A luxury tax is a tax on luxury goods: products not considered essential. A luxury tax may be modeled after a sales tax or VAT, charged as a percentage on all items of particular classes, except that it mainly affects the wealthy because the wealthy are the most likely to buy luxuries such as expensive cars, jewelry, etc. It may also be applied only to purchases over a certain amount; for instance, some U.S. states charge luxury tax on real estate transactions over a limit.
A luxury good may be a Veblen good, which is a type of good for which demand increases as price increases. Therefore the effect of a luxury tax may be to increase demand for certain luxury goods. In general, however, since a luxury good has a high income elasticity of demand by definition, both the income effect and substitution effect will decrease demand sharply as the tax rises.
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Famous quotes containing the words luxury and/or tax:
“Every luxury was lavished on you—atheism, breast-feeding, circumcision.”
—Joe Orton (1933–1967)
“In 1845 he built himself a small framed house on the shores of Walden Pond, and lived there two years alone, a life of labor and study. This action was quite native and fit for him. No one who knew him would tax him with affectation. He was more unlike his neighbors in his thought than in his action. As soon as he had exhausted himself that advantages of his solitude, he abandoned it.”
—Ralph Waldo Emerson (1803–1882)