Is it Time to Liquidate Lifo?
Posted: 2 Nov 2006
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: Suggested Citation