In 1990, Congress adopted a new luxury tax on items such as yachts, private airplanes,
furs, jewelry, and expensive cars. The goal of the tax was to raise revenue
from those who could most easily afford to pay. Because only the rich
could afford to buy such extravagances, taxing luxuries seemed a logical way of
taxing the rich.
Yet, when the forces of supply and demand took over, the outcome was
quite different from what Congress intended. Consider, for example, the market
for yachts. The demand for yachts is quite elastic. A millionaire can easily not
buy a yacht; she can use the money to buy a bigger house, take a European vacation,
or leave a larger bequest to her heirs. By contrast, the supply of yachts is
relatively inelastic, at least in the short run. Yacht factories are not easily converted
to alternative uses, and workers who build yachts are not eager to
change careers in response to changing market conditions.
furs, jewelry, and expensive cars. The goal of the tax was to raise revenue
from those who could most easily afford to pay. Because only the rich
could afford to buy such extravagances, taxing luxuries seemed a logical way of
taxing the rich.
Yet, when the forces of supply and demand took over, the outcome was
quite different from what Congress intended. Consider, for example, the market
for yachts. The demand for yachts is quite elastic. A millionaire can easily not
buy a yacht; she can use the money to buy a bigger house, take a European vacation,
or leave a larger bequest to her heirs. By contrast, the supply of yachts is
relatively inelastic, at least in the short run. Yacht factories are not easily converted
to alternative uses, and workers who build yachts are not eager to
change careers in response to changing market conditions.
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