Saturday, September 10, 2011

The Lesson of Economic Damage From "Taxing the Rich" With the Punitive Luxury Tax in the 1990s

"Most Americans celebrated as the ball fell in Times Square New Year's Eve. But for auto dealers this new year is especially sweet. January 1 marked the expiration of the federal luxury tax on cars, the last vestige of the destructive luxury tax package in the infamous 1990 budget deal.

Starting in 1991, Washington levied a 10% luxury tax on cars valued above $30,000, boats above $100,000, jewelry and furs above $10,000 and private planes above $250,000. Democrats like Ted Kennedy and then-Senate Majority Leader George Mitchell crowed publicly about how the rich would finally be paying their fair share and privately about convincing President George H.W. Bush to renounce his "no new taxes" pledge.

But it wasn't long before even these die-hard class warriors noticed they'd badly missed their mark. The taxes took in $97 million less in their first year than had been projected -- for the simple reason that people were buying a lot fewer of these goods. Boat building, a key industry in Messrs. Mitchell and Kennedy's home states of Maine and Massachusetts, was particularly hard hit. Yacht retailers reported a 77% drop in sales that year, while boat builders estimated layoffs at 25,000. With bipartisan support, all but the car tax was repealed in 1993, and in 1996 Congress voted to phase that out too. January 1 was disappearance day.

The end of any federal tax is such a rarity that it's well worth celebrating. And the luxury tax lesson of economic damage is worth keeping in mind as politicians begin to wail that President Bush's new tax proposals aren't punitive enough on the rich."

HT: Pete Friedlander

20 Comments:

At 9/10/2011 10:23 AM, Blogger Jon said...

I think it's always useful to check sources. Is there data for yacht sales? Saying "dealer's reported" sales drops is kind of fuzzy.

The recession that started in 1990 could have played a roll as well. Yacht sales could be affected by perceptions. My memory is that the Democrats very aggressively pushed the story that the economy was in the doldrums (it's the economy, stupid). After the election was over we learned that in fact the prior quarter of 1992 was decent growth. That perception didn't exist before that and that could have affected sales. It seems simplistic to assume it was all due to the luxury tax.

 
At 9/10/2011 10:24 AM, Blogger Les Johnson said...

Governments never seem to learn that if you want more of something, reduce taxes. If you want less, increase the tax on that item.

Besides ignoring this iron law, some legislators even believe that increasing the tax on an item will not only not cause a reduction in the production of that item, but that manufacturers will actually INCREASE production.

The Canadian Liberals in the 80s, thought oil production would go up, in spite of an onerous tax regime.

Oddly, oil producers quit producing, and went elsewhere to spend their money.

 
At 9/10/2011 10:27 AM, Blogger Les Johnson said...

Jon: The fact that democrats in the Senate, the house and the white house; all approved killing the tax so soon after its birth, would indicate that the tax was not functioning as it should.

 
At 9/10/2011 10:41 AM, Blogger Mark J. Perry said...

Jon: Check the NY Times for more information on what happened to yacht sales and jobs.

 
At 9/10/2011 10:47 AM, Blogger juandos said...

Interestingly enough the Florida SunSentinel has a page linking it to a whole series of article its run since June of '91: IN THE NEWS
Luxury Tax


My particular favorite was one by Louis Rukeyser dated Sept 2, 0f 92: Luxury Tax Soaked Everyone But Rich

Considering the paper was in Florida you know they had to have had a real interest in how that ridiculous tax was hurting the local economies...

One of the most vivid things I personally remember from that tax was how it killed two industries at once on the Great Lakes...

It killed the fishing industry and the boat building industry who's product line was predominently forty to eighty foot fishing ketches...

There were all kinds of unemployed people in Wisconin by the beginning of '92...

 
At 9/10/2011 10:57 AM, Blogger Les Johnson said...

Correction; apparently Bush Sr was still in the white house when the luxury tax was repealed.

But, he had the support of very prominent democrats....

 
At 9/10/2011 11:02 AM, Blogger bix1951 said...

just speculating...
when you transfer income down the ladder what does it then get spent on?
instead of yachts?
food and shelter
or for vice?

 
At 9/10/2011 11:17 AM, Blogger juandos said...

"just speculating...
when you transfer income down the ladder what does it then get spent on? instead of yachts? food and shelter or for vice?
"...

Income was transfered alright but it went from the US and its workforce over to Canada and Europe and their respective workforces...

