The Relation Between Financial and Tax Reporting Measures of Income

Gil B. Manzon and George A. Plesko

No 4332-01, Working papers from Massachusetts Institute of Technology (MIT), Sloan School of Management

Abstract: We examine the magnitude and sources of difference between income for tax and financial reporting purposes using publicly available data from 1988 to 1998. We find evidence that the book-tax income spread has generally increased over time, but that a relatively small set of variables are able to explain this increase. We also find that these same variables explain a large percentage of the variation in the book-tax spread across firms. While neither supporting, nor disproving, the existence and growth in tax sheltering behavior, the results do suggest that financial statement-based measures of income have become less representative of firms' taxable income.

Date: 2003-06-02
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