Response to Everson

In an earlier posting, here, I noted Commissioner Everson's March 27 suggestion that public disclosure of certain corporate tax return information would further tax law compliance.  Everson has connected the need for greater transparency in part to the discrepancy between financial statement reporting and tax reporting that creates an inherent tension between increasing book profits and decreasing taxable income.  See this March 14 speech before the National Press Club.

Senator Grassley, chair of the Senate Finance Committee, is apparently interested in developing legislation to provide greater transparency.  See this April 3 story in the Daily Tax Report.   Similarly, practitioners Peter Canellos of Wachtell, Lipton and Ed Kleinbard of Cleary, Gottlieb have suggested that the Schedule M-3 reconciliation of book-tax numbers, and specific information relating to cash taxes paid, should be made available to the public (perhaps as part of the regular SEC filing of public companies).  Id.

Many tax practitioners, however, have responded negatively to Everson's suggestion, asserting that disclosure might actually increase noncompliance while negatively impacting U.S. corporations' competitiveness.  Id.  They suggest that disclosure of respected companies' aggressive tax strategies will result in a race to the bottom in which other companies adopt strategies already employed by their competitors, or companies might disguise strategies in order to avoid bad publicity.  Id.

The arguments about harm to competitiveness seem to be overstated.  Public corporations already are required to share considerable tax information through the SEC filing requirements.  And while the race-to-the-bottom concern is real, transparency should, on balance, encourage better compliance rather than fostering greater compliance failures.  If corporate return information is released, along with a clear report on cash taxes paid and a reconciliation of taxes paid to financial statement tax provisions, the public will be able to see whether corporations that make huge profits are carrying a fair share of the tax burden.  Corporate social responsibility has received considerable attention in recent years, and the shaming effect of public scrutiny of actual tax payments can be significant.  See my article "Putting SEC Heat on Corporate Tax Shelters, available here on SSRN.