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:
“The child-rearing years are relatively short in our increased life span. It is hard for young women caught between diapers and formulas to believe, but there are years and years of freedom ahead. I regret my impatience to get on with my career. I wish I’d relaxed, allowed myself the luxury of watching the world through my little girl’s eyes.”
—Eda Le Shan (20th century)
“People buy their necessities in shops and have to pay dearly for them because they have to assist in paying for what is also on sale there but only rarely finds purchasers: the luxury and amusement goods. So it is that luxury continually imposes a tax on the simple people who have to do without it.”
—Friedrich Nietzsche (1844–1900)