Accounting professors are pretty united in their opposition to taxing book income. But, accountants are not the only ones who have opinions in the academy about tax policy. Tax law professors often (more frequently than accountants, in my opinion) hold views on tax policy, and, I recently became very interested in what these views were on taxing book income. Some of these views are exceptionally well-informed (on many tax issues, more informed, in my opinion, than the opinions of accountants). With regards to the tax on book income, the only examples of tax law professors’ opinions on taxing book income came from a couple examples of very public support of taxing book income. In my mind, I imagined they all supported it. Do they?

Well, of course, I have no idea. I have no way to ask all tax law professors, or even to get a very representative sample. But, I decided to see what I could learn given the constraints I have. I went to the Tax Law & Policy eJournals on SSRN, and, quickly collected the email addresses of the authors that appeared to be affiliated with law schools that were authors of the most downloaded papers. I collected 50 addresses (it ended up being 51 for boring reasons). Reviewing the names ex-post, there are many notable tax law professors I know that were not asked. But, I did not add anyone, and just stuck rigidly to my initial methodology.  Not a perfectly scientific way, but, it should give me an idea whether the views are as unanimously in favor of the tax as accountants seem to be in opposing it, as was my prior.
I asked, “A minimum tax on financial statement income (book income) is currently part of the Build Back Better Act. Do you support this tax?” I hoped this was a pretty neutral way to ask about the tax. As of this writing, I got back 17 responses, so, likely not even enough to have even close to a representative sample. But, it is what it is. 11 were in favor of taxing book income in the BBB, and, 6 opposed it.

So, not unanimity!

But, certainly some supporters, with few folks who are not fans.

So, why do lawyers appear to have very different feelings on this tax than accountants? This is something I have long pondered. Some possibilities:

1. Differences in the value of the earnings signal generally (if tax lawyers think earnings are overlay managed already, or, are just inputs into a rigged capital system meant to benefit the wealthy, it’s not too costly to distort them more, if they believe that would happen at all (see #2 and 3))
2. Differences in opinion about how the tax will change the earnings signal based on exposure to the accounting literature (they simply have not seen the empirical evidence)
3. Differences in opinion about how the tax will change the earnings signal based on simple disbelief of the accounting literature in general, or, that it will apply this time specifically
4. Belief in the incorruptibility of FASB (I will add–this belief would exist while simultaneously believing Congress is too corrupted to be able to amend the tax code in other ways, and, simultaneously believing corporations are the ones corrupting Congress, but, that for some reason they will not exert influence over the FASB). Or, if they don’t think the earnings signal has value (#1), then, this corruption does not matter.
5. Differences in preferences for redistribution that has to be funded somehow (the more you value redistribution, the larger costs in terms of distortions you are willing to live with to fund that redistribution)
6. Differences in opinion about the baseline aggressiveness of corporations regarding their taxes (if you think firms extremely aggressive and not paying their current legal due, you might be willing to live with more distortion to get more revenue out of them if you imagined this tax would be more immune to manipulation (see #2 and 3)).
7. Tax lawyers are much more likely to obtain political appointments than tax accountants, and, supporting a tax that one’s political party supports may be required in order to signal orthodoxy (alternatively, you may get appointed because you actually support the same things as a party). Interestingly, of the hundreds of accounting professors I emailed a similar survey/request to, I got zero automated responses that the accounting professor was in DC serving a role in the administration. Of the 51 lawyers I emailed, I got back 2 such replies!
8. Differences of opinion about the feasibility of other alternatives to raising revenue from the same types of firms (which itself is based on different priors about the political process).
9. Something else

What do the lawyers themselves say are the reasons they favor, or do not favor, the tax? I also asked! Here are some samples of what the respondents say:

“Politics is the art of the possible. The provision need not be anywhere near my first choice for me to support it in the current constrained setting.”

“Although it would be preferrable to reduce the benefit of many tax preferences in the regular corporate tax, this is not feasible. Thus, a tax on book income is a reasonable 2nd best approach. However, there are design issues in the BBA that need to be addressed.”

“If I had all policy instruments at my disposal, and political constraints were nonbinding, would a 15% minimum tax on book income be the way that I’d raise the revenue to pay for other parts of BBB? Of course not. Capital gains changes (in particular, elimination of stepped-up basis) and an increase in the headline corporate rate would dominate. But if it’s a choice between the minimum tax with $300 billion to spend on climate change/child tax credit/universal pre-K/childcare vs. no minimum tax and $300 billion less to spend on all those things, I’d choose the minimum tax plus the $300 billion. Yeah, the minimum tax will introduce some distortions, but all non-lump sum taxes do, and the distortions strike me as worth the revenue/redistributive benefits here.”

My views on these excellent comments: I completely agree that taxes are created in a political landscape, and we can’t let perfection stop us from doing anything. But, if one really insists on raising more taxes from corporations, one could get more in taxes out of corporations in several different ways without increasing the statutory corporate tax rate (which politically looks tough right now), or taxing book income. This could involve, for example, a corporate AMT where the add-backs are the exact provisions that are causing firms with a lot of book income to have low tax liabilities. You could get to a very similar place, but, leaving book income out of the equation. Or, you could just put limits on how much of a particular deduction firms are allowed to take, just like republicans did with interest in the TCJA. This could be done inside, or outside, of a minimum tax framework. In other words, rather than the tax on book income being “a reasonable 2^nd best approach”, I assert there are other, alternative, less costly 2^nd best approaches.

The last quote is important—in the end, taxes are about trade-offs. So, for example, if you believe that taxing book income will damage the market signal provided by earnings, that is not to require opposition to the tax. Having an income tax on corporations at all hurts the market signal of earnings, as it requires the layering on of one of the most complex pieces of financial accounting rules, accounting for income taxes. Rather, you have to weigh the costs against the benefit of raising more revenue. How much do you value having a larger government that redistributes more? Some people put a very large positive value on that redistribution, and some, a negative value.

Personally, if I look at some of the biggest components of the Build Back Better Act as currently in place (and especially if you recognize things WILL be extended), I would just as soon do away with them, and, not tax book income. In other words, some of the things that we are buying with the revenue from taxing book income in the Build Back Better Act have, for me, a negative value. For example, one of the most costly components of the Act is increasing the cap on the state and local tax deduction, which primarily benefits wealthy people who are very geographically concentrated in California, New York, and New Jersey. I personally do not view the benefits to enriching these already wealthy people as greater than the potential weakening of the financial accounting signal. And even if you insisted that rich Californians, New Yorkers, and New Jerseyans needed this extra cash (say, for example, it is politically necessary to give them this massive handout to get the rest of the bill passed), as I mentioned, you can get it out of the same corporations as the minimum tax on book income would raise it from, without involving taxing book income.

Finally, as one commenter noted, it is true that “all non-lump sum taxes” produce distortions. Tax policy is not about eliminating distortions, but, minimizing them subject to some constraint. And, one way we think of minimizing these distortions is by picking a tax base that is relatively less elastic. Key in this framework is that financial accounting income is much more elastic than taxable income, which evidence we get from a paper by, interestingly, a professor at a law school. Indeed, my thoughts on this can be summarized by one of the anonymous comments left on my survey by a law professor:

“I prefer a minimum tax that expands taxable income without relying on financial accounting rules.”

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