Working Paper: NBER ID: w11067
Authors: 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.
Keywords: No keywords provided
JEL Codes: K34; M41; E62; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| conformity (D70) | reduced earnings management behavior (G38) |
| reducing complexity in reporting (C80) | lower compliance costs (Q52) |
| conformity (D70) | loss of valuable information for investors (G14) |
| conformity (D70) | persistence of tax avoidance strategies (H26) |