The problem with that particular luxury tax is that the fools that thought it up, i.e. Rep. (Dem) George Mitchell of Maine and Se. (Dem) Ted Kennedy of Massachusetts weren't smart enough to see that leisure craft in excess of a certain size and price tag amount made up a very small slice of the overall domestic boating industry...

President (RINO) George H.W. Bush was equally as blind...

 
At 9/10/2011 12:59 PM, Blogger Benjamin said...

Yes, when there is a decline in yacht sales, that is a crisis!

Horrors!

$4 trillion wasted in Iraqistan?

But why focus on the big stuff, when there are cutey-pie anecdotes to fawn over?

Seriously, many consider PIGOU and consumption taxes a much better approach than income taxes.

 
At 9/10/2011 1:16 PM, Blogger Buddy R Pacifico said...

I remember my dad buying my mom a nice diamond ring when I was a kid (WA state, 1960s). Mom and dad worked very hard and this was a reward bling. I inquired how much it cost and Dad responded "one thousand five hundred plus sales and luxury tax".

My dad tried to explain a luxury tax but it never made sense to me. I knew how brutally hard he worked but he had to pay a luxury tax for the sacrifice. This really made a vivid impression on me.

I am not against all taxes but this tax is "punitive".

 
At 9/10/2011 1:24 PM, Blogger Ron H. said...

"The problem with that particular luxury tax is that the fools that thought it up, i.e. Rep. (Dem) George Mitchell of Maine and Se. (Dem) Ted Kennedy of Massachusetts weren't smart enough to see that leisure craft in excess of a certain size and price tag amount made up a very small slice of the overall domestic boating industry..."

I've quit wondering how politicians can be so stupid as to do the things they do, and have come to believe that they are actually very smart. We just don't always understand their incentives.

At the bottom line, I think that almost 100% of the time, politicians are motivated to buy votes and get reelected.

Viewed in that light everything makes way more sense.

"Tax the Rich" has so much emotional appeal to voters who don't know any better, that it must be very hard to resist for an always conniving politician, now, as it was then.

Only when the economic failure of such a wrong-headed policy is obvious to everyone, do they reluctantly change course, while all the time blaming others for the problems that predictably arise.

 
At 9/10/2011 1:26 PM, Blogger Benjamin said...

Buddy--

I have been working for more than 30 years, usually 5-6 days a week, and eight hours is a short day.

I have been paying federal income taxes so that federal employees have have fat pensions, or we can occupy foreign nations for decades at a time. Some federal employees retire after just 20 years of service with full pension and with lifetime medical coverage.

What makes an onerous income tax more or less fair than a luxury tax? I am getting taxed on income I made and use primarily on necessities. You know, food, shelter, medical care.

Yachts and diamond rings?

 
At 9/10/2011 1:44 PM, Blogger Buddy R Pacifico said...

Benji, the luxury tax is on top of all the other taxes -- progressive income tax, property taxes, sales tax.

 
At 9/10/2011 1:45 PM, Blogger Ron H. said...

"My dad tried to explain a luxury tax but it never made sense to me"

That must have been tough. I can't think of any explanation that makes sense except, like you say, as a punitive measure.

For some reason the "rich" don't deserve to buy expensive goods.

 
At 9/10/2011 1:51 PM, Blogger juandos said...

"$4 trillion wasted in Iraqistan?"...

$9 trillion wasted on pandering to parasites

 
At 9/10/2011 1:58 PM, Blogger Ron H. said...

"My particular favorite was one by Louis Rukeyser dated Sept 2, 0f 92: Luxury Tax Soaked Everyone But Rich"

Good old Louis. I had forgotten about him. I always enjoyed his work.

 
At 9/10/2011 2:06 PM, Blogger juandos said...

Rukeyser was/is I thought a smart observer of the human condition Ron H...

Have you had a chance to peruse his web site?

 
At 9/10/2011 3:47 PM, Blogger Benjamin said...

Juandos:

The War on Poverty, the War on Drugs, the War on Terror--all wars designed by federal agencies, to never end, but always consume more and more resources.

 
At 9/10/2011 3:48 PM, Blogger Benjamin said...

Buddy-

Yeah, I hear you. But if I have to say, consumption taxes or income taxes, I would say consumption taxes.

 
At 9/11/2011 2:49 AM, Blogger Ron H. said...

"Have you had a chance to peruse his web site?"

No, but thanks for the link. I doubt it will have the same flavor without Louis.

 

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