Congress Holds the Power to Tax, Not to Decide Accounting Rules

When corporations calculate their “income,” they report one number to the IRS and a different number to investors (sometimes, very different). There are many reasons for the discrepancies, but the underlying principle is that tax rules and financial reporting standards serve distinct, essential purposes and should be kept separate.

These independent systems have worked well, but that hasn’t stopped various attempts over the years to fix what isn’t broken.

The latest development comes from the July appropriations bill passed by the House Appropriations Committee. The bill includes a provision to withhold funding from the US standard setter, the Financial Accounting Standards Board, unless it withdraws a tax disclosure standard that goes into effect next year.

This is an extraordinary attempt by Congress to intervene directly in the independent standard-setting process.

To understand the danger, let’s review the tax and financial reporting systems in the US. Tax rules are set by Congress and administered by the IRS. They’re designed to raise public revenue, support policy objectives, and ensure compliance.

Financial reporting rules, on the other hand, are governed by the FASB and aim to give investors an accurate, consistent, and comparable view of companies’ economic performance. The two systems may overlap in subject matter, but their objectives are fundamentally different.

For example, Congress may want to encourage investment by allowing companies to immediately write off (against their taxable income) the full cost of long-term investments. At the same time, these investments hold considerable economic value. The financial accounting income reported to the public is designed to reflect this reality.

Businesses and investors benefit from having a consistent set of reporting rules whose sole purpose is to provide useful information. Congress, however, is anything but consistent. Election cycles drastically change policy agendas and priorities. So the more Congress has a hand in deciding financial reporting rules, the less consistent and useful those rules will be.

Let’s take a look at the standard that this bill targeted. It requires greater footnote disclosure of tax expenses, particularly in reconciling financial accounting income to taxable income and breaking out tax expenses by jurisdiction.

The changes aim to help investors better understand a company’s tax risk. The standard doesn’t prescribe tax policy or affect how much tax a company pays. It simply improves the quality and consistency of financial disclosures—aligning with the FASB’s core mission.

That isn’t to say the criticisms of this standard are unmerited. Corporations, accounting firms, and others have raised reasonable concerns about the operational burden, the risk of competitive harm, and the potential for disclosures to be misunderstood or misused.

But similar complaints were made when FASB introduced new rules for tax uncertainty nearly two decades ago. Despite the initial pushback, transparency ultimately improved, and companies continued to operate.

Unfortunately, the erosion of boundaries between our tax and financial reporting systems has been a bipartisan effort.

Republicans have joined the fray with this appropriation bill. Democrats have long sought to impose taxes on accounting earnings, driven by outrage that large corporations sometimes report big profits to shareholders while reporting losses to the IRS—without focusing much on the underlying reasons, which are usually benign.

Their wish was granted with the corporate alternative minimum tax as part of the 2022 Inflation Reduction Act—one of the most complicated tax laws of all time and unlikely to raise much revenue.

Turning the standard-setting process into a political battleground carries real risks. When Congress or any political body tries to dictate accounting standards—whether by withholding funding or imposing taxes based on book income—it distorts the purpose of financial reporting itself.

Financial statements lose their credibility if they’re perceived as tools for advancing partisan goals rather than objective depictions of a firm’s financial position. Corporations and investors lose the reliability and consistency that buoy our capital markets.

For decades, this system has delivered high-quality information that enables efficient investment, global competitiveness, and financial stability. It isn’t broken—and trying to fix it through political interference only threatens to undermine what has long worked well.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Andrew Belnap is an assistant professor of accounting at the McCombs School of Business at the University of Texas at Austin.

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