The Nature of Taxes and the Matching Principle.

Abstract One of the accounting practices questioned today concerns the reporting of Federal income taxes. From the theoretical aspects of the nature of taxes, the matching principle, and the going concern concept, the arguments for tax allocation appear to be without adequate support. However, the arguments against a given accounting practice must be supported by empirical evidence as well as theoretical analysis. Empirical evidence relates to the existence of results from the practice of accounting that meets the basic objective of accounting information-fairness to all parties. A cursory review of a number of major corporate balance sheets indicates, as one would expect, that the deferred Federal income tax reserve account is becoming embarrassingly large. This reserve typically is disclosed on the right hand side of the balance sheet as a deferred credit or in the twilight zone under the caption reserves. It is not specifically classified as part of the interest of owners, creditors, employees, government or any other group. Those firms electing not to use tax allocation procedures do not reflect a reserve in their balance sheet. The reported earnings in their income statement, therefore, are higher than for the firms electing to normalize earnings. Since consistency does not exist on an inter-industry or intra-industry level, the problem of comparing financial statements is augmented.