Question

Public Finance text book, Rosen, 10th ed. Chapter 16,

Question # 2: In 2002, the US federal government levied a tax of 3 percent on that part of a car's price exceeding $40,000. (for example, the tax liability on a $50,000 car would be 0.03 X ($50,000 - $40,000), or $300.) Discuss the efficiency, equity, and administrability of this "luxury car tax."

Answer 1

This method of taxation is quite efficient and administrable since the registration of car provides a good data point regarding the cost of the car. Moreover the computation of tax is pretty straightforward which makes the system of tracking and tax monitoring quite efficient.

Additionally, it is also equitable since only luxury cars above a certain threshold are taxed and lower value cars used by the economically weaker section are not under the tax net. This is in alignment with the principles of progressive taxation which is widely used.