Suppose an excise tax is imposed on luxury boats and yachts. Economists argue that such a tax
A)is sure to be vertically equitable, since buyers of luxury boats and yachts are wealthy.
B)entails no deadweight loss as long as buyers of boats and yachts can easily substitute one luxury good for another.
C)violates the benefits principle of taxation.
D)may burden workers in the luxury-boat-and-yacht industry more than it burdens the buyers of luxury boats and yachts.

Question

Quizplus · Accepted Answer

If the tax increases the price of luxury boats and yachts, demand for these products might decrease, which could lead to a decrease in demand for workers in this industry. As a result, the burden of the tax may fall on the workers in the luxury-boat-and-yacht industry more than it does on the buyers of luxury boats and yachts. This means that the tax may be regressive rather than vertically equitable. The benefits principle of taxation suggests that taxes should be levied in proportion to the benefits received from government services, which does not apply to this situation. Finally, luxury boats and yachts may not have perfect substitutes, so the tax may lead to a deadweight loss.

Suppose an Excise Tax Is Imposed on Luxury Boats and Yachts