Luxury Tax

A luxury tax is a tax on luxury goods; it is a tax on purchases or surcharges imposed only on certain products or services that are perceived to be non-essential or available only to the super-rich. Modern examples are taxes on jewelry and perfume. A luxury tax could also be modeled after a nuisance tax or VAT, charged as a percentage on all items of particular classes, except that it mainly affects the rich because the rich are the foremost likely to shop for luxuries like expensive cars, jewelry, etc.

Luxury taxes is also levied with the intent of taxing the rich, as within the case of the late 18th- and early 19th-century British taxes on carriages and manservants; or they will be imposed in a very deliberate effort to change consumption patterns, either for moral reasons or due to some national emergency. The luxury tax can be paid either as a percentage of the purchase price or as a percentage of the amount above the point specified. This can also only apply to sales over a certain amount; for example, certain U.S. states levy a luxury tax on real estate transactions above a certain cap.

All taxes are debatable but some are more controversial than others. A luxury good can be good from Veblen, which is a kind of good for which demand increases as price increases. All buyers of goods and services within the jurisdiction which levies it are usually charged a sales tax. Therefore, the effect of a luxury tax could also be to extend demand for sure enough luxury goods. When charged on essential goods, like food and medicine, they’re seen as disproportionately burdensome to lower-income consumers, who are forced to pay the next percentage of their income in sales taxes.

However, in general, because a luxury good has by definition a high-income elasticity of production, both the effect of income and the effect of substitution would dramatically decrease production as tax increases. Actually, luxury taxes generally fall into two categories:

  • So-called “sin taxes” are levied on goods such as tobacco and liquor and are charged by each customer, regardless of their income. Anyone who objects can just stop buying it. In imposing the tax, the govt. is both discouraging the utilization of those products and raising revenue from those that keep buying them.
  • Taxes on products which can only be purchased by the richest buyers, who probably can afford to pay the premium.

Both taxes are relatively popular because they hit only a minority of the population. In the present time, the revenue productivity of luxury taxes has probably overshadowed the moral argument for them. Luxury taxes are often imposed during times of war to extend government revenues, or to fund another large expense without raising taxes on the final population. Furthermore, the progressive nature of the early taxes began to be lost as more lower-income people’s “luxuries” were taxed in the interest of generating additional revenue; an example is the amusement tax.

Since luxury goods are attributed to the rich in society, it’s expected that the bulk of taxpayers won’t be tormented by a luxury tax. Luxury tax is predicated on the concept of positional goods, which are scarce goods whose value arises as status symbols largely from their ranking against other positional goods. Economists also classify all products with low demand elasticity, which include such “luxuries” as cigarettes and food, as necessities to escape moralistic consequences.

However, in reality, luxury goods have by nature a high sales elasticity of demand. As the tax rises, both the income effect and the substitution effect will sharply decrease demand. A luxury tax is the ideal form of taxation for a pure positional purpose since it collects revenue without negative utility effects.


Information Sources:

  3. wikipedia