I was studying Fiscal policy and I came across measures to reduce income inequality by using fiscal tools. One of the tool mentioned in that was - Higher taxes on luxury goods

This makes sense that luxury good are enjoyed by rich so imposing higher taxes is a sound and prudent measure to take for welfare of poor but here is my thought - Let's say if we don't impose high tax on luxury goods then it would drive more consumption which in turn will cause firms to hire labor for production and poor will benefit with employment and better income opportunities. Government will also benefit from the taxes - both production and consumption taxes! so Wouldn't it be more feasible? Raising incomes of poor through employment is far better.

Also, I believe the reason why it is not done because government doesn't want to be seen as favouring business or corporates over poor which profoundly mars the chance of political party.

Please share your thoughts, critique and if possible help me find fault in my line of thinking.

Note - In India when government imposed highest tax bracket on luxury cars, cars sales did see a slump so the argument that rich will continue to consume regardless of taxes might not hold true broadly also.

  • 1
    $\begingroup$ See en.wikipedia.org/wiki/Supply-side_economics $\endgroup$ Sep 16 '19 at 23:12
  • $\begingroup$ Classic debate between Republicans (lower corporate tax rates so that they will do better, hire more workers) vs. Democrats (higher tax so we have more social welfare program and the poor can live better lives.) $\endgroup$
    – Art
    Sep 17 '19 at 4:07

Luxury goods tend to be Veblen goods, so reducing taxes on them doesn't make them more attractive. They also tend to be goods whose value is mainly based on scarcity, so increasing demand doesn't increase the amount supply, it just increases the equilibrium price. If diamonds were cheaper, would there be significantly more diamond jobs?

There's the further issue that taxes just move money around. Giving rich people a tax break means either raising taxes on poorer people, reducing government spending, and/or deficit spending (which reduces the amount of capital available for private investment).


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