Suppose you are a conscientious social planner. You are confident in your ability to do good. Alas, you need money to pay for your plans. You decide to meet your need for revenue by raising taxes. But how?
You want to be careful to avoid any tax that negatively affects working class men and women – the very people you want to help. You think hard and come up with the perfect solution: a yacht tax. You decide to enact a 10 percent excise tax on the sale of any boat over $100,000.
You couldn’t design a tax more targeted to capture the rich and only the rich. You congratulate yourself on your wisdom. You eagerly await the tax money that will soon be rolling in.
The problem: your idea has already been tried – and it failed. Big time. Passed in 1990, the yacht tax had an immediate financial impact, but not the one its proponents anticipated. Instead of producing a revenue windfall, the effect was something else entirely: yacht sales cratered.
Who was hurt by this unexpected development? Not “the rich.” Yes, many well-off people had to endure the indignity of life without a sparkling new yacht parked in their boat dock. Big loss. The real victims of the tax – the very people the targeted nature of the tax was designed to spare – were the middle-class workers who build yachts.
In the wake of the tax, the yacht-building industry crashed. Bankruptcies soared. Layoffs – 25,000 of them – commenced. Tax revenues dried up, and the pay-out of unemployment benefits increased.
The perfect tax to painlessly raise revenue had turned into a nightmare and probably cost the government money in the end. It was quickly repealed.