A luxury tax

Great Debates
1

I was reading this thread

And I saw Zagadka’s post 38 when he said

“You are, of course, aware of what would happen to the economy if people could only earn $100,000 a year? Property values alone would take decades to readjust (if not administered properly)”

And this reminded me of a book I read a month ago called ‘luxury fever’, it was written by an economist lamening how alot of our GDP and income growth is spent trying to one up our neighbors with bigger houses, more expensive cars, and more expensive everything. He says that we are working longer hours, suffering more stress and that alot of this is just an attempt to one up each other and keep up with each other rather than an attempt to look out for basic needs or to make our lives better. He also stated that this is a never ending game where no one can ever win, people will just trade off more hours of their life, give up more sleep and work more and more stressful jobs with each successive generation to keep one upping each other. He recommended a tax on luxury items (I think 50-100%), he said that this would still allow people to one up each other but it would also provide huge sums of money into the economy to build needed infrastructure. This luxury tax could also replace some other forms of tax like income tax.

So would a luxury tax work? On the surface it seems like it would. A person may be willing to spend $70k on a car to one up his neighbors, but if that $70k was actually 40k for the car and 30k in taxes its still a 70k car and out of the price range of 99% of working americans, so he can still show off his wealth but this way luxury consumption leads to better infrastructure and a more fair tax system that taxes voluntary consumption of goods that only serve to make life miserable for the masses. Essentially since alot of spending is done to keep up with the jonses, bring the jonses down a notch by a luxury tax increasing the cost of items designed mainly/solely to impress with how much disposable income you have by 50-100%.

And luxury items don’t just mean 70k cars, the sq. footage of an average house had doubled since 1950, and people now own 2-3 cars instead of 1. What was ‘normal’ 40 years ago is considered working poor or poor by todays standards, and this is what the author says is motivating this luxury consumption, a desire to not look poor (to own a house that is as big as ones neighbors) and to look rich (to own a house that is bigger than ones neighbors). Obviously the middle class of today will envy the lives the poor in 40 years will lead. This is a good thing as it shows progress and more purchasing power, but at the same time you have to consider that everyone buying bigger, more expensive everything will just lead to more debt & more stress. So an attempt to slow the process down via a luxury tax could be a good idea.

On another note, if there was a salary cap (not that i’m for that) of say 100k would all real estate drop drastically in price? I figure banks would just find a way to give 60 year interest only home loans to compensate for it and that no, real estate prices would only go down a little bit.

2

YOu might want to check out the law of unintended consequences.

We had a luxury tax in America not so long ago. In a very short time, it decimated the domestic yachtbuilding industry, and threw thousands of people out of work.

Nothing occurs in a vacuum, you know. There are costs involved with every policy, and some can’t be easily foreseen.

3

The question really comes down to what are you trying to do. If you are trying to confiscate the money of the wealthy, you will have to try something else. Luxury taxes are notoriously hard to collect in anything like the projected amounts. The fact of the matter is that the very wealthy have no end to the choices they can make. If America imposes a 50-100% luxury tax on cars and yachts, they will simply buy French. As the tax is applied to more and more things (Isn’t fancy wheat bread really a luxury? Can’t most people get by with plain white bread?) the tax will have to effect more and more of the peple you are trying to help.

The idea of limiting income to $100,000 a year is really to silly to require much debate. Suffice it to say that a vast majority of the economic activity that occurs now would simply not occur. Again, the capitalist would simply invest their money elsewhere.

4

I don’t know the income level or how many paid it, but the highest federal tax bracket was 94% during WWII and was about 91% when JFK took office. Can’t speak for the very rich then, but I don’t think it was particularly harmful to the economy overall.

If you could get the Congress to pass it, have it phrased in over a number of years and the Congress “stay the course”, it would change some things but not likely be that adverse in general.

5

Actually, those rates were pretty harmful. The country experienced a pretty bad recession in the late 1950’s.

