Corporations may use different accounting techniques for tax purposes and reporting of financial information to investors. In several scandals, corporations inflated earnings to win the favor of investors. According to the Brookings Institution, "One underlying concern was that at the same time companies were overstating their revenues for financial accounting purposes, they were understating their income for tax purposes."
The Best Disinfectant
Corporate tax returns are not public records. They aren't even available to certain government regulators. It is also difficult to tell how much a company paid in income taxes from its financial disclosures. In 2003, U.S. Sen. Charles Grassley, R-Iowa, recommended that government alter its regulations to make corporate tax records publicly available. The theory was that public disclosure would help alert the public to what a paper from the Brookings Institution called "the widening spread between aggregate book and taxable income in recent years."
It wasn't always the case that corporate tax returns were secrets. According to an essay in the New York Times by Anna Bernasek, for much of the 19th century and part of the 20th century, tax returns were publicly available. Newspapers even reported on the tax liabilities of some of their readers. Bernasek noted however, that aversion to making tax records public rose in 1976 in response to the Nixon administration's use of the records to harass political enemies.
Modes of Disclosure
In debates following Grassely's 2003 request to make tax returns public, there were several suggestions. Some wanted to require corporations to file "pink slips," which contained an outline of the corporation's liabilities reported to the IRS. Others have called for disclosure of a corporation's M-1 Form, which is a schedule that reconciles income as reported for tax purposes with income as reported to investors. Others have called for corporations to disclose federal tax liability on their filings with the Securities and Exchange Commission.
According to a report from the Brookings Institution, corporate tax information is public record in Japan, Norway, Sweden and Finland. All of them limit the amount of information a corporation must disclose. In Japan, the records are public only if the corporation reports more than approximately $330,000—40 million yen—in taxable income. Finland has the most robust corporate tax disclosure. It makes available information on taxable income, capital income and total taxes payable. Finnish companies also disclose reconciliations between book income and tax income.
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