As Congress engages in its latest battle over federal spending and observers wonder whether it will lead to a government shutdown, keep your eye on policy changes buried deep in the House Appropriations Committee’s spending bill. One is a provision that effectively would allow corporations to continue to hide important details about how much they pay in taxes to federal, state, and local authorities in the US and to foreign governments. 

Good tax policy requires transparency. This measure would keep the public and even lawmakers themselves largely blind to the taxes big US corporations pay.

For years, investors, analysts, and policymakers have been frustrated by the lack of detailed corporate reporting on their tax payments. This is especially true of multinationals that take advantage of overseas havens to sharply reduce their taxes.  

In response, the Financial Accounting Standards Board (FASB) in 2023 approved new rules requiring corporations to annually disclose more information to shareholders about the taxes they pay. But if enacted, the House Republicans’ appropriations measure would kill those rules, though its fate is uncertain.  

Accounting changes

The new accounting changes were supposed to start appearing in this year’s annual reports to the Securities and Exchange Commission and shareholders. They require firms to report to shareholders more specific tax information, breaking out amounts paid to state, local, and federal authorities, and by country for foreign tax payments. 

Currently, corporations report something called “provision for taxes.” This is not what they paid for a given tax year, but their best estimate of what they will owe. Often that liability is deferred or a firm may report paying taxes in one year on income earned in a prior year.

As a result, it is difficult, if not impossible, to determine a company’s effective tax rate, the amount paid as share of any given year’s earnings. 

In addition, corporations report little about where taxes are paid. They separate US taxes from foreign taxes but provide little country-by-country detail. 

A congressional cudgel

FASB is trying to improve tax reporting. It is a private non-profit organization that, as its name describes, sets accounting standards for publicly traded companies. It is funded through fees paid by these firms and subscribers to its various publications. 

While FASB gets no federal money, Congress has broad oversight authority over the organization due to its close relationship to the SEC. The House Republicans’ spending bill would use that power as a cudgel, halting congressional approval of FASB’s budget (see page 108) until the accounting agency repeals its new disclosure rules. 

The House Republicans move is broadly consistent with President Trump’s views about corporate transparency. This week he urged the SEC to reduce corporate financial reporting from quarterly to semi-annually. In his first term, he proposed abolishing some shareholder disclosures entirely.

While Trump says less transparency would reduce paperwork for corporate executives, it likely would discourage equity investors and motivate lenders to raise interest rates in the face of uncertainty about the financial health of borrowers.

Consequences for policy

But lack of information about corporate tax liability would have even broader implications for policymakers. 

Some corporations that successfully avoid taxes and their congressional allies may prefer less transparency. After all, it might help weaken arguments for higher corporate taxes since critics will lack sufficient information to credibly complain that big corporations pay little or no tax. Absent hard data, corporations can claim their disclosures are being misread. 

But a lack of reliable information blinds Congress as it makes decisions about tax policy. Without better reporting, lawmakers and analysts will have to act with incomplete knowledge, essentially guessing effective tax rates based on limited and sometimes misleading reporting. While a handful of lawmakers can see actual corporate tax returns, which do show detailed payment information, only rarely can the entire Congress access returns.

Having more detail about corporate tax payments is especially important now. For example, as the US and foreign governments squabble over how US multinationals should be taxed, accurate information about how much these firms pay and to whom would be useful for policymakers around the world as well as shareholders and the public.

And given the massive and growing budget deficit, it is not hard to imagine a time in the near future when Congress and a president will be looking to raise corporate taxes. Knowing more about how much corporations pay under current law would be useful.

Due to the increase in partnerships and other forms of business ownership, the tax liability of big multinationals is less important than in the past. But it still matters. And shareholders, policymakers, and taxpayers should know as much as possible about what these firms pay and to whom.