Final answer:
During periods of rising prices, the Last-In, First-Out (LIFO) inventory accounting method typically yields the lowest income tax bill, as it reports higher cost of goods sold. Economist Arthur Laffer explained the counterintuitive possibility of higher tax revenues following a tax rate cut, attributed to economic stimulation. Bracket creep was eliminated in the 1980s, and now tax brackets are indexed to inflation.
Step-by-step explanation:
During rising prices, the inventory accounting method that generally yields the lowest income tax bill for the current year is the Last-In, First-Out (LIFO) method. Under LIFO, the most recently acquired inventory items are sold first. Therefore, during periods of inflation, when newer inventory tends to be higher priced, the cost of goods sold (COGS) is reported as higher on the income statement, leading to a lower taxable income.
This stands in contrast with the First-In, First-Out (FIFO) method, which would report the oldest and often cheaper inventory as sold first, resulting in lower COGS and consequently higher taxable income.
Economist Arthur Laffer noted that income tax revenue can increase when tax rates go down, as lower tax rates may encourage economic growth and investment, leading to an expanded tax base and potentially higher tax revenue overall. This phenomenon is associated with the concept of the Laffer Curve, which posits that there is an optimal tax rate that maximizes revenue without discouraging productivity.
Through the 1920s to the 2000s, countries have experienced different income tax brackets and rates, with high rates sometimes leading to reduced revenues due to reduced economic activity, and conversely, lower rates potentially leading to increased revenues due to economic stimulation.
Bracket creep, the process by which people move into higher tax brackets simply through nominal wage increases with inflation, was curtailed in the 1980s, and currently, income levels for higher tax brackets are indexed to rise with inflation.