I don’t understand why if inflation is higher than expected, the corp’s real taxes increase because the value of the tax shelter is lower?
thanks!
Depreciation is a fixed charge, but sales & expenses increase with inflation (albeit each to varying degrees). The increase in sales & expenses drives a higher taxes payable, but your depreciation charge is fixed at the lower level, meaning it is unable to shield you from as much tax (as much as it would, if there was no unexpected inflation) .
…hmm 1 more question-
Isn’t it possible for taxes payable to NOT go up even if inflation picks up- lets say inflation affects out costs more than our revenues- wouldn’t taxes payable go down?
if you did that you are trying to sell your product at lower than what is cost you to make them. you are not passing inflation on to your customers. Then what exactly are you trying to do?
ah- thnx!