: measuring changes in value relevance over the last four decades," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 83-115, December. [Downloadable!] (restricted)
  2. Joos, Peter & Plesko, George, 2004. "Valuing Loss Firms," Working papers 562043, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  3. Wayne R. Landsman, 2002. "Has the Information Content of Quarterly Earnings Announcements Declined in the Past Three Decades?," Journal of Accounting Research, Blackwell Publishing, vol. 40(3), pages 797-808, 06. [Downloadable!] (restricted)
  4. Guenther, David A. & Maydew, Edward L. & Nutter, Sarah E., 1997. "Financial reporting, tax costs, and book-tax conformity," Journal of Accounting and Economics, Elsevier, vol. 23(3), pages 225-248, November. [Downloadable!] (restricted)
  5. Plesko, George & Mills, Lillian, 2003. "Bridging the Reporting Gap: A Proposal for More Informative Reconciling of Book and Tax Income," Working papers 4289-03, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  6. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-33, March. [Downloadable!] (restricted)
  7. Fama, Eugene F. & French, Kenneth R., 2004. "New lists: Fundamentals and survival rates," Journal of Financial Economics, Elsevier, vol. 73(2), pages 229-269, August. [Downloadable!] (restricted)
  8. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring. [Downloadable!] (restricted)
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