Luxury Tax


DEFINITION of 'Luxury Tax'

A tax placed on products or services that are deemed to be unnecessary or non-essential. This type of tax is an indirect tax in that the tax increases the price of the good or service and is only incurred by those who purchase or use the product.

The term has remained even though many of the products that are assessed with luxury taxes today are no longer seen as "luxuries" in the literal sense. Today's definition leans more toward "sinful" items, such as tobacco, alcohol, jewelry and high-end automobiles. They are implemented as much in an attempt to change consumption patterns as to collect tax revenues.

Luxury taxes can also be called "excise taxes" or "sin taxes."


Luxury taxes were often imposed during times of war to increase government revenues, or as a way to get more tax revenue from the ultra-wealthy. Even though some people complain about the preservation of luxury taxes today, the vast majority of people and lawmakers don't mind charging extra fees for the use of these ancillary-type products consumed by a minority of the population.

There is much debate over whether levying luxury taxes does more harm than good. For example, who is most harmed by a luxury tax placed on an expensive car - the buyer, who presumably has money to spare, or the middle-class worker who builds the car only to see sales fall when the luxury tax curbs demand? In the late 1980s, Canada attempted a large luxury tax on cigarettes, only to find that a substantial and violent black market soon formed to supply smokers. Legal sales (and tax revenues) fell, while more money had to be re-routed to stop the criminal activity.

  1. Taxes

    An involuntary fee levied on corporations or individuals that ...
  2. Sales Tax

    A consumption tax imposed by the government on the sale of goods ...
  3. Tobacco Tax

    A tax imposed on cigarettes to help pay for healthcare for the ...
  4. Nanny Tax

    A federal tax that must be paid by people who hire household ...
  5. Indirect Tax

    A tax that increases the price of a good so that consumers are ...
  6. Gas Guzzler Tax

    An additional tax on the sale of vehicles that have poor fuel ...
Related Articles
  1. Economics

    What Is Fiscal Policy?

    Learn how governments adjust taxes and spending to moderate the economy.
  2. Taxes

    Before You Visit Your Tax Preparer: Do This

    The earlier you start preparing your tax records and documents, the more likely you are to have a smooth tax return experience – and all the tax benefits you're due.
  3. Fundamental Analysis

    How Influential Economists Changed Our History

    Find out how these five groundbreaking thinkers laid our financial foundations.
  4. Home & Auto

    Are Hybrid Cars Really More Economical?

    Find out if buying a hybrid vehicle is more economical than a fuel-based vehicle. Fewer trips to the gas station sounds nice, but you need to do the math.
  5. Economics

    The Court Cases That Have Shaped US Sales Tax Law: How They Apply Today

    Explore two Supreme Court cases that established legal precedent for the treatment and apportionment of sales taxes at the state level.
  6. Taxes

    5 Tax Moves To Make Before Year End

    Taxes aren't avoidable, but you shouldn't pay more than your fair share. Here are five moves you can make at year's end to lower your tax bill.
  7. Taxes

    Retired? 7 Tips for Cutting Taxes Before 2015 Ends

    As 2015 nears its end, here are some financial moves retirees can make before December 31 that can help to lower your tax bill.
  8. Taxes

    Tax Breaks For Volunteering

    Your volunteer ventures could earn you some welcome tax deductions, along with the satisfaction of helping others.
  9. Taxes

    Six Ways Your Tax Preparer Knows You’re Lying

    Cheating on your taxes is asking for trouble. You might get away with it, but you’re playing with fire and likely to get burned.
  10. Insurance

    Medicare 101: Do You Need All 4 Parts?

    Medicare is the United States’ health insurance program for those over age 65. Medicare has four parts, but you might not need them all.
  1. What are some examples of diminishing marginal benefits in my personal spending?

    A consumer would experience diminishing marginal benefits when he decides to consume more than one unit of a good or service ... Read Full Answer >>
  2. Do tax brackets include Social Security?

    A portion of your Social Security benefits may be subject to federal taxation using tax brackets. Your tax bracket is determined ... Read Full Answer >>
  3. Are personal loans tax deductible?

    Interest paid on personal loans is not tax deductible. If you take out a loan to buy a car for personal use or to cover other ... Read Full Answer >>
  4. Does a Flexible Spending Account (FSA) cover braces?

    Funds from a Flexible Spending Account (FSA) can be used to cover costs associated with installing, maintaining and removing ... Read Full Answer >>
  5. Does QVC charge sales tax?

    QVC, an American TV network, is registered with states to collect sales or use tax on taxable items. QVC is also required ... Read Full Answer >>
  6. Do 401k contributions reduce AGI and/or MAGI?

    Traditional 401(k) contributions effectively reduce both adjusted gross income (AGI) and modified adjusted gross income (MAGI). ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  2. Bullish Engulfing Pattern

    A chart pattern that forms when a small black candlestick is followed by a large white candlestick that completely eclipses ...
  3. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  4. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
Trading Center