luxury tax

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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 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 limit.

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.

Impact

When a luxury tax is imposed, the majority of people aren't affected by it and aren't subject to the tax.^{[citation needed]} Over time, what is viewed as "luxury" might change, resulting in more and more people being affected by the tax. Despite the animosity that ensues, the government may view the income from the luxury tax as essential and will not restrict or rescind it. So it may happen over time that goods considered "ordinary" might also incur luxury tax. An example of this can be seen with various commodities in the country of Norway, where at the beginning of last century, cars and chocolate were viewed as luxury goods. Thus, additional taxes were levied upon these goods. Today few Norwegians consider cars or chocolate a luxury, but the luxury taxes on these goods remain. In Ireland, many personal hygiene products are within the luxury tax bracket. In the United States, winning on a game show is usually considered a luxury, which is subject to taxation as well.

History

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 checkout instead of rendering the sales tax in cash. Presumably, the purpose of the practice was to remove the incentive for stores and businesses to avoid reporting income. Some tokens were copper or base metal while some were even plastic.

In popular culture

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 the player must pay $75.00 to the bank.

External links

• Columbia Encyclopedia entry on Luxury Tax

Further reading

Wikinews has related news: US Congress to Re-Establish the Luxury Tax

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