Discussion of Income Tax Implications of Various Methods of Accounting for Changing Prices

Abstract

The taxation of corporate income in an environment of changing prices is an important and timely issue. Notwithstanding the specific title selected by Professors Davidson and Weil (D-W), their paper appears to have two major, but interrelated objectives. The first is to report the results of an empirical investigation into the likely impact of alternative reporting frameworks for recognizing changes in specific, as well as general prices on the accounting and taxable incomes of seventysix industrials and public utilities. Based on these results and other preselected criteria, the authors' second objective is to formulate a set of policy recommendations for corporate income taxation under conditions of changing prices. Aside from the direct relevance to authorities responsible for tax policy decisions, D-W's results and related methodology should be of interest to capital market agents and academic researchers, among others, who wish to assess the effect of changing prices on corporate profitability. Unfortunately, however, my evaluation of the paper (in its present form)' leads me to believe that it does have some significant, though not necessarily insurmountable shortcomings. Collectively, these deficiencies appear somewhat to question the potential usefulness of the results and conclusions reported therein. The remainder of this critique provides an elaboration. First, issues pertaining to D-W's empirical results