by Calvin Johnson
Calvin H. Johnson is a Professor at the University of Texas Law School.
A prior version of this report was prepared for the 91st Annual Conference
of the National Tax Association in Austin, Texas and will be published
in the Proceedings of the conference. Material prepared for the conference
is used by permission of the National Tax Association.
There have been proposals over the years, Johnson explains, to use
income reported by corporations to their shareholders under Generally
Accepted Accounting Principles, or "GAAP," as the base for
computing corporate taxable income. Johnson argues against using GAAP
as a tax base. In many circumstances, corporations can underreport
their earnings without adverse nontax consequences. In other circumstances,
he argues, a tax on GAAP income would cause reported earnings to shrivel.
Corporations will replace reported earnings with footnote disclosures
or third-party rating standards or some other form of communication
that will be less efficient than reported earnings, but will not be
taxed. The shift away from reported earnings will damage the efficiency
of the stock markets, Johnson argues, without producing government
A tax on GAAP must be compared to a better alternative, Johnson says,
which is to tax a corporation on the change of its stock price, plus
the dividends it has distributed. Change in stock price is a sounder
tax base than GAAP, and Johnson criticizes GAAP as resting on bad
theory. A tax base equal to changes in stock price plus dividends
would be less sensitive to tax than GAAP, Johnson says. Johnson concludes
by listing the kinds of companies that would pay more tax under a
tax on change in share price than they pay either under current law
or under a GAAP tax.
Table of Contents
Bit of History 425
The Irony of Thor Power Tool
The Bragging Tax of 1986
The Troubles with a GAAP Tax
Immunity From Discipline