JFK saw fit to reduce taxes, including the top rate. This had a beneficial effect on economic growth.

6

Do people get to keep all the capital they currently have? If so, how would you enforce such a ‘salary cap’? Bill Gates INVESTMENTS make more than that (probably every few minutes in fact)…so limiting his corporate salary would do nothing to this, right? Or would you confiscate all his wealth as well? To what level? $100k?

Depending on your answer either the economy would collapse very fast or it would collapse…no so fast. Either way, real estate would be the least of your worries IMO.

As to the over all question, I’m assuming you mean a nation luxury tax of 50-100%, yes? First off, how exactly would you define ‘luxury’? Any item not necessary, or only those big ticket items over some fixed (and arbitrary like the $100k cap? :wink: ) level? Again, a resonse would depend on your answer to that. If its only ‘big ticket’ type items, then my guess is you would simply destroy what little ‘big ticket’ manufacturing capability still resides in the US, pushing it to other countries…and you would probably hurt who ever imports such things to the US. You wouldn’t prevent the really rich from OWING such things, just buying them here.

If the other (i.e. ‘any item not necessary’)…well, I shudder to think what effect THAT would have.

-XT

7

As much as I theoretically like the idea of a luxury tax, rich people would always find a way out of it, whether it’s buying overseas or using “gift” loopholes or buying on the black market. There’s just no way you’re going to get a rich guy to pay a 100% tax on an already outrageously expensive car. It would just wind up punishing the American worker.

IANAEconomist, but I think a salary cap would lead to to incredibly fast hyperdeflation. If you put the cap at $100,000, that would quickly become the new “billion” and people would start making a quarter an hour, unless you had incredibly strict rules about minimum wage. And even if you did, the economy would spin into a crisis within months as banks (who wouldn’t be able to back people’s savings because your savings account of a hundred dollars is now equivalent to a year’s pay) failed and companies vacillated between lowering their prices (to accomodate the new quarter an hour pay rate) and raising them (because some people would be able to withdraw their savings before the banks closed, and that money would now be worth a lot). And of course, that wouldn’t stop the rich anyway, they’re all citizens of the Cayman Islands.

8

Of course, this economist has a better idea what my “basic needs” are than I do? The entire POINT of a free economy is to have each individual consumer decide for themselves what to spend their money on.

Perhaps he doesn’t get the idea that this desire to own more causes people to work harder, thus increasing our GDP and income. They might have covered this concept in my first week of Economics class. Take away a person’s ability to earn more money (which they use to buy stuff) and they will not increase their effort.

I do think it is unfortunate that so many people trade off quality of life for money, but it is their choice to make, not mine. I choose to make a bit less so that I can spend time with my wife rather than spend 12hrs each day at the office, that is my choice.

9

Yes, there was a luxury tax 9I think it was repealed under President Bush I). It applied to yachts, cars and MENS CLOTHING (you had to pay it on garments over $400). The result? Just about every American boatyard shut down-there was such massive unemployment in this industry that the government lost money. And the upscale men’s shops werew devastated-several in my area closed for good!

10

Well, at times it’s better than having to pay a solid two grand just for staying at that damned Boardwalk hotel.

11

Pardon me if I don’t cry crocodile tears for the yacht industry. I seldom hear fiscal conservatives become so distraught over the the loss of other formerly strong American industries, like the loss of god-knows how many jobs in the steel industry, the loss of hundreds of thousands in manufacturing in general, and the outsourcing of service positions to other countries.

It is only common sense that all taxes should be evaulated for their impact on the economy, but let’s get real: George Bush I is the guy who signed off on a 10% tax on only those new boats that cost more than most people’s homes at the time. Wealthy folks decided to spend their millions buying foreign-made boats rather than buying American products. Apparently, when the folks who own big businesses decide to fire Americans and hire cheap labor in the Third World, it’s a smart business decision that helps American consumers buy cheap products, but when those same businessmen decide not to buy American-made goods and put our workers out of house and home, it’s the government’s fault.

