Public Finance

In 1991 the federal government imposed a 10% “luxury
tax” on sales of new recreational boats and on
certain other high-priced consumer goods. Sales of
new recreational boats plummeted, causing unemployment
among boat building workers. In 1996,
this federal tax was repealed. What would have been
the equity based justification for this “luxury tax.”
Draw a diagram similar to Figure 2.3. Design your
diagram to show the luxury tax incidence spread
evenly between the consumer and the producer. Also
show a 50% drop in boat sales, after the imposition
of the luxury tax. Did the luxury tax yield the equity
outcome initially expected? Why?