Inflation Tax and LIFO Accounting

Americans concerned with their level of taxation may be overlooking a significant but hidden form of taxationinflation. This may be difficult to grasp because inflation doesn’t resemble other taxes such as income tax or sales tax. Additionally, money lost because of inflation doesn’t appear to go right to the authorities. Finally, the elected government does not mandate inflation like they do additional taxes. Consider the following example. First, let’s say that at the year 2000 the cost of an Accounting textbook is 100. A student buying this textbook in 2010 is spending $10 that wouldn’t need to have been paid in 2000 as a consequence of inflation. What makes this $10 rise in cost a form of taxation is the simple fact that the Federal Reserve, part of the government apparatus, impacts the inflation rate by controlling the money supply. When the Federal Reserve makes more money available, this leads to higher prices for customers which although hidden should be thought of as a tax. This phenomenon is known as inflation tax.

Some might argue that inflation affects the currency uniformly, so the increase in prices due to inflation is accompanied by a rise in income, but that is not accurate. To keep the example from above, let’s say the student purchasing this textbook was saving up for school since 2000. The money that has been spent in 2000 to cover college costs is worth less in 2010. So while the student’s income could be higher in 2010, any money spent out of their savings will probably be exposed to this invisible tax. Inflation tax impacts all people and businesses, particularly those with money based primarily in cash. Money is affected because unlike other investments, so it doesn’t have the chance to grow. So stuffing money under a mattress may protect from thieves, but it doesn’t protect from inflation. As a result, some businesses choose to use LIFO (Last In First Out) bookkeeping as a method to stem inflation.

The inventory items that were bought most recently (the last in) are offered in an effort to keep up with inflation. Let us examine how this functions in detail. This increase in price does not only influence the student buying the textbooks, it also impacts the business that’s selling the textbooks to the student. Remember, the $10 increase wasn’t the bookstore’s markup – they don’t find this as profit. Instead, the publication can be affected by inflation and, such as the students; they cover more for these novels in 2010 compared to 2000. What LIFO does is match inflation as best as possible. By selling the publications that were purchased most recently (and probably paid the most money for), the company is able to stem its loss from inflation uk seafarers tax.

In any case, the store sells textbooks in a cost that is $20 higher than they cover. But if the shop had a book in its inventory that was bought in 2000 (for $80) which it sold in 2010 (for $110). The business is going to be taxed to their whole $110 sale, even though $10 of the comes directly from inflation. The underlying principle of LIFO accounting is that this could be prevented by selling the items that were most recently added to stock, not giving inflation much time to take effect and do its harm.

While in the Campus Bookstore example, the money saved through LIFO accounting might not seem material, it certainly adds up at bigger companies. In times of inflation, LIFO ought to be something to think about as a way to avoid inflation tax. While inflation impacts all of society, many are unaware of its debilitating results on our money. What a lot of do not see is that inflation is indeed a form of taxation. While it does not come out of a person’s paycheck or get tacked on to some revenue bill, inflation is an indirect form of taxation that does have an extremely concrete cost. Firms and investors alike must familiarize themselves with all the deleterious effects of inflation tax and consider approaches to prevent it, such as LIFO accounting.