Question

Hi, can I get an analysis of the case "Repeal of the Luxury tax" from the textbook "Business and its Environment" by David Baron.

Answer 1

Imposition of the Luxury Tax is an action which had very important effect in the non market and causes great loss to consumers as well as producers. Such losses turns to repeal the luxury tax.

This case is an example for distributive politics along with giving importance for demand and supply of non market. Those who buys luxury goods have to pay a tax which is very high. Such tax reduces their surplus, whereas it benefits the taxpayers and the public. Therefore, luxury tax reduces the demand for luxury goods. Consequently, profits of industries dealing with luxury goods goes down and they lose their market and struggled on paying of their costs. Higher the fixed costs and lower the employees' salaries who lost job, higher will be the demand for repeal. Demand for such repeal of luxury tax comes from the industries who lose demand and employees' worked there, not from rich persons. Rich used to buy luxury goods whenever they needed. As demand for luxury goods are elastic, loss of producer's cost will results in high demand for repeal. And those who spoke against this repeal are the Congress members who were anxious about fiscal responsibility.

IRS rules which executes luxury tax was worried about evasion of such tax. People who wants to avoid luxury tax then requires a low profile and tried their maximum to hide those luxuries from the media.

In short, by using industry demand and supply, luxury tax effect analysis can be made. It helps to identify cost loss and surplus made by consumers and also collected taxes.