12

Er…is this a joke? If market forces dictate outsourcing to another country and company’s do so to remain competetive, its a smart busniess decision. Yep, check. If the government imposes a tax that further drives American company’s out of business because they can’t compete with foreign company’s, its the governments fault. Yet, check.

I don’t get it…truely. Are you saying that American company’s should work at a loss to keep business here…and THATS smart business? Or are you saying that America ‘rich’ folks should buy products that cost more but do pretty much the same thing just because they are made in the US…just so the government will get its cut and those industries will continue in the US?? Or that if the government imposes a badly thought out luxury tax that causes a certain vertical segment of our dwindling industry to go belly up because they can no longer compete due to cheaper foreign products, while not really bringing in any substantial revenue for its trouble is NOT the governments fault? Or what ARE you saying?

-XT

13

What is nuts is giving companies tax breaks for outsourcing jobs. The US loses enough jobs without the government conspiring to make it even more cost effective to outsource.

The luxury yacht class would have been more productive if it had applied to domestic as well as imported yachts. The adverse impact on US shipbuilders was the fault of a poorly written law, not the principle of taxing luxuries.

14

What the heck are you talking about. If you have never heard conservative talk about the loss of jobs in various industries, it is because you are not paying attention.

Here is a pretty detailed history of the steel industry. It includes:

"*Experimental Negotiating Agreement developed. In the early 1970s, labor and management crafted the Experimental Negotiating Agreement drafted under the leadership of USWA president I.W. Abel. The pact provided groundbreaking job-security agreements for workers, and included a no-strike pledge that lead to a prolonged labor peace in the industry. It was the first time a major union and an entire industry agreed voluntarily to settle bargaining disputes by arbitration.

“The agreement was unprecedented in labor history,” writes John Hoerr in And the Wolf Finally Came. But historians argue that the agreement—despite its value in preventing strikes and the problems posed by strikes—coupled with the wage and benefit gains following World War II were a major factor in the massive decline in the steel industry beginning about 1982.

From 1974 through 1982, steelworkers received automatic, annual wage increases of at least 3 percent, not including cost-of-living increases based on inflation. Between 1972 and 1982, steel wages rose 179 percent, Hoerr writes. Meanwhile, there was no correspondingly big increase in productivity; this hurt U.S. producers’ competitiveness worldwide.

Exacerbating these problems were the high level of imports brought on by the high production costs of domestic mills, and the new minimills. Minimills usually had a higher output per manhour than the integrated mills, a trend that continues today. Minimills also employed, as they continue to do, high-yielding incentive-pay plans and efficient work practices. “The minimills’ market share, an insignificant 3 percent in 1960, soared to about 18 percent in 1982,” says Hoerr. The EAF share of U.S. output now is approaching 50 percent.

  1. Downturn leads to massive layoffs. In the late ’70s and early ’80s, a downturn in the industrial economy and Big Steel’s big problems led to a massive shutdown of old mills and the loss of jobs for hundreds of thousands of workers. The industry’s and the union’s failure to peg compensation to the quality of work and productiveness of the workplace, Hoerr says, “is the great failure of the industry and the union.”*"

Which group was clamoring to protect jobs then?

In both cases it is the government’s fault if they enact policies which make it irrational for businessmen to do the opposite. For instance, if they increase taxes on American goods it becomes silly to buy American. If they cause labor costs to increase then it becomes silly to hire Americans. You only get a contradiction if you ignore the underlying mechanisms.

15

You know, I’ve heard this for a while now. Can you explain you this works? Is it some twisted consequence of tax breaks for investing in third world countries? Or what?

