Wednesday, August 25, 2021

Getting Ready For the Democrat Party’s Tax Increases

Assuming the Democrat Party’s $3.5 trillion spending plan passes Congress later this year, it will include several tax increases.

While we wait for the details, I would like to remind readers of a true story, which illustrates the difference between persons or firms that appear to be paying taxes and those who really bear the burden, the incidence, of taxes.

 

In November 1991, Congress enacted and President George H.W. Bush signed a 10% luxury surcharge tax on new boats over $100,000, cars over $30,000, aircraft over $250,000, and furs and jewelry over $10,000. The tax was called a “luxury” tax because it was to “tax the rich.”  The government estimated it would raise $9 billion over the following five years to reduce the budget deficit

 

Take new boats.  Assuming boat builders could not reduce the price of new boats overnight, a boat that previously cost $100,000 would now cost $110,000.  A rich buyer of a $110,000 boat would appear to pay the $10,000 luxury surcharge.

 

Buyers who were willing to pay $100,000 for a new boat might not be willing to pay $110,000.  How many might that be?

 

To the shock of boat builders and their employees, the number was huge.  Buyers literally went on strike, refusing to pay the luxury tax.  Sales of luxury yachts fell precipitously.  Firms fell into the red and many employees were laid off.

 

Who bore the burden, the incidence, of the 10% luxury surcharge tax on boats?  Almost all was borne by boat builders and their employees.  Very little was borne by consumers who topped buying them.

 

The tax caused a loss of jobs in New England, hitting Senate Majority Leader George Mitchell’s home state of Maine very hard.  In August 1993, the tax was repealed at the urging of the yacht industry.


When you read analyses which claim that the incidence of the Democrat Party’s tax increases will fall largely on the rich, keep this example of the 1991 10% luxury surtax on boats in mind.  What appears to be a tax on the rich may, in fact, turn out to be a tax on middle- and lower-middle income households.