Status Goods and Luxury Taxes

Abstract

Economists generally have condemned such taxes as imposing an in comparison with more broadly based general sales or income taxes. Also, it is alleged that any desired income redistribution could be obtained with more efficiency (and perhaps greater equity) through a progressive income tax (1). However, this paper will show that taxes on an important group of luxuries, status goods, do not necessarily impose an excess burden. Indeed taxes on these goods actually impose a burden lower than the yield of the tax, making such taxes a highly desirable source of revenue. A status good is one whose utility derives at least partially from the amount the purchaser pays for it. In most cases this is because display of the good serves to demonstrate that the user can afford it. Examples are gold jewelry, fur coats, and certain luxury automobiles. In other cases the good serves to show that the purchaser cared enough to spend what the good cost. Examples would include engagement rings, the sending of floral decorations for funerals, and many courtship expenditures. It is necessary to make clear that consumer preference for status goods is not due merely to use of price as a guide to quality. As Scitovsky and others (2) have pointed out, consumers frequently lack the information to appraise complex goods adequately and are forced to assume that the higher priced goods also have the highest quality. However, for a status good price is more than an aid to judging the potential utility of the good, it is part of the utility of the good. The desired effect on other people, or on the owner's self-esteem would be less if the good was less expensive. Evidence comes from a variety of social sciences that many goods are consumed not merely because of the physical pleasure they bring, but because their consumption provides evidence that the purchaser is of the class that can afford such expensive goods. There is an extensive sociological literature (3) which shows that society can be divided into a series of classes, the most obvious differences between which are in the level of income, (other determinants of class such as occupation, educational level, and amount of inherited wealth are normally reflected in differences in