Obama's Latest Incredibly Stupid Idea: Kill the LIFO Rule
Ed Morrissey highlights President Obama's baffling focus on "LIFO" accounting rules in the debt ceiling debate. Definitely RTWT, but Ed thinks there is some snazzy commentary from his readers regarding LIFO. I've read the comments and I didn't see any intelligent commentary, so let me take it from here.
First, let me state that the President is ridiculous to focus on this in the context of our fiscal problems, this "small ball" of the most pathetic kind, like the corporate jet obsession. Second, for the President to say that the LIFO rule is "arcane" is about what you'd expect from a guy who never had a real job and has proven himself to be a total boob when it comes to finance. The truth is that the LIFO rule is as relevant as ever, right this very moment. Why? I'm gonna tell you.
Essentially, the LIFO rule protects corporations from having to pay taxes on phantom profits. In times of inflation, corporations can record nominal profits that aren't really profits, although they look like a profit in a strict book accounting sense. Let's say a company buys inventory every couple of months and it buys its inventory today at $50 per unit. After a few months, inflation drives those units up in price by 3%. Assuming the corporation can sell those units at it's planned profit margin and pass through the inflation in the short term, it'll get that margin plus the 3% inflation, but that 3% isn't really profit, it's getting more nominal dollars but dollars that are worth less. In practice however corporations usually can't pass through inflation in the short term, so they charge the pre-inflation price resulting in their planned profits margins getting eroded by the 3% inflation. Without the LIFO rule they are taxed as if inflation didn't have any effect - they'd be taxed on 3% of additional profits that are not really profits but phantom profits or they'd be taxed on their full nominal profits even though inflation has rendered a percentage of those profits worthless. LIFO protects against being taxed on phantom profits. It is a fundamentally fair policy, and it's incredibly practical - any government that forced companies to pay taxes on profits that weren't real would insure capital flight and chronic economic under-performance.
Finally, guess what? Inflation is on it's way back. I've chronicled that before. So the LIFO rule is as relevant today as it's ever been. That's why the corporations are fighting this tooth and nail, not for some idealogical anti-Obama reason or sinister corpo-fascist gambit. Federal Reserve policy would essentially be dictating their tax rates and history teaches that inflation can easily shoot upward uncontrollably. They're afraid, with inflation picking up and, by many accounts, set to rage, that they'll get hit with a massive, and potentially unstoppable, upward tax hike.
Obama may pass this off as an arcane issue over accounting jargon, (and yes, people can play minor games with LIFO) but this is a critical piece of rational tax policy. Obama's attack on LIFO is one of his stupider, economy-killing ideas - and that is saying alot as he's had plenty of doozies.
First, let me state that the President is ridiculous to focus on this in the context of our fiscal problems, this "small ball" of the most pathetic kind, like the corporate jet obsession. Second, for the President to say that the LIFO rule is "arcane" is about what you'd expect from a guy who never had a real job and has proven himself to be a total boob when it comes to finance. The truth is that the LIFO rule is as relevant as ever, right this very moment. Why? I'm gonna tell you.
Essentially, the LIFO rule protects corporations from having to pay taxes on phantom profits. In times of inflation, corporations can record nominal profits that aren't really profits, although they look like a profit in a strict book accounting sense. Let's say a company buys inventory every couple of months and it buys its inventory today at $50 per unit. After a few months, inflation drives those units up in price by 3%. Assuming the corporation can sell those units at it's planned profit margin and pass through the inflation in the short term, it'll get that margin plus the 3% inflation, but that 3% isn't really profit, it's getting more nominal dollars but dollars that are worth less. In practice however corporations usually can't pass through inflation in the short term, so they charge the pre-inflation price resulting in their planned profits margins getting eroded by the 3% inflation. Without the LIFO rule they are taxed as if inflation didn't have any effect - they'd be taxed on 3% of additional profits that are not really profits but phantom profits or they'd be taxed on their full nominal profits even though inflation has rendered a percentage of those profits worthless. LIFO protects against being taxed on phantom profits. It is a fundamentally fair policy, and it's incredibly practical - any government that forced companies to pay taxes on profits that weren't real would insure capital flight and chronic economic under-performance.
Finally, guess what? Inflation is on it's way back. I've chronicled that before. So the LIFO rule is as relevant today as it's ever been. That's why the corporations are fighting this tooth and nail, not for some idealogical anti-Obama reason or sinister corpo-fascist gambit. Federal Reserve policy would essentially be dictating their tax rates and history teaches that inflation can easily shoot upward uncontrollably. They're afraid, with inflation picking up and, by many accounts, set to rage, that they'll get hit with a massive, and potentially unstoppable, upward tax hike.
Obama may pass this off as an arcane issue over accounting jargon, (and yes, people can play minor games with LIFO) but this is a critical piece of rational tax policy. Obama's attack on LIFO is one of his stupider, economy-killing ideas - and that is saying alot as he's had plenty of doozies.
posted by Donny Baseball at 11:56 AM
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