Transitional Issues in Fundamental Tax Reform: A Financial-Accounting Perspective

Abstract

In recent years, a number of legislative proposals have been introduced to replace the federal income tax system with a consumption-based tax system. In the 104th Congress, these included the flat tax, introduced by House Majority Leader Dick Armey, and the National Retail Sales Tax (RST), introduced by Reps. Billy Tauzin and Dan Schaefer. Recent analyses of tax restructuring proposals have suggested that transitioning from the income tax system to a new tax system could cause substantial changes to taxpayer wealth. In this paper, we discuss financial accounting for income and consumption taxes, and we examine the potential effects of tax restructuring on the book values of corporations. The paper presents estimates of the financial statement effects of replacing the corporate income tax with the National RST, or alternately the flat tax, for a sample of 96 large corporations in 1995.