When we think about taxes, we should look at yachts. In 1990, because of a new luxury tax, anyone who purchased a yacht paid 10% more. The result? People stopped buying domestically made yachts. Yacht makers went out of business and the government never collected the revenue it sought. After the tax was repealed in 1993, sales increased.
Fast forward to 2010. On April 6th, the Florida house capped the tax on yachts at $18,000. Consequently, people buying boats sold for $300,000 or more got a tax cut. The result? Supporters claim sales will increase because boat buyers will no longer go elsewhere to avoid the tax. In response, opponents say this tax cut will not help most Floridians, especially the unemployed and those with declining home values.
The debate about a tax on luxury items returns us to taxing dilemmas. Government’s search for more revenue is complex. The most politically attractive solutions might not always become fiscally fruitful.
The Economic Lesson
In addition to progressive income taxes and luxury taxes, Congress can look at other tax approaches. They can consider higher sales or estate taxes, a value added tax on manufacturing firms, and a flat tax for everyone. Whichever they select, the incentives they create will shape the response and the revenue they generate.