Episode 05 – Luxury taxes... on the working class?

In this episode, we first travel 2,000 years to the Roman Empire. Then, to the United States of the 1990s, to see how the Luxury Tax approved by Congress in 1990 backfired. After that, we will check on how things are going in Canada, just two weeks ago, to see how we learn nothing from past mistakes. And finally, we will go back to the Roman Empire. All of this while trying to understand fundamental economic concepts such as direct and indirect taxes, progressive and regressive taxation, elastic and inelastic supply and demand, and tax incidence. Tax incidence is the key concept for today's episode.    

When they were not fighting, Rome traded with all the peoples beyond its borders. To the north of Britannia, with the Picts, and in continental Europe, to the north of the Rhine and Danube rivers, with Cherusci, Marcomanni, Quadi, and many more peoples.   

To the south of the Roman African provinces, Rome traded with peoples like the Mauri and the Garamantes and the kingdoms of Kush in modern Sudan and Axum, even more to the south, in modern Ethiopia. 

But it was beyond the East, with the Arabian Peninsula, India, and as far as China, that Rome traded the most. They appreciated the Roman wine, oil, pottery, glassware, and especially the bullion value of the Roman coins. Many hoards of Roman coins are found in India and Sri Lanka, for example. In turn, the Roman elites valued Chinese silk and products from India and the Arabian Peninsula, such as incense and myrrh, precious stones, pearls, and spices, especially black pepper. Allow me to emphasize that all of these eastern commodities were luxurious products, expensive luxurious products.  

In the second half of the 1st century AD, the Roman author Pliny the Elder wrote his monumental work titled Natural History. There, Pliny the Elder bitterly complained: "At the very lowest computation, India, China, and the Arabian Peninsula, withdraw from our empire 100 million sesterces every year—so dearly we pay for our luxury and our women." Clearly, Pliny was the life and soul of any party. 

Pliny the Elder could not know with certainty the amount of cash flowing to the East. But to put these 100 million sesterces per year in perspective, this is almost 1/5 of the total annual army expenses of the time, and the army was by far the most significant imperial expenditure. 

Now, what we know with certainty is that this trade was very profitable, and wherever there's profit, there are taxes. 

Portoria was one of the many types of taxes in the Roman Empire. It was the equivalent of modern tariffs. Portoria were paid at the borders of the empire, at the borders of provinces, and even at the borders of cities and towns. Rates varied across the empire from 2% in places like Spain to 5% in Sicily, although 2.5% was a common rate between provinces, as in Asia, for example, in what is modern western Turkey.  

Now, the available evidence suggests that portoria fees at the empire's external borders were higher. 

For example, somewhere between the late 1st century BC and the very early 1st century AD, the geographer Strabo suggests that because of these portoria fees, it was more profitable not to invade and occupy Britain: "no corresponding advantage was to be gained by taking and holding their country. For it seems that at present more revenue is derived from the duty on their commerce than the tribute could bring in, if we deduct the expense involved in the maintenance of an army for the purpose of guarding the island and collecting the tribute." We don't have more details about these portoria fees, so we don't know their rates. What we know is that two decades after Strabo's death, Emperor Claudius' financial calculations yielded a different result, and he started the conquest of Britain. 

Lucky for us, we do have the portoria fees on the luxury products traded to the East of the empire's borders. 

The highest rate of all portoria was 25% on imported goods at these Eastern external frontiers, based on evidence from Egypt, the Syrian city of Palmyra, and the Red Sea port city of Leuke Kome, in what is now Saudi Arabia. This fee is 10 times the average fees in provincial borders such as Asia, in modern western Turkey, one of the wealthiest provinces in all the empire, by the way. 

The Eastern tariff rate of 25% is probably because, beyond the Eastern provinces, as we previously saw, trade with the Arabian Peninsula, India, and China was highly profitable for the merchants involved; after all, it was luxury trade on goods such as silk, incense, precious stones, pearls, and spices. 

However, at some point between the late 100s and the early 200s AD, this is, between the reigns of Marcus Aurelius and Severus Alexander, this 25% portoria rate was cut in half to 12.5%. It probably happened in the 220s under Severus Alexander. And you may wonder why?

You see, when Pliny the Elder complained that importing eastern luxury goods cost 100 million sesterces a year, trade with the East was at its peak. A hundred years after this peak, eastern trade started to decline in the late 100s AD, and it substantially diminished in the 200s AD, especially the Indian Ocean trade with India, which was possibly Rome's largest trade partner. This trade reduction was probably caused by the Antonine Plague, which lasted 15 years from AD 165 to 180, and by the decline of gold and silver mining output throughout the empire during the same time frame. With less gold and silver to exchange for luxury items from the East, it's understandable that trade declined. 

