U.S. Luxury Tax — A Total Failure

The U.S. enacted a luxury tax in November 1990, established by Congress and signed by President George H.W. Bush. Buyers of private yachts, planes, furs, jewelries and luxury cars are levied excise taxes. When luxury goods exceed certain prices, they are charged with excise taxes. For example, yachts below $100,000 are taxed at regular rates, and for yachts above $100,000, in addition to the regular rates, a 10 percent tax is charged on the excess amount.

At that time, the bill was idealistic and simple to understand — only the rich can afford luxury items, and a tax on the rich fulfills social justice. Although the bill violates Bush’s election promise to “not raise taxes” during his term as president, he did not receive much opposition in proposing the luxury tax.

However, in August 1993, two years after its introduction, the U.S. Congress decided to end the “luxury tax” because the tax revenues were disappointing and the livelihoods of common folks who made a living by selling “luxury items” were negatively impacted.

　

The lesson learned in this period has been written into U.S. economic textbooks. The “luxury tax” fundamentally violates economic principles and market theories. Under supply and demand, the demand of luxury goods is quite elastic. In other words, the luxury tax imposed on certain goods will prompt the rich buyers to seek alternatives. They may find other entertainments than buying yachts, perhaps flying to Panama for a vacation and buying a yacht there.

The elasticity of supply for luxury goods is rather inelastic. Can yacht producers easily switch production to alternative products? Can yacht workers easily find new jobs? These problems can’t be easily handled.

More importantly, problems slowly emerge from the shortfall of luxury tax collection, and the the yacht industry took an unexpectedly hard hit. Within a year, sales plunged 70 percent, and many firms had to lay off workers and even declare bankruptcy. Large numbers of workers lost their jobs. In Florida, 13,000 yacht workers were unemployed, and related industries were also affected. The impact was significant.

Ironically, the largest shortfall was in the tax revenue. After the luxury tax introduction, the 5-year tax revenue was estimated to be $9 billion. However, in its first year, the tax revenue was only a few tenths of a million dollars. In addition, the government also had to pay unemployment benefits.

The U.S. Congress reflected on the mistake and proposed new laws. Not only was the luxury tax removed, the buying of luxury items was greatly encouraged. Any luxury yachts meeting certain requirements (of course, it has to be manufactured in the U.S.) could secure loans from the government, with a maximum loan of $2 million.

Since then, the so-called “luxury tax” has been unheard of in the U.S., but still experimented with globally. In recent years, Mexico levied a luxury tax on several items; Australia levied tax on luxury cars, with a maximum tax rate of 33 percent; Hungary levied a luxury tax for real estate, yachts and cars whose value exceeded $150,000. In Britain, higher income tax is levied on rich people, leading them to think twice before buying luxury items. Surprisingly, Thailand levies a luxury tax on Internet users.

But there are also many counterexamples. In the U.S., the state congresses of New York and Illinois rejected a luxury tax for jewelries proposed by the state government. In Italy, the autonomous region of Sardinia removed the luxury tax on foreign yachts.

There are many reasons for opposing the luxury tax bill other than economic efficiency. First, why should buyers be penalized for purchasing luxury items? If one was frugal all his life and saved enough to purchase a luxury for enjoyment or as a gift, why should one be penalized?

Second, the rich have purchasing power that could help the government collect more taxes. This is beneficial for the distribution of wealth. Even if a prodigal son squanders the family fortune, it is his personal problem. The society benefits from the purchasing power of the rich that revives the economy. How bad can it be?

Third, the rich can spend their money in foreign countries if a local luxury tax is imposed. Luxury tax encourages them to spend the money abroad. When import duties are imposed, they will spend even more abroad. For people who are able to consume, righteous and legitimately, we should allow them to consume. We would prefer them to consume domestically rather than internationally.

Taiwan also faces a luxury tax debate recently. It had a few more reasons to pass the bill than the case in the U.S. — stopping property speculators from driving up housing prices to reduce the inequality between the rich and poor, and to perform social justice. But this is more of a conceptual problem. We have to ask: To solve a transportation problem, should everyone own a vehicle, or is public transportation another option? Similarly, to solve a housing problem, should everyone own a house, or is renting another option? In Taiwan, over 88 percent of families own their homes, compared to 66 percent in the United States. It seems that the U.S. has more potential for expansion into privately owned properties, but, surprisingly, the U.S. government is less concerned about property speculators. Under a mature rental system in the U.S., many people don’t really need to buy houses.

Another problem that needs to be answered: Is it a housing bubble in Taiwan, or is it just a housing bubble in Taipei?