Is it Time to Liquidate Lifo?

Posted: 2 Nov 2006

See all articles by Edward D. Kleinbard

Edward D. Kleinbard

University of Southern California Gould School of Law

George A. Plesko

University of Connecticut School of Business

Corey M. Goodman

New York University (NYU)

Abstract

We discuss the role and economic significance of the last-in, first-out (LIFO) inventory accounting method in the current tax system, both as a matter of practice and of policy. After examining the traditional justifications for LIFO we argue that LIFO, as it is administered, is inconsistent with both its own objectives and with broader income tax principles. LIFO, as practiced in the United States today, benefits only a narrow range of businesses; they in turn rely on it entirely for its tax benefits, rather than to complement normal business operations. Further, the evidence on LIFO suggests that it creates inefficiencies in business operations, and may facilitate earnings management. We conclude that any discussion of fundamental tax reform must consider the repeal of LIFO.

Keywords: LIFO, FIFO, inventory accounting, tax accounting, inventory, tax policy

JEL Classification: H25, M41, M43, M44

Suggested Citation

Kleinbard, Edward D. and Plesko, George A. and Goodman, Corey M., Is it Time to Liquidate Lifo?. Tax Notes, Vol. 113, No. 3, pp. 237-253, October 16, 2006. Available at SSRN: https://ssrn.com/abstract=941201

Edward D. Kleinbard

University of Southern California Gould School of Law ( email )

699 Exposition Boulevard
Los Angeles, CA 90089
United States

George A. Plesko (Contact Author)

University of Connecticut School of Business ( email )

School of Business
Storrs, CT 06269-2041
United States
860-486-6421 (Phone)

Corey M. Goodman

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

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