Accrual Accounting and Tax Revenues
Speaker
Abstract
| We investigate whether the use of accruals in the definition of taxable corporate income affects variability and magnitude of corporate tax revenues. Accruals alleviate timing and matching problems in cash flows and are expected to reduce volatility of taxable income and affect the timing of income recognition. However, this effect can be mitigated or even reversed due to reporting discretion inherent in accruals. Using an OECD sample of 26 countries, we construct a tax accrual index that counts accrual norms required by the tax code. We find that corporate tax revenues are less volatile in high accrual countries. As accruals affect the timing of income recognition, we find that high accrual countries collect relatively higher tax revenues when corporate sector grows, and relatively lower revenues when corporate sector contracts. Our results point to macroeconomic consequences of using accruals in the definition of taxable income and have implications for understanding the effects of tax reforms and book-tax conformity. |
| Contact information: |
| Paolo Perego |
