Question

n 1990, Congress passed a new luxury tax on items such as yachts, private airplanes, furs, jewelry, and expensive cars. According to the textbook, which of the following statements is (are) correct?

(x)One goal of the tax was to prevent rich people from buying luxuries.

(y)One goal of the tax was to raise revenue from those who could most easily afford to pay the tax.

(z)The burden of a luxury tax usually falls more on the middle class worker that produces the good than on the wealthy buyer because demand for luxury goods is usually price elastic.

A.(x), (y) and (z)B. (x) and (y) only C.(x) and (z) onlyD.(y) and (z) onlyE.(x) only

Answer 1

The correct statements are (y) and (z). Hence, the correct option is D.(y) and (z) only.
Explanation:
Luxury tax is a tax on luxury goods (products not considered essential). A luxury tax is calculated after a sales tax or VAT. It mainly affects the wealthy because the wealthy are the most likely to buy luxury goods like expensive cars, jewelery, private airplanes, yachts etc.

Since only the rich can afford to buy yachts, private airplanes, fur, jewelry and expensive cars, taxing luxuries is a logical way to tax the rich. Hence, the goal of the luxury tax was to raise revenue from those who could most easily afford to pay.

However, the demand for luxury goods is quite elastic. This implies that price or other factors have a big effect on the quantity bought by rich people. On the other hand, the supply of luxury goods is relatively inelastic (in the short run). This is because the factories set up for producing these goods can not easily find an alternative and the workers employed are not eager to switch their careers.

Thus, the elastic demand and inelastic supply result in the burden of tax falling largely on the suppliers instead of the consumers (wealthy people). Thus, the burden of luxury tax falls more on the middle class (workers and firms) than on the rich.