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Congress Should Listen to the Right Experts—Taxing Book Income is a Bad Idea

Write-Off: The Tax Blog

People often form strong, uninformed opinions on issues that actually require expertise to really understand. Tax policy is no different. One of the common laments about the Tax Cuts and Jobs Act (the TCJA–the Trump tax cut) in the academic tax circles in which I work was that it was all done behind closed doors, with little input from experts. In 1986 when the code was previously majorly overhauled, there were many hearings, testimonies, and more than a year of back and forth before the bill was passed. The TCJA was passed in a few short months, with little external expert input. Many in the tax community mourned the lack of dialogue about the TCJA. But, with all the handwringing about the lack of expert input about the issues back then, Democrats seemed bound and determined to repeat the experience again, pushing through an incredibly complex piece of legislation before it is well understood, or well vetted. The posterchild for this problem is the minimum tax on book income.

This tax would tax the financial accounting income of companies. Companies compute their profits in two ways. One for shareholders, according to financial accounting rules. And, anther one for the IRS, following the Internal Revenue Code that Congress writes. Shareholder need to know how the company is actually doing so they can make investment decisions, and, the IRS needs to know taxable income and tax liability so they can help fund a country. The two systems have fundamentally different goals, and therefore, produce different income numbers. The financial accounting version of income was never meant to be taxed, and if taxed would likely cause a host of unintended consequences. Recently, my coauthor, Michelle Hanlon, and I sent out a letter to our academic accounting colleagues, asking if they agreed this tax on book income was something to be concerned about. Frankly, among people as deep into nuance and detail as accounting professors are, you find few issues on which we all agree. Yet, more than 280 people have signed the letter, saying this tax is very concerning. These are not crazy conservatives or anti-government anarchists—these are accounting professors from across the political aisle who understand financial accounting rules. They understand the purpose of the tax code, and, who really believe that co-mingling the two accounting systems is concerning.

Most tax law writing gets done by lawyers, and the empirical support for these taxes often comes from economists. It is not surprising that you can find individuals in these two groups that will support a tax on book income (although many others from this group also oppose it). Why? Because these groups simply don’t understand financial accounting, and, they imagine taxing financial accounting values will be simple. It won’t be. People who actually understand financial accounting need to be consulted to help understand this proposal. The tax accounting system and financial accounting system are different systems, with different ways of keeping score. You would not bring in a hockey expert for a dispute in scoring on a tennis match. Listen to the right experts, especially financial accountants—taxing book income is a bad idea.

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