Luxury Tax

The Luxury tax is usually advocated as a way to increase government revenue. When a luxury tax was enacted in 1991 most of it was repealed two years later because it did not raise the expected government revenue. I support it for a different reason: to reduce consumption of some types of luxuries.

There are two types of luxury goods: those that inherently cost a lot to make(like yachts and mansions) and those that don’t. Examples of the second include expensive wines, watches, fashion accessories and other goods which are Veblen goods.

If your main goal is to raise revenue you can’t set the tax rate too high, but if your main goal is to reduce consumption of luxuries you can set it as high as you want. There should be high taxes on the first type of luxury goods. I’d say a yacht costing 1 million dollars should have a tax rate of 50%. One costing 10 million should have a tax rate of 400%. One costing 100 million should have a tax rate of 1900%. 

The key thing to understand about this type of luxury consumption is that it is very much about status competition rather than about the inherent value of the goods themselves. Someone who buys a 100 million dollar yacht buys it not because he enjoys it more than he would a 10 million dollar yacht, he buys it to display the fact that he is wealthier than the guy who has a 10 million dollar yacht. Both he and the man who can afford a 10 million dollar yacht will have to buy cheaper yachts, but the first man still has a better yacht than the second man.

Opponents of the tax will point out that the makers of luxury goods employ middle and working class people, who would be harmed by a reduction in sales. This is logic that can be applied to anything. Wasteful government programs employ middle class government workers. When poor people receive welfare they usually spend most of it, benefiting all kids of middle class business owners and the workers they employ.

Luxury consumption is inherently wasteful from the point of view of the greater economy. If a rich man buys a 2 million dollar yacht he will be contributing to the employment of the middle and working class class people who made the parts for and assembled that yacht. But if he instead uses that 2 million dollars to build a factory, he will also employ middle and working class people who will build that factory. And after the factory is built, it will employ people and produce value.(which the government can then tax) A 2 million dollar yacht produces nothing, even if you employ people to clean or repair it.

The first type of luxury good should be made by the private sector. The industries which produce very expensive Veblen goods should be nationalized and the importation of such goods should be banned. It may seem strange to you to imagine purchasing luxury goods produced by the government. It’s totally at odds with the ethos of the luxury goods industry, which is super high quality. But in the final analysis people do not buy Veblen goods because they are of better quality, they buy them because they are more expensive, status displaying goods.

Since the companies which make the Veblen goods have been nationalized a luxury tax on them will not be necessary. The companies should have high profit margins. If they don’t then they are being mismanaged. Which should occasionally happen, they will be government run companies after all. The individuals who run the companies will be told to raise those margins, or else! And if they still can’t get the profit margins up the industries will be shut down. You might have a shortage of luxury handbags for a while. But I still think it would be worth it.

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