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Show THE VOICE OF BUSINESS Business needs no new erssrnies By Richard L. Lesher, President Chamber of Commerce of the United States There is no longer any disagreement that America's economic problems are deeply imbedded, that they will not be cured overnight and that we all share the responsibility of promoting an extended recovery. Nor should anyone be surprised that we who represent business in Washington have been working to change the tax code, because we are convinced taxes must be cut to promote long-term capital formation by encouraging savings and investment. What might surprise you. however, is that many businesses themselves might not be taking full advantage of the current tax laws. Indeed, it seems ironic that while we are trying hard to get business a tax cut, there is a possibility some firms have been unwilling un-willing to give themselves a tax cut. In effect, thousands of firms continue to use a method of inventory accounting which, because of inflation, obliges them to pay as extra taxes funds which might be used for expansion, captial replacement or dividends. The stakes can be big. Indeed, certain cer-tain firms which have switched their accounting procedures have realized billions of dollars in tax savings. For example, Reginald H. Jones of General Electric, estimates his corporation alone has saved roughly $1 billion in taxes. The most common method of inventory in-ventory accounting on income statements which raises business taxes is called FIFO, (first in fist out), while the method which lowers them is called LIFO (last in first out). One essential difference betweent he two is that the FIFO method fails to adjust inventory costs for inflation. Thus, when these unadjusted, or lower, costs are subtracted sub-tracted from earnings during a period of rising prices, the earnings will remain artificially high and the firm will face a higher tax bill than it would have under LIFO. Why do so many companies stick with FIFO? Some people believe "the firms are merely trying to impress their shareholders with their ability to maintain high earnings despite worsening wor-sening inflation. Personally, I am skeptical of this explanation, for the sttx.k market is rarely fooled and those who follow corporate America from Wail Street have some of the best analytical minds in the country. Reginald Jones believes the reason may be that most top executive contracts con-tracts are tied to reported earnings which leads business leaders to be overly concerned with short-term profitability. Nevertheless, there do seem to be legitimate reasons for not switching inventory methods. First, to make the switch is mast instances a firm must obtain a ruling form the IRS. whietvean he difficult. In the case of small business, many firms simply cannot afford the accounting costs of adopting the I.lr O procedure. Then, too, even for lancer firms the administrative costs of switching !o LIFO may actually outweigh out-weigh the newly-realized tax savings. One point we should all remember is that the real culprit here is not a particular par-ticular accounting method, but inflation in-flation itself. So aside from adopting credible policies that will attack inflation in-flation in a sustained and meaningful way, Congress should also re-examine the regulations and tax laws that impede im-pede firms from adjusting their inventory in-ventory costs for inflation. For their part, business leaders should reexamine their own inventory accounting procedures to be sure their firms do not suffer from a fixation on short-term earnings. At the very time our economy is plagued by a critical shortage of investment captial and a real decline in profits, the last thing the business community should do is to encourage an already cynical public into believing its earnings are much greater than they really are. That will only strengthen the hand of economic illiterates who scream about "obscene profits" and who demand more government regulations. We have enough problems now without adding to our burdens. Let's not have it be said that we have finally met the enemy, and he is us. |