Even Worse Than the Luxury Tax Is the Pathetic Case Against It


October 17, 1991|By TRB

WASHINGTON — Washington. - I prefer the term boat rather than yacht,'' says Sen. John Chaffee of Rhode Island. He is pushing for repeal of the so-called ''luxury tax,'' enacted as part of last year's budget agreement. The tax applies to the purchase of furs and jewels costing over $10,000; cars over $30,000; yachts, er, boats over $100,000; and private airplanes over $250,000. The tax is 10 percent of the excess -- e.g., $200 on a $32,000 car.

When President Bush abandoned his ''no new taxes'' pledge, he hid his shame by clinging to a strained pledge of no new increases in ''income tax rates.'' One result was increases in excise taxes on gasoline, alcohol and cigarettes -- taxes that hit working people disproportionately.

Democrats insisted on balancing these with taxes on items bought by wealthy people. The effort is mainly symbolic. Even optimists figure the luxury tax will raise only $1.5 billion over five years.

Now boat builders, imported car dealers and so on have launched an energetic campaign for repeal. They claim that sales of luxury items are plummeting, jobs are being destroyed and government revenues are actually lower as a result.

It's certainly true that no one designing a rational tax system from scratch would include an item like this one.

As Senator Chaffee says, ''Somebody can spend $250,000 and build a second home, a ski lodge in Vail, and not pay a nickel, but if they buy a $150,000 boat they pay a tax. Now does that make sense?'' No, it does not make sense.

With all the unfairness in the world, unfairness to buyers of pleasure boats compared with buyers of ski condos may not touch your heartstrings. But the economic point is valid: This is a silly way to go about taxing the rich. The Internal Revenue Service has been forced to grapple with questions like: What if someone buys a pair of fancy earrings one at a time?

Trouble is, the sensible way of making affluent people bear more of the tax burden -- raising income tax rates -- is politically foreclosed. And the luxury tax was a quid-pro-quo for new taxes and spending program cuts that hit working people directly, which nobody is proposing to repeal. Furthermore, the supposedly dire effects of the luxury tax are being grossly exaggerated.

Any tax depresses the economic activity being taxed. That's one of the unfortunate things about taxes. And that is why -- unless you are purposely trying to discourage something, like smoking -- the best taxes are ones like the income tax that diffuse the burden over as wide a range of economic activity as possible.

However, when wealthy people are deterred from buying expensive jewelry or fancy cars and boats, the money doesn't disappear from the economy. Only two things can happen: Either it gets spent on something else, or it gets saved. If the money is spent on something else, that creates jobs and generates tax revenues to replace those lost. If the money is saved, that is something we are also supposed to be encouraging, is it not?

You would think that an organization self-described as ''a coalition of BMW, Ferrari, Jaguar, Mercedes-Benz, Porsche and Rolls-Royce dealers'' would have enough sense of irony not to name itself the Federation Against Inequitable and Regressive Taxation,'' no matter how sincerely it believed in the justice of its cause.

But no. FAIRTAX (get it?) commissioned a consultant's study which purports to show that the luxury tax has reduced sales of cars costing over $30,000 by 20 percent. This, the study concludes, will lead to the loss of at least 3,320 jobs and cost the government at least $135.5 million this year.

The figure the consultants primly label ''total cost of luxury tax'' and calculate with comic exactitude as $135.5 million omits completely the revenues from the luxury tax. Using the consultant's own figures for the average cost of cars subject to the tax ($54,000) and estimated 1991 sales (97,264), the luxury tax on cars will bring in $233.4 million this year -- close to double the purported ''cost.'' As for those 3,320 lost jobs, FAIRTAX's consultants figure the luxury tax will prevent 24,316 sales. At $54,000 each, that's $1.3 billion not spent on BMWs, etc. It's hardly inconceivable that $1.3 billion spent or invested elsewhere will create more than 3,320 jobs.

A study by the minority staff of the congressional Joint Economic Committee, purporting to measure the effect of the tax on boats, planes and jewelry, commits similar fallacies with greater arrogance. An introduction by Rep. Dick Armey of Texas complains that revenue estimates for the luxury tax are ''static,'' and brags that his study offers instead a comprehensive ''dynamic analysis.''

This glistening dynamic analysis concludes that the luxury tax will throw more than 9,000 Americans out of work and cost the federal government nearly $20 million in 1991. There are dynamic pages full of graphs, formulas and footnotes.

In estimating lost sales, the study eagerly notes that there are many substitutes not subject to the luxury tax. But nowhere do these dynamos acknowledge that substitute purchases will also create jobs and generate tax revenue -- a flaw that makes the study worthless.

If this is the best its opponents can do, the luxury tax wins by default.

OC TRB is a column in the New Republic written by Michael Kinsley.

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