Luxury Tax

What is a 'Luxury Tax'

A luxury tax is 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."

BREAKING DOWN 'Luxury Tax'

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.

RELATED TERMS
  1. Luxury Item

    An item that is not necessary for living, but is deemed as highly-desired ...
  2. Luxury Automobile Limitations

    An annual limit on the amount of depreciation that can be taken ...
  3. Direct Tax

    A tax that is paid directly by an individual or organization ...
  4. Consumption Tax

    A tax on the purchase of a good or service. Consumption taxes ...
  5. Indirect Tax

    A tax that increases the price of a good so that consumers are ...
  6. Taxes

    An involuntary fee levied on corporations or individuals that ...
Related Articles
  1. Taxes

    Use Tax Vs. Internet Sales Tax: How Are They Different?

    Learn about the differences between a use tax and an Internet sales tax. Find out about transactions in which the taxes apply, and to whom they apply.
  2. Professionals

    Types Of Taxes

    These taxes are unavoidable for corporations.
  3. Budgeting

    The Psychology Behind Why People Buy Luxury Goods

    Luxury goods are a great example of how irrational we can be; a decent and sturdy handbag can be purchased for $50, yet people will still spend thousands to buy a brand name. Why?
  4. Taxes

    5 States Without Sales Tax

    Learn about the five states that do not charge sales taxes and about other taxes the states levy instead in order to generate revenue.
  5. Taxes

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  6. Professionals

    Tax Accounting

    Tax Accounting
  7. Economics

    Calculating Net of Tax

    Net of tax is a figure that has been adjusted for taxes.
  8. Taxes

    Explaining Progressive Tax

    A progressive tax is a levy in a tax system where the tax rate increases as the taxable base increases.
  9. Taxes

    5 Most Taxing Taxes for Americans

    There’s not much that unites Americans like their hatred of taxes. Here's a list of taxes we dislike the most.
  10. Taxes

    What's an Indirect Tax?

    An indirect tax is levied on goods or services rather than on an individual or a company.
RELATED FAQS
  1. What are the differences between regressive, proportional and progressive taxes?

    Understand the differences between the most common tax systems including regressive taxes, proportional taxes and progressive ... Read Answer >>
  2. How does the marginal tax rate system work?

    The marginal tax rate is the rate of tax that income earners incur on each additional dollar of income. As the marginal tax ... Read Answer >>
  3. What's the difference between the marginal tax rate system and a flat tax?

    Find out about the difference between marginal tax rates and flat taxes. Gain insights on both systems and the arguments ... Read Answer >>
  4. What is the difference between income tax and capital gains tax?

    Understand the difference between a person's income tax and his capital gains tax. Learn when a person needs to pay taxes ... Read Answer >>
  5. Who first came up with the idea of a progressive tax?

    Learn how the progressive income tax system developed in the United States and became the federal government's primary revenue ... Read Answer >>
  6. Is progressive tax the same thing as marginal tax rate?

    Learn how a marginal tax rate is a form of a progressive tax rate. Learn the pros and cons of such a tax policy and who may ... Read Answer >>
Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center