Misinterpreting Taxes

Kimberley Strassel of WSJ Opinion Journal wrote a pretty misleading piece on Friday opposing a few Democrat-backed tax hikes. As we have discussed previously, I support some of these more than others. I find the case for the carried interest tax to be a mixed bag; some of the others mentioned I don’t mind, some I do. Regardless, that’s not really the criticism I am trying to make here.

Rather, it is specifically of the comparison of any of these taxes to the (in)famous luxury tax of 1990. Her characterization of that tax is absolutely misleading. She claims that it was repealed because it was a tax-the-rich effort that did damage it did to a number of industries (such as the boat-building industry) and hurt the working class. Of course, that is far from the whole story.

The reason those industries were so hurt was that the luxury tax was horrifically designed. It turns out that if you massively tax things people don’t need to buy (for example, yachts and jewels) … they stop buying them! Go, read up on elasticity, it’s not that hard to figure out. These industries were torn apart because demand was cut drastically in the face of the tax hikes. It is far from clear that any of the taxes under discussion would encounter any similar barriers due to high elasticities.

That isn’t to say any of these taxes would be a free lunch. None are. But to compare them to the debacle that was the luxury tax is disingenuous and contributes little to the debate.

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