Answer to Question #167837 in Microeconomics for Bubblys

Question

In 1990, the U.S. Congress imposed an excise tax on yachts built in the U.S. and other high-priced luxury products such as jewelry and fur coats with a price over $100,000. The Joint Congressional Committee on Taxation predicted that these so-called “luxury taxes” would raise more than $30 million for the federal government in 1991. In fact, these taxes generated only about $16 million in revenue. Furthermore, about 7500 jobs in the U.S. boat-building industry were lost, so those workers paid less in income taxes. Putting this all together, the luxury tax led to a decrease of $7 million in government revenue rather than the predicted $30 million increase. Why didn’t the plan to raise government revenue by imposing an excise tax on luxury goods work as planned? Explain what mistake Congress made in setting the tax on luxury products.

Answer 1

Congress has set a very low amount for the definition of a luxury item. Since objects of such a value can be afforded by people of average income, we can call this consumption relatively massive. Setting the minimum amount of $ 500,000-700,000 would have a completely different result.