Tax and Book Income Essay

Tax and Book IncomeINTRODUCTION            Income accounted to depositors or shareholders are termed book income while taxable income is an income accounted to the government. Specifically in the United States, these two economic terms are used as alternative actions of the US corporate economic performance conferred in latest findings, scholarly articles and by US lawmakers (_____, 2004-2005).LITERATURE REVIEW            The main difference between book income and taxable income in terms of assessing economic performance is the ‘mandated rule’ error which contains more than book income. Lawmakers in particular do not assess performance rather they pass tax rules for the purpose of raising revenue and motivate behavior in paying taxes. On the other hand, taxable income contains a lesser amount of ‘managerial bias’ error compared to book income. This scenario is cause by the predisposition of the managers to the rules. In my opinion the difference between taxable income and book income can be explain by its translation into operating cash flows, book and tax accruals (accumulation).

Recent development in research found out that tax accruals gain explanatory/descriptive power intended for yearly stock returns with a percentage increase to operating cash flows and book accruals. Comparatively, book accruals have more explanatory/descriptive power than tax accruals. In 1997-2001, the explanatory power of book accruals declines significantly to tax accruals (Desai, 2002).            Also, I think that there should be a difference between tax and book income because tax accruals gives explanation on returns better than book accruals. In application, these concerns lawmakers to policy debates regarding the importance of book income specifically in 1990’s.ReferencesReconciling Corporation Book and Tax Net Income, Tax Years 1995-2001.  (2004-2005). IRS, Statistics of Income Winter 2004-2005 Bulletin, Publication 1136.

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Desai, M. A. The Divergence between Book and Tax Income. (2002). Harvard University and NBER. 


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