Luxury tax

A luxury tax is a tax on luxury goods: products not considered essential. A luxury tax may be modeled after a sales tax or VAT, charged as a percentage on all items of particular classes, except that it mainly directly affects the wealthy because the wealthy are the most likely to buy luxuries such as expensive cars, jewelry, etc. It may also be applied only to purchases over a certain amount; for instance, some U.S. states charge luxury tax on real estate transactions over a certain limit.

This article is about concept in taxation. For the use of the phrase in reference to the salaries of professional athletes, see luxury tax (sports).

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A luxury good may be a Veblen good, which is a type of good for which demand increases as price increases. Therefore, the effect of a luxury tax may be to increase demand for certain luxury goods. In general, however, since a luxury good has a high income elasticity of demand by definition, both the income effect and substitution effect will decrease demand sharply as the tax rises.

Theory

Luxury tax is based on the concept of positional goods, which are scarce goods whose value arises as status symbols largely from their ranking against other positional goods. This creates a zero-sum game in which the absolute amount of goods purchased is less relevant than the absolute amount of money spent on them and their relative positions. Agents competing in such a game for pure positional goods do not lose utility if some of this money is taken as tax, because their utility comes as status from the amount of money (displayed to be) spent rather than the use-value of the goods themselves. For a pure positional good, a luxury tax is the perfect form of taxation because it raises revenue without reducing the utility of those paying the tax.[1] [2]

History

In Britain, authorities taxed windows – the window tax – from 1696 to 1851.[3] France imposed window taxes[4] from 1798 to 1926.

In the United States, many states used to collect state sales-tax through the use of "luxury tax tokens", instead of calculating a percentage to be paid in cash like the modern-day practice. Tokens could be purchased from the state and then used at checkouts instead of rendering the sales tax in cash. Some tokens were copper or base metal, while some were even plastic.

By country

Bulgaria

A luxury tax of 10% on boats over $300,000 and aircraft over $1 million was proposed in 2010 by finance minister Simeon Djankov. Parliament approved the tax for a temporary 3-year period.

Norway

In Norway, at the beginning of the 20th century, oil-powered cars, sugar products, and chocolates were viewed as luxury goods.[5] Today few Norwegians consider sugar or chocolate a luxury, but the luxury taxes on these goods remain.[5]

United States

In November 1991, The United States Congress enacted a luxury tax and was signed by President George H. W. Bush. The goal of the tax was to generate additional revenues to reduce the federal budget deficit. This tax was levied on material goods such as watches, expensive furs, boats, yachts, private jet planes, jewelry and expensive cars. Congress enacted a 10 percent luxury surcharge tax on boats over $100,000, cars over $30,000, aircraft over $250,000, and furs and jewelry over $10,000. The federal government estimated that it would raise $9 billion in excess revenues over the following five-year period. However, only two years after its imposition, in August 1993, at the behest of the luxury yacht industry, President Bill Clinton and Congress eliminated the "luxury tax" citing a loss in jobs.[6] The luxury automobile tax remained in effect until 2002.[7]

In sports, the Luxury tax is the incremental tax team owners have to pay for their teams going over the salary cap, basically a financial penalty for high-spending teams.[8]

A common misconception is that tampons and other menstrual products are taxed as a "luxury item" because they are subject to sales tax in 30 states as of February 2021.[9] In actuality, they are simply subject to the normal state sales tax rate in states where they are not tax exempt. Such tax exempt consumer products vary from state to state, but are usually limited to food, prescription drugs, and more rarely, clothing.[10]

One of the squares on the Monopoly board game (U.S. edition) is labeled "luxury tax". While there is a picture of a sparkling diamond ring on the square, the only effect is that whoever lands on this square must pay $75.00 to the bank.

In the 1961 film Breakfast at Tiffany's, the salesman at Tiffany's tells Holly Golightly and Paul that the "federal tax" referring to the 10 percent luxury tax then in effect was not required on a particular item they were considering as a purchase.

See also

References
  1. Ng, Yew-Kwang. 1987. “Diamonds Are a Government’s Best Friend: Burden-Free Taxes on Goods Valued for Their Values.” The American Economic Review 77 (1): 186–91.
  2. • Robert H. Frank (2008). "consumption externalities," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
       • _____ (1997). "The Frame of Reference as a Public Good," Economic Journal, 107(445), pp. 1832-1847. Archived 22 September 2017 at the Wayback Machine
       • _____ (2005). "Positional Externalities Cause Large and Preventable Welfare Losses," American Economic Review, 95(2), pp. 137-141 Archived 3 November 2013 at the Wayback Machine (close Bookmarks tab & press +).
  3. Sadar, John Stanislav (2016). "Revolutions in Glass". Through the Healing Glass: Shaping the Modern Body through Glass Architecture, 1925-35. Routledge Research in Architecture. New York: Routledge. p. 44. ISBN 9781317562610. Retrieved 21 September 2019. The Window Tax had been introduced as a luxury tax, and was charged on a per window basis.
  4. Banfield, Thomas Charles (1843). "M. de Parieu on Taxes on Enjoyments (les Jouissances)". Six Letters to the Right Hon. Sir Robert Peel, Bart: Being an Attempt to Expose the Dangerous Tendency of the Theory of Rent Advocated by Mr. Ricardo, and by the Writers of His School. London: R. and J.E. Taylor. p. 4. Retrieved 21 September 2019. M. Sismondi has said with reason that the window tax, ranked in France amongst the direct taxes, was rather a tax upon the consumption of the houses [...]. Taxes upon habitations and their accessories are the most productive of all impositions upon luxury.
  5. ""Chocolate tax" should go". Aftenposten. 20 June 2007. Event occurs at 14:07. Archived from the original on 26 June 2007. Retrieved 11 September 2017.{{cite web}}: CS1 maint: bot: original URL status unknown (link)
  6. Atwood, Liz. "Boat dealers predict sales increase Luxury tax repeal helps ANNE ARUNDEL COUNTY BUSINESS". baltimoresun.com. Retrieved 23 August 2019.
  7. "Good Riddance to the Luxury Tax". Wall Street Journal. ISSN 0099-9660. Retrieved 20 April 2016.
  8. Frank, Urbina (11 October 2018). "How does the NBA's luxury tax work?". Hoops Hype. Retrieved 16 October 2018.
  9. "Tampon Tax". Investopedia. Dotdash. 16 February 2021. Retrieved 26 April 2021.
  10. "Sales Tax by State: Are Grocery Items Taxable?". TaxJar. TPS Unlimited. 13 August 2020. Retrieved 26 April 2021.
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