One may speculate that the reduction in half of the portoria fees from 25% to 12.5% was a measure to encourage trade and thus keep taxing the luxury goods imported from the East. It is no coincidence that, right at the time the portoria fee was cut in half, trade with the East began to decline more and more. 

Spoiler alert, although Emperor Severus Alexander probably cut this eastern portoria fee in half, his assassination sparked the 50 years of chaos of the Crisis of the Third Century, and trade with the East declined even more. However, it didn't disappear completely.  

I overextended this first section. Talking about Rome always carries me away. The point is that, number one, even in ancient times, luxury products were taxed at a higher rate. This is not something our modern politicians came up with. Number two, it seems that when the eastern trade was declining, the eastern portoria fees were cut in half. I can only speculate that this portoria fee reduction aimed at incentivizing and reviving the eastern trade in luxurious products to, in turn, keep taxing them. Anything is better than nothing. At least in this particular case, it seems that someone in the Roman administration figured out the basics of tax incentives. Something we often forget in our modern and much more technologically advanced world. 

Now, when it comes to taxes and other subjects treated on this podcast, such as price and wage controls, subsidies, collectivization, and so on, unintended consequences are often part of the equation, even if, big if, some of these policies are well-intentioned. 

This is what happened in 1990 when the US Congress approved the Omnibus Budget Reconciliation Act of 1990, better known by its acronym OBRA-90. Despite increasing individual income tax rates and introducing taxes on many items we will see now, on November 5 of that year, the OBRA-90 was signed into law by President George H. W. Bush. This is Bush the father, let's call him Bush "senior". The funny thing is that two years prior, he had campaigned precisely on not raising taxes.  

At the 1988 Republican National Convention, then Ronald Reagan's Vice President and presidential candidate, Bush "senior," emphatically said:  

PLAY the campaign clip. 

But one thing is to make promises, and another is to govern. Once in the White House, President Bush "senior" had to deal with a Democratic-controlled Congress, this is both the House of Representatives and the Senate. By agreeing to a compromise with Congress, President Bush broke his campaign promise, and the phrase "Read my lips: no new taxes" troubled his presidency. It was one of the reasons why he was not reelected for a second term. 

Long gone are the times when taxes were at the center of the national debate. Those were the good days. 

Part of OBRA-90 was the introduction of a 10% luxury tax for the following year on cars worth more than 30,000 dollars, boats worth more than 100,000 dollars, jewelry and furs valued at over 10,000 dollars, and private aircraft valued at over 250,000 dollars.  

The logic was that if the wealthiest paid for such superficial goods, they could contribute more to society and, in the process, help balance the federal budget. 

By the way, other taxes were increased, for example, on air travel, telephone services, gasoline, and the so-called "sin taxes." When you read the transcripts of the Congress sessions debating this bill, the members of Congress mention numerous times these "sin taxes." This refers to an increase of 16 cents per six-pack of beer, 18 cents per bottle of table wine, 1 dollar per gallon of liquor, and 8 cents per pack of cigarettes. "Sin taxes" on alcohol and tobacco aim to discourage their consumption.  

But let's go back to the main subject of today's episode, the luxury taxes. As soon as it was applied, the law of supply and demand acted independently of Congress and President Bush "senior," and the luxury taxes backfired. Here's why. Let's break it down from general to specific concepts. Let's go top to bottom. 

Taxes are paid on what you earn, what you buy, and what you own. Now, the first division, the two large classifications are direct and indirect taxes.  

Direct taxes fall on one and only one person or company and are paid only by that specific person or company; for example, with personal income taxes or corporate taxes. On the other hand, indirect taxes usually fall on products or services, for example, with a sales tax, and both producer and consumer share the burden of the indirect tax. This is important. We will see more of this in a second.  

Direct taxes are progressive, meaning, the more money you make, the more taxes you pay. Indirect taxes are regressive because the fixed tax rate on a product is paid by everyone who buys it, regardless of their income. A sales tax, for example, is regressive because it represents a larger percentage of the salary for someone in a lower income bracket. It hurts more to pay a sales tax of 100 dollars on a new TV if your salary is also 100 dollars than if your salary is 1000.  

Now, you may think that since luxury taxes are paid by the wealthy, so, who cares? Here's the trick. 

I mentioned that direct taxes are paid by the same person or company on whom the tax burden falls. For example, you and only you pay your personal income tax. On the other hand, the burden of paying indirect taxes is shared between producers and consumers, and this is called tax incidence. This is a key concept for today's episode: the distribution of the tax burden between the producer and the consumer is called tax incidence.  It turns out that the luxury taxes end up being paid, not by the wealthy consumers but by the producer working class. 

