Question

The topic of this discussion is on taxes & elasticity. Specifically answer this prompt: If the federal government wanted to implement a "luxury tax" (or a tax on certain luxury items like expensive private jets, excessively expensive jewelry and furs, and expensive yachts), would you support it? Explain why or why not briefly.

1. A yes/no/maybe answer to the question with an explanation of your reasoning.
2. Include a detailed and accurate application of one or more of the concepts: price elasticity of demand, price elasticity of supply, tax incidence, consumer surplus, producer surplus.

Answer 1

Luxury goods are characterized by high income and price elasticity of demand.

With regards to taxation, government must charge those goods which are price inelastic in nature, so as to not reduce consumption fall much and thus make huge tax revenues.

In case of luxury goods, since the demand is highly elastic in nature, taxing these luxury goods will lead to a drastic fall in demand for these goods and the government will not be able to collect high tax revenues.

Thus, it is not optimal to tax these goods if the purpose of the government is to collect high tax revenues. The focus should instead be on goods having inelastic demand.