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


Michelle Hanlon


Massachusetts Institute of Technology (MIT) - Sloan School of Management

Terry J. Shevlin


University of California-Irvine

January 2005

NBER Working Paper No. w11067

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.

Number of Pages in PDF File: 45

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Date posted: February 16, 2005  

Suggested Citation

Hanlon, Michelle and Shevlin, Terry J., Bank-Tax Conformity for Corporate Income: An Introduction to the Issues (January 2005). NBER Working Paper No. w11067. Available at SSRN: http://ssrn.com/abstract=652985

Contact Information

Michelle Hanlon (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States
617-253-9849 (Phone)
Terry J. Shevlin
University of California-Irvine ( email )
Paul Merage School of Business
Irvine, CA 92697-3125
United States
206-550-9891 (Phone)
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