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A luxury tax is a
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
on
luxury goods In economics, a luxury good (or upmarket good) is a good for which demand increases more than what is proportional as income rises, so that expenditures on the good become a greater proportion of overall spending. Luxury goods are in contrast to n ...
: products not considered essential. A luxury tax may be modeled after a
sales tax A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow the seller to collect funds for the tax from the consumer at the point of purchase. When a tax on goods or services is paid to a govern ...
or
VAT A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the en ...
, charged as a percentage on all items of particular classes, except that it mainly directly 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 Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
transactions over a certain limit. A luxury good may be a
Veblen good A Veblen good is a type of luxury goods, luxury good for which the demand increases as the price increases, in apparent (but not actual) contradiction of the law of demand, resulting in an upward-sloping demand curve. The higher prices of Veblen ...
, 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 In economics, the income elasticity of demand is the responsivenesses of the quantity demanded for a good to a change in consumer income. It is measured as the ratio of the percentage change in quantity demanded to the percentage change in incom ...
by definition, both the
income effect The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption as measured by their pref ...
and
substitution effect In economics and particularly in consumer choice theory, the substitution effect is one component of the effect of a change in the price of a good upon the amount of that good demanded by a consumer, the other being the income effect. When a ...
will decrease demand sharply as the tax rises.


Theory

Luxury tax is based on the concept of
positional goods Positional goods are goods valued only by how they are distributed among the population, not by how many of them there are available in total (as would be the case with other consumer goods). The source of greater worth of positional goods is thei ...
, which are scarce goods whose value arises as status symbols largely from their ranking against other positional goods. This creates a
zero-sum Zero-sum game is a mathematical representation in game theory and economic theory of a situation which involves two sides, where the result is an advantage for one side and an equivalent loss for the other. In other words, player one's gain is e ...
game in which the absolute amount of goods purchased is less relevant than the absolute amount of money spent on them and their relative positions. Agents competing in such a game for pure positional goods do not lose utility if some of this money is taken as tax, because their utility comes as status from the amount of money (displayed to be) spent rather than the
use-value Use value (german: Gebrauchswert) or value in use is a concept in classical political economy and Marxist economics. It refers to the tangible features of a commodity (a tradeable object) which can satisfy some human requirement, want or need, o ...
of the goods themselves. For a pure positional good, a luxury tax is the perfect form of taxation because it raises revenue without reducing the utility of those paying the tax.


History

In Britain, authorities taxed windows – the
window tax Window tax was a property tax based on the number of windows in a house. It was a significant social, cultural, and architectural force in England, France, and Ireland during the 18th and 19th centuries. To avoid the tax, some houses from the p ...
– from 1696 to 1851. France imposed window taxes from 1798 to 1926. 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 checkouts instead of rendering the sales tax in cash. Some tokens were copper or base metal, while some were even plastic.


By country


Bulgaria

A luxury tax of 10% on boats over $300,000 and aircraft over $1 million was proposed in 2010 by finance minister
Simeon Djankov Simeon Dyankov ( bg, Симеон Дянков, also Djankov; born July 13, 1970) is a Bulgarian economist. From 2009 to 2013, he was the Deputy Prime Minister and Minister of Finance of Bulgaria in the government of Boyko Borisov. Prior to his ...
. Parliament approved the tax for a temporary 3-year period.


Norway

In Norway, at the beginning of the 20th century, oil-powered cars, sugar products, and chocolates were viewed as luxury goods. Today few Norwegians consider sugar or chocolate a luxury, but the luxury taxes on these goods remain.


United States

In November 1991, The United States Congress enacted a luxury tax and was signed by President
George H. W. Bush George Herbert Walker BushSince around 2000, he has been usually called George H. W. Bush, Bush Senior, Bush 41 or Bush the Elder to distinguish him from his eldest son, George W. Bush, who served as the 43rd president from 2001 to 2009; pr ...
. The goal of the tax was to generate additional revenues to reduce the federal
budget deficit Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget ...
. This tax was levied on material goods such as watches, expensive furs, boats, yachts, private jet planes, jewelry and expensive cars. Congress enacted a 10 percent luxury surcharge tax on boats over $100,000, cars over $30,000, aircraft over $250,000, and furs and jewelry over $10,000. The federal government estimated that it would raise $9 billion in excess revenues over the following five-year period. However, only two years after its imposition, in August 1993, at the behest of the luxury yacht industry, President
Bill Clinton William Jefferson Clinton ( né Blythe III; born August 19, 1946) is an American politician who served as the 42nd president of the United States from 1993 to 2001. He previously served as governor of Arkansas from 1979 to 1981 and agai ...
and Congress eliminated the "luxury tax" citing a loss in jobs. The luxury automobile tax remained in effect until 2002. In
sports Sport pertains to any form of competitive physical activity or game that aims to use, maintain, or improve physical ability and skills while providing enjoyment to participants and, in some cases, entertainment to spectators. Sports can, th ...
, the Luxury tax is the incremental tax team owners have to pay for their teams going over the salary cap, basically a financial penalty for high-spending teams. A
common misconception Each entry on this list of common misconceptions is worded as a correction; the misconceptions themselves are implied rather than stated. These entries are concise summaries of the main subject articles, which can be consulted for more detail. ...
is that
tampons A tampon is a menstrual product designed to absorb blood and vaginal secretions by insertion into the vagina during menstruation. Unlike a pad, it is placed internally, inside of the vaginal canal. Once inserted correctly, a tampon is held ...
and other menstrual products are taxed as a "luxury item" because they are subject to
sales tax A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow the seller to collect funds for the tax from the consumer at the point of purchase. When a tax on goods or services is paid to a govern ...
in 30 states as of February 2021. In actuality, they are simply subject to the normal state sales tax rate in states where they are not tax exempt. Such tax exempt consumer products vary from state to state, but are usually limited to food, prescription drugs, and more rarely, clothing.


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 whoever lands on this square must pay $75.00 to the bank. In the 1961 film '' Breakfast at Tiffany's'', the salesman at Tiffany's tells Holly Golightly and Paul that the "federal tax" referring to the 10 percent luxury tax then in effect was not required on a particular item they were considering as a purchase.


See also

* Luxury Car Tax *
Luxury tax (sports) A luxury tax in professional sports is a surcharge put on the aggregate payroll of a team to the extent to which it exceeds a predetermined guideline level set by the league. The ostensible purpose of this "tax" is to prevent teams in major marke ...
*
Positional good Positional goods are goods valued only by how they are distributed among the population, not by how many of them there are available in total (as would be the case with other consumer goods). The source of greater worth of positional goods is thei ...
*
Conspicuous consumption In sociology and in economics, the term conspicuous consumption describes and explains the consumer practice of buying and using goods of a higher quality, price, or in greater quantity than practical. In 1899, the sociologist Thorstein Veblen co ...


References


External links


Columbia Encyclopedia entry on Luxury Tax
{{Authority control Personal taxes