Luxury Tax Inequality In Society

Luxury tax is not a solution to inequality within society.

Introduction

A real challenge for many economists is to find a way to decrease the financial inequality within society. Several economic and political possibilities exist to decrease the big differences between the rich and the non-rich. On the one hand, providing state subsidy might be a good tool for this challenge. In this way relatively poor people in society are helped to increase their welfare and to limit inequality. On the other hand, there is the possibility to decrease inequality by limiting some of the welfare of the relatively rich people in society. This can be done by raising taxes on luxury goods while keeping the tax on other goods the same. However, a sales tax on

2014). This group of customers will have an even harder time buying luxury goods when they have to pay more tax. Due to their price sensitivity they will be likely to not buy the good anymore after an increase in price. An example to illustrate this situation can be a person buying a wedding ring once in his life or going on a relaxing holiday. While before the luxury tax he might have been able to go on a luxury holiday every 10 years, he might now decide to not go anymore at all. In this way poor people will have a much harder time to buy luxury goods or even decide to not buy them anymore at all. Rich people might also consume less luxury goods but will still be more enabled to buy these goods every now and then. This means that both groups will limit their consumption of luxury goods as a result of luxury tax. The wealthy buy less luxury goods and the non-wealthy will probability not buy it anymore at all. From this point of view, the tax will result in a similar or even bigger gap between these two groups and therefore will not solve the inequality within

This can for instance be done by introducing a subsidy. Subsidizing goods or services that are necessary but costly to the low income families can increase their wealth. When the government subsidizes necessity goods and services, like education and healthcare, low income families will have some money left to spend on other goods. When they spend more money on other goods, the demand of other goods goes up. This will lead to an increase in production and therefore more jobs. In addition, when subsidizing necessity goods and services such as education, the effects of this subsidy will also be noticeable in the long term (Schultz, 2001). Schultz (2001) analyzes a program where education is subsidized for poor families in Mexico. His analysis shows that subsidies stimulate poor children to study, which in the long term lead to better jobs. When those poor children are given the ability to get educated well and find a good job, they will also have the ability to earn a higher salary (Schultz, 2001). The individual can spend this money on goods which will increase his or her personal wealth but also increase production in industries. An increase in production will lead to more job opportunities for the lower classes. Non-wealthy workers will most likely be surer of their job and are possibly able to find a way to earn more