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

Author

Listed:
  • 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.

Suggested Citation

  • Michelle Hanlon & Terry Shevlin, 2005. "Bank-Tax Conformity for Corporate Income: An Introduction to the Issues," NBER Working Papers 11067, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11067
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    File URL: http://www.nber.org/papers/w11067.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Mills, Lillian F. & Plesko, George A., 2003. "Bridging the Reporting Gap: A Proposal for More Informative Reconciling of Book and Tax Income," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(4), pages 865-893, December.
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    6. Plesko, George A., 2004. "Corporate Tax Avoidance and the Properties of Corporate Earnings," National Tax Journal, National Tax Association;National Tax Journal, vol. 57(3), pages 729-737, September.
    7. Hanlon, Michelle, 2003. "What Can We Infer About a Firm’s Taxable Income From Its Financial Statements?," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(4), pages 831-863, December.
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    13. Lenter, David & Slemrod, Joel & Shackelford, Douglas A., 2003. "Public Disclosure of Corporate Tax Return Information: Accounting, Economics, and Legal Perspectives," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(4), pages 803-830, December.
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    Cited by:

    1. Steijvers, Tensie & Niskanen, Mervi, 2014. "Tax aggressiveness in private family firms: An agency perspective," Journal of Family Business Strategy, Elsevier, vol. 5(4), pages 347-357.
    2. Jesse Edgerton, 2011. "Investment, accounting, and the salience of the corporate income tax," Finance and Economics Discussion Series 2011-20, Board of Governors of the Federal Reserve System (U.S.).
    3. Evers, Maria Theresia & Meier, Ina & Nicolay, Katharina, 2016. "Book-tax conformity and reporting behavior: A quasi-experiment," ZEW Discussion Papers 16-008, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

    More about this item

    JEL classification:

    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - 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; Trading Volume; Bond Interest Rates

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