Luxury Tax in the United States of America (USA)

October 13, 2010US Taxby EconomyWatch


As the very name suggests, Luxury Tax in United States is levied on luxury commodities. The intention for imposing Luxury Tax in United States may be for taxing the elite and rich class of people, who can afford to pay some amount of their earnings to the state in the form of tax, and help in making the nation financially all the more prosperous. Recently, the United Sates Luxury Tax is being imposed on goods like perfumes, tobacco, deluxe cars, alcohol, jewelries, and many other items.

In United States, Luxury Tax is one of the most important indirect taxes. It is levied only when purchase of the luxury products and their use takes place. Luxury Tax is formulated, implemented and imposed to initiate changes in the existing pattern of consumption, so as to generate and incur more income. Luxury Tax is also known by the name of "Excise Tax" or "Sin Tax".

Though Luxury Tax is a common and prevalent form of tax, yet its imposition was emphasized during emergencies such as battles, to boost up income on government levels. The increase in government income at the time of wars helped the American nation time and again to meet the huge war-related expenses.


Evolution of Luxury Tax in United States:

When Luxury Tax is imposed in United States, there was hardly any reaction seen among the overall American population, perhaps because they were not in a state to respond to such reactions. With passing time, it started affecting more and more people in America. Despite the prevalence of all kinds of hostilities, the income generated from the imposition of Luxury Tax was considered to be of immense importance by the American government. Hence, there was no plan on the part of the government either to limit the tax or annul it, though discontentment had already started spreading among the common masses. Since the revenue earned from the imposition of Luxury Tax was pretty high, there was a possibility that "ordinary" goods might be tagged as luxury ones and Luxury Tax levied on them. This was perhaps the reason why Luxury Tax was unpopular among the common American masses.

In the past, there had been cases when sales tax was collected by the state by making use of "Luxury Token Tax", rather than calculating a percentage which requires cash payment, commonly practiced today. As far as luxury tokens are concerned, they could be bought from the state and used for making payment, rather than paying the sales tax amount in cash.

Nature of Luxury Tax in United States:

The American Luxury Tax is patterned, following the models of either the Value Added Tax (VAT) or Sales Tax. Luxury Tax is charged as a percentage on all luxury goods of a particular type. Luxury Tax is mainly applicable to the wealthy section of the American population, as well as on the buyers, making purchases over certain specific amounts. Hence, all those making transaction in real estates on American state levels are not allowed to cross the pre-determined limits.

Application of Luxury Tax in United States and its effects:

The effect of United States Luxury Tax is not the same for all luxury commodities. In case of a Veblen item, Luxury Tax initiates an increase both in its demand and prices. Hence, the effect of Luxury Tax is felt if the demand for certain luxury item heightens to a considerable extent.

Imposition of Luxury Tax in United States of America: Some Drawbacks

The issue whether imposition of Luxury Tax is useful or harmful is a debatable one. Though Luxury Tax is considered to be a means of extracting a part of the wealth of the rich class, a fall in the tax amount leads to decrease in the price of the luxury goods, leading to sufferings of the middle-class workers. In an attempt to increase Luxury Tax on luxury items like cigarettes, there is every possibility that black marketing may start on substantial or high levels, for supplying the consumers with more cigarettes. Termination of such criminal activities arising out of the imposition of Luxury Tax leads to a fall in the income generated from legal sales tax. Not only this, curbing of these criminal activities may as well demand spending of more money.

Imposition of the American Luxury Tax may sometimes decrease the purchase of certain luxury items. For instance, in the early part of the 1990s, a 10% Luxury Tax was levied on fur, costly jewelries, airplane and car purchasing worth $30,000 and above. This resulted in a sharp decrease in their purchases, causing problems to the producers of the goods and the retail traders dealing with them. At one point of time, the situation became so grave that Luxury Tax had to be annulled, and was replaced by the 1993 Revenue Reconciliation Act.

Other aspects of the United States Luxury Tax:

In America, Luxury Tax is levied in diverse areas, apart from luxury goods. One such area is sports. From the sports point of view, Luxury tax is considered as a surcharge, levied on the collective team payroll. The extent of levying Luxury Tax in the form of surcharge seldom surpasses the level of guidelines, which is pre-determined and set by the team. The apparent goal for imposing Luxury Tax in the sphere of sports is to prevent the gifted players from signing contracts with other teams, for more income. These actions on the part of the players not only disrupt the balance of the concerned team, but also reduce the interests of the fans in their absence.

Several sports team across United States have implemented the Luxury Tax system until recently, among which the National Basketball Association and Major League Baseball are worth mentioning. However, in case of National Basketball Association, the usefulness of luxury tax cannot be fully enjoyed, owing to its individual salary cap system.


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