Question

You work as a stock analyst. You specialize in analyzing markets for "high-end" manufactured products. The president has recommended that Congress impose a tax of $20,000 on every person who purchases a new yacht. He argues that rich people who can afford to purchase yachts (they cost around $2 million) should pay higher taxes. The money raised would be used to provide additional benefits to returning war veterans.

You are writing a research report on the firms that manufacture yachts. You want to include a statement in the report about whether you think the proposal is likely to pass Congress and become law. You have analyzed the proposal and the voting records of members of Congress. You have decided that the proposal will not obtain enough votes to pass Congress, unless the major labor unions representing employees in this industry support it. You know that many of the yacht-producing firms hire veterans who could benefit from the programs funded by the tax.

QUESTION: Analyze the effects of imposing a $25,000 per yacht tax on consumers (on a qualitative basis).

Answer 1

The question says that the president has recommended that Congress impose a tax of $20,000 on every person who purchases a new yacht. He argues that rich people who can afford to purchase yachts (they cost around $2 million) should pay higher taxes. But this argument would not hold true always. The counter initutive reaction could be that the assumption that people who can buy yatch cannot pay higher tax. There is some sort of price elasticity and by imposing so much taxs, the demand can actually go down. The government need to take care of all the segments of the society. It not always the low end but also the high end segment that contribute to the number of votes.

On top of it the stocks of "high -end" manufacturing company will crash. With the impostion of higher tax, other high end manufacturing company can expect a higher tax in near future. This anticipation can led to falling of the stock prices. And this would indirectly impact the economy and the government will have a bad impression on the common mob.

Hence this imposition of tax is not a good idea. A better tax system can be brought it.