Confidentiality of Corporate Tax Returns

Grassley’s suggestion of making corporate tax returns public, and the SEC’s and Treasury Department’s responses, prompted much discussion among scholars, tax practitioners, government policy makers, and the media. Many of the key issues are examined in detail in the other papers prepared for this conference. This paper offers an overview of the issues by providing current and historical perspectives from the fields of accounting, economics, and law.
We proceed as follows. In section II the paper briefly describes the political and economic context for Grassley’s letter and reactions to his letter. Then, in section III we summarize the history of tax return disclosure. In section IV we evaluate claims made by proponents and opponents of tax return disclosure. In doing so, we consider the possibility of making corporate tax returns public in their entirety, but focus on other forms of disclosure. One possibility is to make public only certain portions of corporate tax returns or to disclose only the bottom line tax liability of each corporation. In his letter to the SEC, Grassley allowed for this possibility by suggesting that “a summary version” of returns be made available to government regulators and the public. A related alternative is to make public the Schedule M-1 (or a summary version), the tax return schedule that reconciles taxable income with the accounting earnings that are computed for financial reporting purposes. Grassley himself raised this possibility in a second letter to the SEC and Treasury Department, and some legal and academic commentators have also suggested that an expanded version of the current Schedule M-1 be made a public document. (Kleinbard and Canellos 2002; Mills and Plesko 2003) A third alternative, mentioned by then-Treasury Secretary Paul O’Neill in his reply to Grassley, is to improve the tax reporting on a company’s financial statements—either through voluntary disclosure by firms or mandate by the Financial Accounting Standards Board (FASB) or the SEC. Finally, a broader policy response to the concern over opaque financial and tax reporting would be to make taxable income more closely conform to accounting income. Which, if any, of these alternatives is good policy depends in part on the goals of increased disclosure, which this paper will address.