The Optimal Relationship Between Taxable Income and Financial Accounting Income: Analysis and a Proposal

66 Pages Posted: 27 Sep 2007 Last revised: 4 Apr 2008

See all articles by Daniel Shaviro

Daniel Shaviro

New York University School of Law

Date Written: February 2008


The persistence of the book-tax gap, or excess of companies' reported financial accounting income over their taxable income, suggests that accounting manipulation and tax sheltering remain significant problems, even in the aftermath of the "Enron era." Some have therefore suggested making the United States a "one-book" country, in which the same income measure would be used for both purposes. This Article offers the first systematic exploration of the optimal relationship between the two income measures, based on the distinct purposes they serve and the significance of two distinct sets of incentive problems: those pertaining to corporate managers, and to the political decisionmakers who make the rules.

Absent these incentive problems, the two ideal measures would differ, reflecting that allocating tax burdens is not the same exercise as informing investors. The incentive problems cut in favor of uniformity, however, by supporting the creation of a "Madisonian" offset between managers' and politicians' twin quests for high accounting income and low taxable income. But this offset has more promise as a device to constrain managers than politicians, given the difficulty of binding Congress and the existing partial insulation of accounting rules from direct political influence. In light of the political incentive issues, pure one-book and two-book approaches may both be inferior to partial conformity, such as that which would result from generally requiring a 50 percent adjustment by large, publicly traded companies of taxable income towards financial accounting income.

Keywords: tax policy, optimal taxation, financial accounting, tax-book gap, corporate governance, tax sheltering

JEL Classification: H20, H21, H25, H28, M40, M41, G30, G38

Suggested Citation

Shaviro, Daniel, The Optimal Relationship Between Taxable Income and Financial Accounting Income: Analysis and a Proposal (February 2008). NYU Law and Economics Research Paper No. 07-38, Georgetown Law Journal, Vol. 97, Available at SSRN: or

Daniel Shaviro (Contact Author)

New York University School of Law ( email )

40 Washington Square South
Room 314-B
New York, NY 10012-1099
United States
212-998-6187 (Phone)
212-995-4341 (Fax)

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
PlumX Metrics