Celia Whitaker (Sullivan & Cromwell, New York) has published How to Build a Bridge: Eliminating the Book-Tax Accounting Gap, 59 Tax Law. 981 (2006).  Here is part of the Introduction:

This Article argues that the asserted benefits of the book-tax divide no longer justify its substantial costs in terms of tax compliance, revenue collection, economic policy, and the perceived unfairness of the U.S. income tax laws. As Treasury, Congress, and numerous scholars and practitioners have recognized, when the tax consequences of a transaction are severed from the economic consequences, the results can be pernicious. The book-tax divide in particular opens an enormous gap within which corporations seeking to reduce tax liabilities can shelter reported financial income. To the extent that they do, the government and citizens are the victims. The resulting accounting gimmicks can often create a tax shelter for sophisticated taxpayers to reduce their tax liability—increasing the burden that the rest of the citizens must bear. Capital market investors also fall prey to the book-tax divide, since it creates opportunities for businesses to mislead shareholders and investors about a firm’s actual economic health. Moreover, as discussed further below, the complexity of maintaining two separate sets of books (three for those firms potentially subject to the corporate alternative minimum tax) generates tremendous compliance costs and incentives for cutting corners.

This Article, in contrast, considers that neither the tax system’s primary goal of raising revenue nor the financial accounting system’s primary goal of providing investor information would be compromised under a system of near-total accounting conformity. To be sure, under a radically revised accounting system such as the one proposed herein, legislators will have to give up the myriad tax preferences that currently litter the Code. The starting point for taxable income will be financial income as reported to investors, which should ideally be a close approximation of economic income. Then, a few of the most important tax provisions—for example, the credits for research expenses and for foreign income taxes paid—should be retained as selected departures from reported financial income. But the scale and scope of those departures will have to remain limited to prevent erosion of the system. This Article will argue that the current Schedule M-3, the form upon which corporations reconcile financial statement income to taxable income, can be used as a template for such a system.

A secondary, more recently voiced objection to book-tax conformity concerns the potential loss of valuable information contained in having two sets of data. Yet the pathologies of the current system—tax shelters, financial misrepresentations, loss of taxpayer confidence, and high compliance costs—far outweigh any benefits achieved from the comparison. Moreover, those benefits are largely academic ones for the consumption of economists and tax professors; how many investors are going to sit down and compare a corporate tax return against a financial statement, with each document numbering perhaps into the hundreds of pages?

Finally, even those who might favor book-tax conformity as an abstract concept one day might ask, why now? The answer, if not found in the increasingly alarming data regarding tax and accounting fraud, lies in the corridors of power in Washington. Tax reform will be a hotly contested issue in the mid-term congressional elections of 2006, as well as the presidential election of 2008. The need for tax reform is there. If anything is going to be accomplished, now is the time to do it.

Whatever shape the reform proposals will take in the closing months of 2006, the Bush administration has made clear its intent to lower corporate tax rates. Already in the American Jobs Creation Act of 2004 (AJCA), Congress lowered the top rate on domestic manufacturing and small corporations and extended the liberal section 179 rules that allow small businesses to expense many otherwise depreciable investments. In the conference report, legislators noted that “[t]he conferees . . . expect that the tax-writing committees will explore a unified top corporate tax rate in the context of fundamental tax reform.” In other words, a unified and lower corporate tax rate designed to help U.S. multinationals compete on a global scale is on the agenda.

In an age of soaring federal deficits, and given the political imperative of revenue neutrality, any such rate reduction must be offset by base broadening measures. Modified book-tax conformity would achieve the base broadening objective by disallowing the vast majority of tax preferences (relative to financial accounting treatment) for corporate business transactions. Moreover, the present book-tax difference provides a harbor for abusive tax shelters that would be swept away in a system of near uniformity of accounting standards. Such a change would help ensure that revenue neutrality would not require more politically difficult increases in personal income taxes (another area in which the second Bush administration wants to make permanent rate cuts) and would help remedy the perceived inequities of the corporate tax.