The luxury taxes on yachts, cars, private jets, etc., and the so-called "sin taxes" on alcohol and tobacco are indirect taxes. Specifically, they are excise taxes. This is a type of indirect tax different from the sales tax you pay when buying groceries, for example. Both excise and sales taxes are indirect taxes, but, in case you wonder, let me explain their differences quickly. 

Sales taxes are applied to the whole of goods and services bought at that specific moment, and excise taxes are applied to very specific goods and services. Many of these specific goods and services are subject to both sales and excise taxes. Sales taxes are a percentage, and excise taxes can be a percentage as well, as in the 10% on luxury boats in the OBRA-90 Act, or a fixed amount per unit, like the 8 cents per pack of cigarettes listed in the OBRA-90 Act, regardless of the prices of the cigarettes. Sales taxes are only imposed at the county and state levels, state as in a province for those who are listening outside of the US. Excise taxes can also be imposed by the county and state, but also at the federal level, as was the case with these luxury taxes we are talking about today in the OBRA-90 Act. When you go to the grocery store, you see on the receipt the percentage of the sales tax you are paying at the cashier, but the excise tax is included in the final price, so you would usually not see it as a separate receipt item.  

A sales tax is collected from the consumer by the retailer at the point of sale, while an excise tax is the responsibility of the producer, retailer, or manufacturer to pay. You may not have heard of excise taxes before, but in 1940, 30% of all federal US tax revenue came from excise taxes. A percentage that decreased over the following decades, to only 2.5% of total federal revenue in 2020.   

In any case, when it comes to indirect taxes, producers will try to pass the cost of sales or excise taxes on to consumers as the final price.  For example, when a 10% sales tax is imposed on the butter you buy for 10 dollars, the retailer will try to sell it to you for 11 dollars, passing on the complete 10% of the sales tax. But you may find a quick substitute for butter, such as margarine. As soon as butter sales drop, the retailer will try to lower the price at the expense of profits just to stay in business. That way, by cutting costs and profits to lower prices and stay competitive, the retailer will absorb some of the tax burden, while the consumer will absorb the rest. This is: tax incidence. And tax incidence, meaning how the tax burden is shared between the parties involved, depends on the elasticity of the supply and demand. But let's go back to the luxury taxes of the OBRA-90 Act to illustrate this better.  

You see, demand for luxury goods is generally elastic, meaning that this demand changes whenever prices change. A millionaire can easily buy a luxury car, or if those prices increase, make a charitable donation or buy a new house in Monaco. On the other hand, the supply of these luxury goods is not very responsive to price changes, at least in the short and medium terms the supply of luxury goods is inelastic. A Ferrari factory cannot easily and quickly be transformed to produce other goods, nor can the specific skills of a yacht assembly line worker be easily transferred to another activity. 

Hence, the tax incidence, this is, who actually pays the burden of the tax, falls on the inelastic supply side, on the lower-middle class who work in these factories. 

To put it another way, after an increase in luxury taxes, millionaires who buy these products stop buying them, and demand falls. Millionaires may buy their yachts elsewhere and go on vacation to Bali. As a result, the companies that produce these luxury items are forced to cut wages, announce layoffs, and even close. Then, what happened after the luxury taxes of the OBRA-90 Act? 

In 1993, The Washington Post reported that in a year and a half, the taxes on yachts had collected 12.7 million dollars, barely enough to cover the Department of Agriculture's expenses for two hours. All of this while it had "contributed to the general devastation of the American nautical industry, as well as jewelry makers, and private aircraft manufacturers who were also targeted by the tax." 

Also in 1993, the Sun Sentinel, a Florida newspaper, reported that "nationally, yacht sales dipped from 7,500 in 1990 to 3,500 in 1992 (this is a fall of more than 50% of sales in barely two years, by the way). There were 30,000 jobs lost nationwide, 8,000 (of them) in South Florida, where one in every four of America's boats is built." 

In Maine and Massachusetts, the situation was worse. According to The Wall Street Journal, yacht manufacturers lost 77% of sales. In total, some estimates mentioned between 50,000 and 75,000 lost jobs, not only among the boatbuilder workers, but also among dealerships, marinas, trucking companies, and material suppliers across the country. As the boat industry sank in the US, boat companies in Europe and the Bahamas rode the waves of new opportunities coming to their shores.    

What about the private jets? The Congress Joint Tax Committee had previously estimated the tax on private aircraft sales would raise 6 million dollars in the first year, but the result was a disappointing 53,000 dollars, barely 0.9% of the projected amount. 

In the car industry, the impact was not as catastrophic. However, the 10% luxury tax on cars generated 88 million dollars in 1991, while causing greater losses in income and payroll taxes due to sharply reduced car sales and profits. 

In total, in the first year alone, the luxury taxes raised 97 million dollars less than the initial projection. 

