Inventories, Investment, Inflation and Taxes
Sales today were made possible by inputs of factor services and intermediate goods at various previous dates. Prices change between the input dates and the sale date. Especially in periods of general inflation, these price movements create ambiguities in the reckoning of proﬁts. The accounting deﬁnition used in taxing proﬁts can have signiﬁcant economic eﬀects. Tax accounting is generally not neutral vis-à-vis general inflation. Costing inputs at their historical nominal prices (FIFO) is a real burden and disincentive, greater the higher the inflation rate. It is analogous to depreciating durable capital at historical cost. However, it may be partially, completely, or excessively oﬀset by another non-neutrality, the deductibility of nominal interest from taxable income. This too has analogous eﬀects on after-tax returns from ﬁxed capital.
Tobin, James, "Inventories, Investment, Inflation and Taxes" (1987). Cowles Foundation Discussion Papers. 1092.