Question

You work as a stock analyst. You specialize in analyzing markets for "high-end" manufactured products. The president has recommended that Congress impose a tax of $20,000 on every person who purchases a new yacht. He argues that rich people who can afford to purchase yachts (they cost around $2 million) should pay higher taxes. The money raised would be used to provide additional benefits to returning war veterans.

You are writing a research report on the firms that manufacture yachts. You want to include a statement in the report about whether you think the proposal is likely to pass Congress and become law. You have analyzed the proposal and the voting records of members of Congress. You have decided that the proposal will not obtain enough votes to pass Congress, unless the major labor unions representing employees in this industry support it. You know that many of the yacht-producing firms hire veterans who could benefit from the programs funded by the tax.

QUESTIONS:

1) Analyze the effects of imposing a $25,000 per yacht tax on consumers (on a qualitative basis).

2) Based on this analysis, do you think that the labor unions will support the proposed tax? Explain. What does it depend upon?

Answer 1

1.Imposition of tax will lead to fall in the level of consumer surplus as prices increase in the market. Though producer surplus will increase as compared to pre tax but overall total surplus in the economy will decline due to deadweight loss associated with the imposition of tax on consumers on yacht consumption.

2.Since many of the yacht producing firms hire veterans who could benefit from the programs funded by the tax, they will support the tax on yacht as they know that the fund will be spent on their welfare.It all depends on the utilization of the funds by the government. If they think that the government is serious about their welfare and will spend the money on their welfare,they will support the tax/.