Mostly summarized from Gregory Mankiw’s Principles of Economics 5th Ed.
PART
2 How Markets Work
Chapter 6 of
36 Supply, Demand, and Government Policies
Section 15 of
15
…
In
1990, Congress passed a law adding a 10% luxury tax on yachts.
The
goal was to raise revenue for the federal government from the rich Because only
the rich could afford to buy yachts, taxing yachts seemed a logical and
progressive tax.
Because
of the forces of supply and demand, the result was different than Congress
expected but economists could have predicted.
…
The
demand for yachts is elastic, millionaires can easily forgo buying a yacht.
They
can instead buy some other luxury such as a bigger house or a European vacation.
However,
the supply of yachts is inelastic.
Yacht
factories are not easily converted to alternative uses.
Workers
who build yachts cannot easily change careers.
With
elastic demand for yachts and inelastic supply of yachts, the burden of this
tax fell mostly on the suppliers.
…
The
tax on yachts significantly reduced the demand for yachts.
The tax
burden was largely placed on the firms and workers who build and supply yachts.
It resulted
in some yacht companies going out of business, and many workers losing their
jobs.
So,
the burden of this tax fell more on middle class suppliers and workers than on rich
buyers.
Realizing
this, Congress in 1993 repealed the luxury tax on yachts.
(end of chapter 6 of 36)
… …
Congratulations!
17% of way to becoming a competent economist.
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