EFFECTIVE TAX RATES FROM FINANCIAL STATEMENTS

Abstract

driving forces behind tax reform was the concern that many large corporations, and indeed industries, were not paying their fair share of taxes. Over the past several years, studies showing that many large companies pay little or no tax have been widely reported in the various media and quoted by politicians to illustrate the need to restructure our tax system. Specific provisions in the current tax reform proposals can be traced directly to this concern. For example, members of the tax-writing committees have repeatedly asserted the need for a strong minimum tax to ensure that all taxpayers pay some tax. As a result, the tax reform package under current consideration has a tough minimum tax proposal. Even more interesting is a provision in the bill passed by the Senate Finance Committee to treat one-half of the excess of book income over the alternative minimum taxable income base as a tax preference. The roots of this provision lie in the desire to tax economic income, while recognizing that the tax code does not adequately measure it. For the first time ever, a corporation's tax liability could depend on how its financial statement income is measured. Although this would impose pressure on the accounting rules, it is, politically, a very attractive idea. Members of Congress would be better able to answer questions from constituents and watchdog groups about a tax system that permits large profitable companies to pay no tax.