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Tax Increases: Yacht Lessons

by Elaine Schwartz    •    Mar 21, 2013    •    514 Views

Called a fairness issue, proposed corporate jet tax increases have been described as an offset to poverty program cuts. However, supporters of the taxes might be disappointed.

Some history…

The Omnibus Reconciliation Budget Act of 1990 included a luxury tax on yachts, aircraft, and more expensive furs, jewelry, and autos. It was supposed to be a relatively painless way to add $31 million to federal revenue.

But it did not work out that way. With higher prices depressing quantity demanded, the government actually lost money. Job cuts in each of the impacted industries meant elevated federal spending for unemployment benefits. Diminished sales decreased government revenue. The net result? A loss of $7.6 million rather than a $31 million gain.

I wonder whether current proposals to diminish tax breaks on corporate jets are a 1990 rewind. The rationale is the same, the need for revenue is similar and the tax bite will go up. The question is whether higher taxes again will create unanticipated consequences.

In Wichita, Kansas, the mayor is concerned.  Home to Cessna, Beechcraft and Learjet, one tenth of all jobs in the region depend on private aviation. As one employee at Yingling Aviation explained to Reuters, just having the industry stigmatized has caused diminished sales, created less maintenance work, and hurt local grocery stores.

I know that fairness and revenue are potent arguments for tax increases. However, I keep worrying about their impact on economic growth. Can I confirm that my concern is valid? This summary of a paper from economists Christine Romer (former chair of the President’s Council of Economic Advisors) and David Romer indicates how tough it is to determine the connection between tax hikes and economic growth.

Your opinion?

Sources and Resources: It was amazing to see in this Reuters article how similar the current protests to new tax legislation resembled the 1990 tax act debate. For more on the content and impact of the 1990 legislation, this Washington Post article and the NY Times provided details. For much more detail, here is the text of the The Omnibus Reconciliation Budget Act of 1990.

Please note that the history of the luxury tax was taken from a past econlife entry.

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