No, it would not. The very wealthy would simply have invested in art, or woman’s rather than men’s clothing. The problem with a luxury tax is that it has to compete not just with other nations producing the exact same items. It has to compete with all of the other choices a person is free to make with their disposable income. If you tax yachts, people will buy airplanes. If you tax airplanes, people will buy cars. If you tax cars, people will buy home theaters. If you tax those, people will buy something else. Disposable income is more disposable the richer you are. You have more choices, so any tax has to compete with more and more.

16

Ravenman, when you lose jobs because you are just flat uncompetitive, that’s just tough luck, learn to be more competitive, this is the way a free economy works. When you lose jobs because a stupidly conceived law MAKES you uncompetitive, that’s tragic. The law was designed as a money grab on rich folk for buying nice things and wound up only hurting working class people who make nice things.

WRT outsourcing, you don’t seem to appreciate the incredible price pressures that are on businesses. That’s all the consumer cares about, witness that fact that Walmart crushes their competition via nothing but lower prices. You don’t compete on price, you’re out of business and EVERYONE loses their job. When you can get some parts of cost reduced by going offshore, you do it, at least 95% of your people stay working.

17

Well yes…then who’s fault would that be again? Wouldn’t it be…the GOVERNMENTS fault if the law was written poorly? Kind of the point I was trying to make there.

On preview though I agree with pervert (again)…it really wouldn’t matter as it STILL wouldn’t have worked. The rich would have simply spent their money elsewhere.

-XT

18

I’m saying that those who are opposed to luxury taxes only seem to worry about American job losses when they can try to pin the blame on the government. I think it’s a pretty shallow argument that has more to do with having an axe to grind about the gummint, rather than a genuine expression of concern for American workers.

Just as BobLibDem stated, this yacht business matter doesn’t mean that luxury taxes, if properly levied, are a bad thing. We are now in a budget situation that is in many respects worse than than of the early 1990s. If a wealthy person wishes to buy a $5 million yacht, I don’t see why it would be unfair to ask them to pay a modest amount more tax above that which must be paid on other items, such as sales taxes that a young mother would have to pay to clothe her child. A luxury tax of 50 percent to 100 percent referenced in the OP is simply excessive, but I don’t see a problem of a 10% tax on million-dollar yachts, diamonds, furs, or whathaveyou, regardless of the national origin of the products.

19

Well, again, that is because you have not been paying attention. When conservatives talk about lower taxes and smaller government they do not mean tax cuts for the wealthy. They mean a larger economic pie. If you have never heard concern for the working people, it is because you have refused to interpret conservative messages this way.

This sounds more hopeful. However, you still have to craft it in such a way that you will not lose more taxes than you raise. If you increase the tax on yachts by 10%, say, how many yacht sales have to disapear (as compared to last year) before you are actually losing money? Any idea? How cmany yacht sales will disapear under such an increase? Remember you are going to make the yacht 10% more expensive for the buyer without adding anything at all to its value. Remember also, that you are competing not simply against foriegn yacht makers, but agains all of the miriad things that rich people can spend their money on. Making one rare item 10% more expensive is quite likely to simply drive money to those other things.

I have no idea what the curretn national tax on yachts is. Do any of you?

20

Except that we had a 10% tax. It failed. It’s not just that people didn’t buy American yachts (or boats – the tax was on vessels above $100,000, hardly a yacht). They bought used vessels to avoid the tax. The tax was supposed to raise $31 MM in the first year (which itself tells you how dumb it was – these things don’t raise any real revenue, they’re just designed to make redistributionists like yourself feel better about yourselves). It ended up raising $16.6 MM. Big surprise! If you tax something more you have less of it, whether it’s labor, consumption, capital or even land. (It’s becoming clear that I’m going to have to set a hotkey for that sentence). And oh by the way, the forgone income tax from and unemployment benefits for the people who lost their jobs added up to $24.2 MM. The luxury tax was a net revenue loser.

Quick factual aside: The apparel luxury tax in the 1990 act was not on men’s apparel. It was, predictably enough, on furs.