Under a bipartisan consensus, the US Congress cancelled the luxury tax in 1993 for all goods except cars, which were later cancelled in 1996, effective January 1, 2003. The luxury tax was short-lived. It collected less revenue than what was lost in taxable wages and companies' profits, plus it represented a government expense in unemployment benefits. 

If you think the lesson with the luxury taxes in the United States of the 1990s was learned, think again. Three decades later, just across the northern border, Canada did it again. 

In September 2022, the Select Luxury Items Tax Act went into effect. I applied for luxury cars and aircraft valued at over 100,000 Canadian dollars and for certain vessels, such as yachts and sailboats, valued at over 250,000 Canadian dollars. A tax of 10% of the total purchase value was applied or 20% of the specific value above the threshold, whichever was lower.   

Two years later, in mid-2024, the Canada Revenue Agency reported that of the expected 52 million dollars to be collected on luxury boats over these two years, only 12 million were collected, meaning that the luxury tax on boats fell 77% short of the Canadian government's estimates. 

In consequence, and just as it had happened in the US 30 years before, the Canadian government cancelled the luxury taxes on boats and aircraft, taking effect on November 5th, 2025, just two weeks ago as of the moment I record this episode. 

The official government document reads: “Budget 2025 proposes to eliminate or modify tax measures that have proven to be inefficient, costly to administer, and challenging for Canadian industries at a time of ongoing global economic uncertainty.”

The tax on vehicles valued at over 100,000 Canadian dollars, which can be pickup trucks and farm equipment instead of "luxury cars," is still in place. It's interesting because in the US, it also took a bit longer to eliminate the luxury tax on cars. I wonder if the same will eventually happen in Canada.  

The Canadian government made the same mistakes the US government made 30 years before. As the Roman statesman and scholar, Cicero said in the 1st century BC: "Anyone can make a mistake, but only a fool persists in error." Why? Because we repeat the mistakes of the past when judging ideas by intentions rather than results. 

Even the mistakes of the luxury taxes approved by the US government in the 1990s may have been avoided if someone in Congress had read the Roman historian, Tacitus. You see, the US Congress and President Bush "senior" failed to understand the concept of tax incidence, this is, who would end up paying the burden of the luxury taxes. It was not the wealthy consumers but the working class on the supply side. 

In his work "Annals," the 1st century AD historian Tacitus described how in the year AD 57: "In the consulate of Nero, for the second time, and of Lucius Piso, little occurred that deserves remembrance…" But a few lines below, Tacitus recounts: "…the tax of four per cent on the purchase of slaves⁠ was remitted more in appearance than in effect: for, as payment was now required from the vendor, the buyers found the amount added as part of the price."  

The remission of the 4% on the sale of slaves was a formality. The Roman administration started collecting the 4% from the vendor instead of the buyer, yes, but the vendor passed the 4% to the buyer, who ended up paying the full tax anyway. Tacitus was not an economist in the modern sense of the word, but a careful observer who understood this.  

As with our modern politicians, the Roman Empire also taxed luxury goods. However, at least one of these ancient Romans, the historian Tacitus, understood the concept of tax incidence. A concept that our modern politicians still don't grasp.  

SOURCES

https://www.jstor.org/stable/41543974

https://www.jstor.org/stable/43919248 

https://www.jstor.org/stable/jj.6914759.12

https://tax.thomsonreuters.com/en/glossary/excise-tax 

https://www.cato.org/commentary/budget-blunders-1990-are-no-blueprint-2011

https://www.ssa.gov/history/pdf/Downey%20PDFs/Omnibus%20Budget%20Reconciliation%20Act%20of%201990%20Vol%204.pdf 

https://www.congress.gov/crs-product/R46938 

https://www.wsj.com/articles/SB1041807729976794664

https://www.washingtonpost.com/archive/business/1993/07/16/how-to-sink-an-industry-and-not-soak-the-rich/08ea5310-4a4b-4674-ab88-fad8c42cf55b/

https://www.nmma.org/press/article/24773

https://freedomandprosperity.org/2021/blog/george-h-w-bushs-ill-fated-luxury-tax/  

https://boattest.com/article/day-us-cruiser-industry-was-murdered 

https://boattest.com/article/canadian-luxury-tax-boats-falls-short-77

https://www.ctf.ca/EN/EN/Newsletters/Perspectives/2023/1/230102.aspx

https://www.junonews.com/p/liberals-cutting-luxury-tax-on-private

https://www.aerotime.aero/articles/canada-repeals-luxury-tax-on-aircraft

https://budget.canada.ca/2025/report-rapport/pdf/budget-2025.pdf 

https://penelope.uchicago.edu/Thayer/E/Roman/Texts/Tacitus/Annals/13B*.html