Say, What About a Luxury Tax?

January 11, 2008  ·  Filed under: Mailbag

From a reader named Dominick:

As a small-business owner, I am obsessed with the idea of cutting down the compliance requirements.

Since the FairTax was designed with a prebate to address the lowest levels of the economy, has anyone considered adding a luxury tax to apply to the highest levels? Unlike the AMT, a luxury consumption tax of 15% could be added to the FairTax to items that are sold which are a multiple higher than the average. So, a $600 pair of jeans would be taxed more than a $30 pair.

A luxury tax could quell arguments that the rich would pay less under the FairTax. A luxury consumption tax goes after the type of goods the rich are more likely to purchase. It doesn’t single out any particular industry and it’s unlikely to expand like the AMT to snag more money from those on the lower in the economy.

I’m not a researcher so I don’t know exactly how much of the economy is luxury goods. Likewise, I’m not sure what the additional tax rate should be. But if something like that were implemented, I see the possibility of lowering the initial FairTax rate or even increasing the size of the prebate. Either of those, would be a big win.

Have at it.

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No Responses to “Say, What About a Luxury Tax?”
  1. If you buy a cheap pair of jeans, that would generally be considered in the poverty levels and you’d essentially be paying 0% tax (because of the prebate).

    If you’re rich, and you spend the poverty level in your first month of spending, then when you buy any pair of jeans you pay the luxury tax rate of 23%.

    Keep in mind that theoretically, nobody pays an actual 23% rate, since everyone gets the prebate. Spending at the poverty level, you pay 0%. Spending at twice the poverty level, you pay 11.5%. At 3x the poverty level, you pay 15.3%. At 4x the poverty level, you pay 17.25%. You’d have to be spending 8x the poverty to get to a rate of 20%. Even if you spend at 24x the poverty level, your effective rate is still only 22%.

    So someone spending at 24x the poverty level pays an extra “luxury” rate of 10.5% over someone spending at twice the poverty level. And this is not just on specific luxury items, this is on every item. And it is in effect without having to keep track of any kind of “average” cost for a type of item or requiring insane complex rules for business to keep track of when computing tax on each item.

    Derek  ·  Jan 11, 2008 at 10:27 pm  ·  Permalink
  2. The three main reasons citizens should oppose anything like FairTax are:

    1) Eliminating Social Security and Medicare taxes means over time that no one can know how much was paid into these programs. The benefits for them will merely become discretionary Congressional spending and morph into means-tested welfare with drastically reduced benefits as opposed to the defined “insurance” programs they now are. There is a GOOD REASON we have separate FICA & Medicare taxes, a reason we do not want just “lost” from citizen control.

    2) Eliminating a corporate tax code means eliminating the last and only control that citizens can have over corporations. An absurdity!

    3) Eliminating corporate taxes means that there would be no such thing as a “tax-exempt” status that a church or other not-for-profit could lose for preaching politics instead of performing the stated mission of the organization.
    Your churches will become uncontrolled political clubs with weekly rallies.
    This is the reason Mike Huckabee likes this plan, and it would be hard for the rest of us to imagine a plan more destructive to secular democracy.

    Dan Davis  ·  Jan 11, 2008 at 11:03 pm  ·  Permalink
  3. The objection that I’ve seen and heard is that the impact of the FairTax is that those earning over $200,000 would pay less than they do now while those in the middle would pay more.

    I’m suggesting that by adding a luxury tax, the tax revenue could be recaptured from those with highest incomes and possibly expand the tax benefits to everyone else by lowering the FairTax rate or increasing the prebate beyond the poverty level. Either of those certainly would make the FairTax more politically viable.

    Dominick  ·  Jan 12, 2008 at 3:49 am  ·  Permalink
  4. A luxury tax will not work. Ask the yacht industry.

    In case you are unaware, Congress passed a “luxury tax” on the yacht industry. Instead of punishing the rich, it decimated the industry. The rich were able to spend their money on something else…another home, a luxury car, etc, while those “grunts” who worked on building the yachts saw the demand dry up. Many yacht builders went out of business.

    The FairTax is progressive with the prebate. The rich, with more discretionary income, will naturally pay more.

    Wendy  ·  Jan 12, 2008 at 8:14 am  ·  Permalink
  5. This could be applied as a separate excise tax. Just as it is done today on things like cigarettes.

    Morphh  ·  Jan 12, 2008 at 12:58 pm  ·  Permalink
  6. A great idea. Unfortunately, defining a luxury is not easy, A $600 pair of jeans is but what about a $600 suit? How would you like to go through a store and decide at what level a item goes from ‘budget’ to’ designed to last’ and then to ‘excessive’? Certainly be a way to keep former IRS staff employed!

    foreigner  ·  Jan 12, 2008 at 6:13 pm  ·  Permalink
  7. It might be hard to apply it to sub-groups of normal puchases. A luxury tax is normally applied to things like a yacht, caviar, expensive cars, jewelry, etc. It may also be applied only to purchases over a certain amount, for instance, some states charge luxury tax on real estate transactions over a limit.

    Morphh  ·  Jan 12, 2008 at 6:52 pm  ·  Permalink
  8. I think the luxury tax will not work. If the Fair Tax is stating that individuals get to keep all of their paycheck and only pay the fed tax when a purchase is made, then they are at liberty to purchse any item. Regardless of income, those who want to spend their money on luxury items will pay the tax.

    All things relative it depends on number of people in the household, and if the household is a two income household.

