0 votes
asked ago in General Economics Questions by (240 points)
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 Answer

0 votes
answered ago by (2.7k points)
It's a good reasoning, but a couple of fact don't recommend to do that. First, government has to collect taxes and those poor people working now would have to pay them, decreasing consumption in ordinary goods, what destroys jobs as well. Second, if the poor people pay taxes and the rich don't do that, the inequality would increase rapidly.

Goverment has to find the balance in collection of taxes, because they are necessary in national defense, public security or unemployment insurance. It has to tax accordingly with the disposable income. And we have to consider that taxes create consumption and jobs as well, so tax the rich strongly than the poor is fair.

If the consumption of luxury goods decline and it results in hoard, I think that an income tax would be always better than a goods tax. But that hoarding could be reinvested in economic activity, creating more jobs as well.