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Dynamic Economic Decision Making: Strategies for Financial Risk, Capital Markets, and Monetary Policy by JOHN E. SILVIA

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Chapter 11

Fiscal Policy as Agent of Change

In late 1990, President George H. W. Bush, a Republican, and the Democratic majority in Congress decided to levy a luxury tax on yachts. The theory was that a 10 percent tax would not discourage anyone willing to spend $100,000 or more on a yacht and that such a tax would raise revenue without impacting the economy. The tax failed on both counts, as it, unfortunately, halted the purchases of yachts, raised unemployment among marina workers, and raised far less revenue than planned. Three effects were immediately obvious. The tax on the rich was not paid by the rich, since they did not buy anywhere near the number of yachts that policy makers estimated. Second, since there were far fewer yacht sales, there was far less revenue raised for the federal government. The 1991 revenue yield was one-half that estimated by the Joint Committee on Taxation in 1990. Finally, since there were far fewer yacht sales, there were fewer yachts produced and therefore far less need for the carpenters, the fiberglass and metal workers, or any of the direct or indirect (transportation, sales, support) staff involved in the business. According to the Joint Economic Committee, the yacht tax destroyed 7,600 jobs in the boating industry. The yacht tax was a disaster paid for by the average blue collar marina workers through the loss of their jobs. Congress, coming to its senses, repealed the tax in 1993.1

Fiscal policy—through spending decisions and tax law changes—tops ...

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