The Theoretical Analysis And Empirical Study Of Income Tax Accounting Choice

With the deep going of economic system reform and the establishment of modern corporation system and capital market, Chinese corporations own the probability and necessity of accounting choice. Among numerous accounting policies, income tax accounting is an important one. A study of income tax accounting choice is done, theoretically and empirically, in this dissertation In the first part of this dissertation, the author analyses determinants of accounting choice with contract theory. Since a corporation is a nexus of contracts, in order to supervise constitution and executer of contracts, every part of contract relations requires the use of accounting data; as a result, accounting becomes a part of contract. Different accounting policies show different contract relations, and process of accounting is virtually process of accounting choice, so it is necessary for company managers to choose accounting policies. Then what are determinants of it? Three famous hypotheses—bonus plan hypothesis, ratio of liability to equity hypothesis and business scale hypothesis—have been made by Prof. Watts and Zimmerman. Three contract relations—reward contract, debt contract and political cost— related to the three famous hypotheses, are addressed in this article. Conclusions of this part are, when income lines between upper limit and lower limit of bonus plan, managers choose those policies that can increase income, while when out of the two limits, choose policies that can reduce income; managers only choose policies to increase income because of debt contract; and mangers in big companies prefer polices to smooth income on reason of political cost.In the second part of this dissertation, the author studies income tax policy. Separation of accounting and tax leads to permanent difference and timing difference; and different treatment to timing difference leads to two different accounting method: tax payable method and tax effect accounting method. After study, a conclusion is drawn that most corporations choose policy of tax effect accounting method to smooth income.In the last part of this dissertation, the author, employing method of multiple linear regressions, performs an empirical research of a sample of 27 enterprises and their partnerships in Chinese security business, and finds reasons to choose method of tax effect accounting. The conclusion is that reasons are political cost, range of income fluctuant and book keeping cost.