The Interactive Great American Taxing Game: Luxuries

Release Date
May 28, 2015

Topic

Gov't Debt & Spending Government Taxing
Description

It’s the Great American Taxing Game and you have chosen to tax luxury goods like yachts, fur coats, and expensive jewelry. Many people in the world today are suffering, but a small minority has plenty of money to spend on luxuries. It makes sense to tax these luxury items heavily and redistribute the wealth, right? Your host Prof. Art Carden explains that this isn’t as clear cut as it first appears. There are many substitutes for luxury goods. A heavy tax on yachts, for example, is more likely to hurt the people building the ships than the super-rich who might decide not to buy one if the price is too high. Is taxing luxury goods the best option for raising government revenue? Don’t forget to see what would happen if you taxed oil companies or cigarettes instead.

The Crusade for Politically Correct Consumption [article]: This FEE article discusses how the push for sin taxes invites pork-barrel politics and stems from puritanical elitism.
A Higher Gasoline Tax Will Solve Everything? [article]: Another FEE article compares gas taxes to sin taxes, arguing that they are ultimately paternalistic measures.
Luxury Tax [encyclopedia entry]: A definition and history of the luxury tax.
The Effect of Tax Changes on Consumer Spending [report]: The New York Federal Reserve reports on the impact of taxation on consumer behavior.

The Interactive Great American Taxing Game: Luxuries
There are a lot of people in the world who are suffering. At the same time, there’s a small minority of people who can spend lavish sums on baubles and luxuries like yachts. It’s the consumers of luxury goods, like yachts, who can most afford to pay. It makes sense then to tax yachts, fur coats, and fancy jewelry heavily and then redistribute the wealth, right?
Not so fast. There’s any number of substitutes for a yacht. Attacks on yachts will create a lot of inefficiency because it means people won’t be buying a lot of yachts that are worth more than the cost to produce. There’s a distributional effect as well. You might think you’re taxing Percy and Penelope Plutocrat. Instead, you’re actually taxing Sam and Sally Shipyard. So if you’re a government official needing to raise revenue, which one of these would you want to tax?