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Research
Mar 29, 2021

Financial Accounting Income Should Not Be Included as Part of the Tax Base: Statement for the record, U.S. Senate Committee of Finance

Statement

Recently proposed tax policies have financial accounting income (GAAP income, or book income) serve as part of the tax base. These proposals range from a flat tax on book income for corporations above a certain size, to using book income as part of a minimum tax for corporations above a certain size.

We oppose including financial accounting income in the tax base. Our opposition stems from (a) the academic literature in accounting, which identifies clear negative effects associated with taxing financial accounting income; and (b) additional negative effects, though not yet empirically tested, which seem highly plausible given what we do know about incentives faced by corporations.

In short, including financial accounting income in the tax base will result in worse financial information for investors and less efficient tax collection, economically disadvantage companies based in the United States, politicize accounting standards, and require highly complex implementation, which may undermine the intention of current proposals. These arguments can be further understood below.


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