    I agree who wants the job of labeling all items for sale as “Must Have”, “Want” or “Need”. Taxpayers will have to maintain constraint under the Fair Tax if implemented. I do though believe it will help a great deal in allowing households to save more. I am certain anyone will watch their spending when buying items other than food and necessities when they are taxed at 30%.

    Lisa  ·  Jan 13, 2008 at 5:54 pm  ·  Permalink
  9. What I was describing (not meaning to implying support) is that it would not change the FairTax at all. The FairTax does not abolish excise taxes. If a luxury tax were implemented, it should be an excise tax and not part of the FairTax.

    Morphh  ·  Jan 14, 2008 at 8:48 am  ·  Permalink
  10. Dan, a few responses to your very tangential response re: luxury taxes…

    1) Do you really think the “accounting” of how much was paid into SS and Medicare actually matters in practice? They’re pay as you go programs. What I pay makes no difference to what I get out. What the aggregate has paid in to date will make no difference as to what is paid out in aggregate in 20 years. The whole concept of a trust is a total joke.

    2) What the heck are you talking about?! The current tax scheme provides essentially no meaningful control for consumers over corporations. We have two much stronger means of control: not buying stuff from companies we don’t like and legislation and regulation.

    3) Ever hear of a 527 entity? Last time I checked, they were tax exempt and can talk about politics all they want. If you really think that a) churches don’t already have plenty of political discourse and b) the churches that don’t would start to, I think you have a fairly poor appreciation for church life in the US. I can think of several churches that engage directly in political talk. I think that most churches that don’t get into politics are avoiding them for a reason: their parishoners don’t go to church to talk about politics but to talk about God.

    tcg  ·  Jan 14, 2008 at 10:29 am  ·  Permalink
  11. One of the ideas behind FairTax is that it would allow average citizens the opportunity to save without being penalized. I think a luxury tax may become a penalty for saving.

    For example, let’s say there is a luxury item that a middle-income person wants to purchase… a Corvette. Well, FairTax is designed to enable this person to save up for that purchase without penalty. But, if we’re to add a luxury tax to this Corvette, which can cost quite a bit more than the average car… the luxury tax would become more money that this person is going to have to save initially.

    Now let’s look at the person you are wanting to target with a luxury tax, a car collector. Such as a person that may want to purchase the same Corvette in each color it is available in. He is going to already pay quite a bit more in taxes than the middle-income person with 23% of the cost of each of those cars going to the government under FairTax. He’ll blow his pre-bate in just one purchase.

    Tanner  ·  Jan 14, 2008 at 7:03 pm  ·  Permalink
  12. Perhaps the original poster hasn’t been to the same churches I have. There is plenty of politicking from the pulpit and in the pews.

    There are also plenty of yachts and limos purchased by small businesses, that then use those vehicles as rentals. I know 2 people, definitely not rich, who bought limos and drive them as rentals for people who want a limo for a special occasion. They are just a small business.

    This smells of wealth envy and redistribution of wealth … something I want no part of.

    Wm. Bradley  ·  Jan 15, 2008 at 10:28 am  ·  Permalink
  13. I’ve just read an interesting article in this month’s issue of Forbes magazine(pg37). The article demonstrates that we are all fools and the boiling frog analogy is true as ever. The article talks about a new “rule” that the IRS will be implementing it says that a professional tax preparer will now be responsible to decide if the advice he/she gives will result in the client losing in tax court and if this situation arises the tax preparer either needs to notify the IRS using a newly designed form (another one) form flagging the account for the IRS if this is not done the preparer risks a $1000.00 fine and a career damaging disciplinary action.
    CPA’s interviewed for the article acknowledged that they would, under these new rules, be an arm of the IRS. It was also said that tax returns would be much more expensive since prepares would now want to do extensive research at taxpayers expense to minimize risk to themselves…The FAIRTAX has to be implemented sooner rather then later. This is another of several outrages perpetrated against the foolish taxpayer.

    JP  ·  Jan 15, 2008 at 10:36 pm  ·  Permalink
  14. I think we should just get to the base of what luxury taxes are about; the redistribution of wealth. That happens to be one of the basic tenets of Communism and to a somewhat lesser degree Socialism. So show me a country that has ever done either of those well and can compete with us in terms of standard of living.

    dculling  ·  Jan 16, 2008 at 8:31 am  ·  Permalink
  15. JP… I’m not sure what you’re describing in #13 is such a new concept. The specific application of it likely is, but the “knowing participant” idea is pretty old. A CPA has an ethical and legal obligation to do his job according to certain standards. For a long time, one of those standards has been that they report things that they know to be fraudulent or inaccurate. They are, afterall, signing their name under a line that says that the information presented on the form they’ve prepared is accurate to the best of their knowledge. If they know it’s not accurate, they shouldn’t be signing, and if they refuse to sign and know that the client is going to file the inaccurate form, they have long had a professional ethical obligation to report the filing.

    It sounds like the creation of a specific form as the mechanism for reporting such issues is the only think that’s new.

    Similar concept in an unrelated field: Lawyers are prohibited from discussing crimes that have been committed by their clients. They are, however, REQUIRED by their professional, ethical and legal standards to disclose any knowledge they have of future crimes that will be committed by the same client. It’s why lawyers don’t ever ask if the defendant really committed the crime. If the defendant admits to the lawyer that he did, the lawyer can’t even consider letting the client testify under oath or speak to authorities because it’s almost certain that the client will commit the crime of perjury or something equivalent (e.g. 18 USC 1001, false statements made to a federal official during the course of an investigation). CPA’s have a similar professional, ethical and legal duty to report behavior by their clients.

    tcg  ·  Jan 17, 2008 at 3:40 pm  ·  Permalink