Warren’s corporate tax ‘solution’ is fundamentally flawed – Michelle Hanlon and Jeff Hoopes

MIT Sloan Professor Michelle Hanlon

MIT Sloan Professor Michelle Hanlon

From The Hill

Sen. Elizabeth Warren (D-Mass.) recently proposed a tax on financial accounting income, which she calls her “Real Corporate Profits Tax.” This is a bad idea that will create many problems.

Warren is correct that public companies in the U.S. calculate income under (at least) two different sets of rules.

First, there are Generally Accepted Accounting Principles (GAAP) written by the Financial Accounting Standards Board (FASB). These rules are meant to reflect the economic performance of the business so that shareholders, among others, can evaluate the firm and its management.

Second, corporations calculate profits according to the Internal Revenue Code, created by Congress, to determine taxable income. The Internal Revenue Code is meant to raise revenue for the government, and in some cases, to change the ways companies behave — encouraging investment and research and development (R&D), for example.

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