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

Michelle Hanlon and Terry Shevlin

No 11067, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E62 G12 K34 M41 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-acc, nep-fin, nep-law and nep-mac
Note: PE
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Citations: View citations in EconPapers (33)

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