Williams highlights unintended consequences of attempts to soak the rich

Walter Williams‘ latest column probes the historical record of recent government attempts to “tax the rich.” Specifically, Williams looks at the impact of an attempt in 1990 to impose a 10 percent luxury tax on yachts, private airplanes, and the most expensive cars.

Back then, Congress told us that the luxury tax on boats, aircraft and jewelry would raise $31 million in revenue a year. Instead, the tax destroyed 330 jobs in jewelry manufacturing and 1,470 in the aircraft industry, in addition to the thousands destroyed in the yacht industry.

Those job losses cost the government a total of $24.2 million in unemployment benefits and lost income tax revenues. The net effect of the luxury tax was a loss of $7.6 million in fiscal 1991, which means Congress’ projection was off by $38.6 million.

The Joint Economic Committee concluded that the value of jobs lost in just the first six months of the luxury tax was $159.6 million.

Congress repealed the luxury tax in 1993 after realizing it was a job killer and raised little net revenue. Why did congressional dreams of greater revenues turn into a nightmare?

Kennedy, Mitchell and their congressional colleagues simply assumed that the rich would act the same after the imposition of the luxury tax as they did before and that the only difference would be more money in the government’s coffers.

Like most politicians then and now, they had what economists call a zero-elasticity vision of the world, a fancy way of saying they believed that people do not respond to price changes. People always respond to price changes. The only debatable issue is how much and over what period.

Here’s my question for you: Is it likely that in the two decades since 1990, American human nature has changed? If Congress imposes a luxury tax on corporate jets and other luxury items, will Americans behave differently this time?

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