Final answer:
Permanent book-tax differences include income items for book purposes that will never be taxable. These differences are crucial as they result from transactions that are recognized in financial statements but never in tax returns, and they do not reverse over time.
Step-by-step explanation:
Permanent book-tax differences are specific items in financial accounting that will never affect taxable income, as opposed to temporary differences that will eventually reverse over time. The answer to the student's question is (b) include items of income for book purposes that will never be items of income for tax purposes. Permanent differences arise because some items are recorded in the financial statements but are excluded from tax returns or vice versa. These can be either favorable or unfavorable and they do not reverse like temporary differences do. An example of a permanent difference is a fine or penalty paid by a company that is recorded as an expense in accounting books but is not deductible for tax purposes.
Changes in the tax code can have significant impacts on the distribution of income and aggregate demand. A permanent tax cut or spending increase is expected to stay in place indefinitely, whereas a temporary tax cut or spending increase lasts only for a short time before reverting to the original level. This distinction is critical because individuals and firms tend to respond more strongly to permanent fiscal policy changes than to temporary ones. The economic behavior influenced by these policy changes is at the heart of many political debates about taxation.