Fundamentals of Economics. Доловова Н.Н - 61 стр.

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Who Pays the Luxury Tax?
In 1990, Congress adopted a new luxury tax on items such as yachts, private
airplanes, furs, jewelry, and expensive cars. The goal of the tax was to raise revenue
from those who could most easily afford to pay. Because only the rich can afford to
buy such extravagances, taxing luxuries seemed a logical way of taxing the rich.
Yet, when the forces of supply and demand took over, the outcome was quite
different from what Congress intended. Consider, for example, the market for yachts.
The demand for yachts is quite elastic. A millionaire can easily buy a yacht; she can
use the money to buy a bigger house, take a European vacation, or leave a larger
bequest to her heirs. By contrast, the supply of yachts is relatively inelastic, at least in
the short run. Yacht factories are not easily converted to alternative uses, and workers
who build yachts are not eager to change careers in response to changing market
conditions. Our analysis makes a clear prediction in this case. With elastic demand
and inelastic supply, the burden of a tax falls largely on the suppliers. That is, a tax
on yachts places a burden largely on the firms and workers who build yachts because
they end up getting a lower price for their product. The workers, however, are not
wealthy. Thus, the burden of a luxury tax falls more on the middle class than on the
rich.
The mistaken assumptions about the incidence of the luxury tax quickly
became apparent after the tax went into effect. Suppliers of luxuries made their
congressional representatives well aware of the economic hardship they experienced,
and Congress repealed most of the luxury tax in 1993.
Answer the questions
1. On what goods did the Congress adopt a new luxury tax?
2. Are these the only luxury items? What can you add?
3. What was the goal of the 1990 luxury tax?
4. Did the outcome and Congress’s intentions coincide?
5. Does the demand for yachts vary? Why?
6. Does the supply for yachts vary? Why?
7. Who suffers when the demand is elastic and supply isn’t?
8. Why does the burden of a luxury tax fall more on the middle class than on the
rich?
9. Who told the representatives from the Congress about the economic
diffic ult ies?
10. Did the Congress abandon most of the luxury tax?
Fill in the gaps using the words given
(material, necessities, amounts, burden, suppliers, fundamental, beer, tangible,
hardship, luxuries)

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