Page 595 - TaxAdviser_2022

accounts had similar after-tax values. made in recent years to more closely link
Researchers provide After controlling for participants’ risk taxable income to book income, and the
recently enacted Inflation Reduction
preferences, the authors found that,
valuable guidance compared with Roth account holders, Act of 2022, P.L. 117-169, includes a
on tax policy by tax-deferred account holders had higher 15% minimum tax for large corporations
that is based on adjusted financial state-
estimates of their future after-tax bal-
providing insight ances, allocated more of their account to ment income.
on potential policy the lower-risk, lower-return investment, to the AAA, which was published
In her Presidential Scholar address
and perceived less difficulty in meeting
changes as well as their after-tax goal for retirement sav- in the September 2021 issue of The
feedback on existing ings. These results are consistent with Accounting Review (Vol. 96, Issue 5),
policy. the authors’ hypothesis. Michelle Hanlon discusses several is-
Additional parts of the experiment
sues that are pertinent to such propos-
tested whether various interventions als. She notes that there could be full
mitigate individuals’ inclination to take linkage, where book income is used as
on less risk with a tax-deferred account. taxable income. There instead could
making the account’s after-tax value The authors found that tax-deferred be partial linkage, such as the busi-
less than the nominal value appearing account holders allocated more of their ness untaxed reported profits (BURP)
on a quarterly or annual account state- savings to higher-risk, higher-return adjustment that applied in the latter
ment. This future tax liability’s salience investments when their retirement sav- 1980s. Hanlon notes that the imple-
is weak for most individuals, which ings goal was stated in pretax dollars, mentation of partial or full linkage is
may cause them to overestimate their when they had to estimate their final more complicated than many people
after-tax retirement savings. Roth IRA tax liability, and when they were given realize because of such issues as net
accounts are not affected in this way feedback about their progress toward operating losses and controlled for-
because withdrawals from them gener- saving for retirement. The authors also eign corporations.
ally are tax-free. found that the effect was stronger when Hanlon reviews research on the
In their article published in the multiple interventions were applied si- financial reporting effects of linking
March 2021 issue of The Accounting multaneously. Tax advisers and financial book income and taxable income, such
Review (Vol. 96, Issue 2), Shane Stinson, planning professionals are well posi- as during the BURP adjustment’s
Marcus Doxey, and Timothy Rupert tioned to provide such interventions, and brief life and international differences
hypothesize that individuals’ inclination the results of the authors’ experiment in book-tax linkages. The evidence
to overestimate a tax-deferred account’s suggest that the interventions will have generally indicates that firms are more
after-tax value may cause them to be- beneficial effects. likely to alter their financial reporting
lieve that it will be easier to meet their to attain tax objectives when book-tax
future cash flow needs than is the case. ‘The Possible Weakening of linkages are stronger, and this leads to a
Such an individual therefore may see Financial Accounting From book income that is less informative for
less of a need to generate a higher return Tax Reforms’ capital market participants. While these
than does an individual holding a Roth The objective of financial accounting research results are not surprising to
account with the same after-tax value, is to provide information about a firm’s accountants, they seem to be underap-
so investments held in tax-deferred economic performance to shareholders preciated by the economists and lawyers
accounts may be lower-risk, and thus and other external stakeholders. The who advise policymakers. Hanlon notes
lower-return, than investments held in objective of the federal income tax is that there is not much research on these
Roth accounts. to raise revenue and to provide vari- financial reporting effects and advo-
The authors conducted an experi- ous economic incentives to taxpayers. cates for more of it.
ment to test this hypothesis. Participants Because these objectives differ, a firm’s Hanlon concludes that linking
allocated an account’s balance between book income, which is determined under taxable income more closely to book
two investments, where one of them had financial accounting rules, sometimes is income would be unwise because it
lower risk and a lower expected return greater than its taxable income, which likely would impair the quality of
than the other. Some participants had is determined under tax law. This out- financial reporting. The capital market
a tax-deferred account, while others come can seem inappropriate to many costs of such impaired quality are not
had a Roth account. The two types of taxpayers. Several proposals have been easy to discern but are nonetheless real.

www.thetaxadviser.com November 2022 53