The term luxury tax is used to describe an ad valorem tax placed on products or services that are thought to be non-essential items. Luxury taxes are typically levied as a percentage of the selling price of the item and may involve threshold price points to trigger this tax.
Also known as a luxury surcharge, a luxury tax is an ad valorem tax, which means the amount of funds collected is based on the price paid for the product or service. As the name implies, luxury taxes are oftentimes imposed on goods or services that are considered non-essential. Since the tax usually affects relatively small populations of wealthy individuals, it's a form of taxation favored by lawmakers.
From November 1991 through August 1993, the United States imposed a 10% luxury tax on automobiles selling for $30,000 or more, aircraft selling for more than $250,000 as well as boats selling for more than $100,000. The tax was repealed by Congress after failing to meet its original objective of helping to close the federal deficit.
Critics of luxury taxes claim they not only fail to generate revenues, but also serve to hurt specialty businesses. For example, a 10% tax on boats may result in a significant decrease in consumer demand. A decrease in consumer purchases would not only cause the tax to miss its revenue-generating targets, it also has a direct impact on the businesses making the product.
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