The Relation Between Financial and Tax Reporting Measures of Income
Author(s)Manzon, Gil B. Jr; Plesko, George A.
We examine the magnitude and sources of difference between income for tax and financial reporting purposes using publicly available data from 1988 to 1998. We find evidence that the book-tax income spread has generally increased over time, but that a relatively small set of variables are able to explain this increase. We also find that these same variables explain a large percentage of the variation in the book-tax spread across firms. While neither supporting, nor disproving, the existence and growth in tax sheltering behavior, the results do suggest that financial statement-based measures of income have become less representative of firms' taxable income.
MIT Sloan School of Management Working Paper;4332-01