Jewish World Review Oct. 28, 1999 /18 Mar-Cheshvan, 5760
Tax Break for
the Yachting Class
ONCE WHEN PAUL HINDEMITH, composer of very modern music, was
rehearsing one of his especially dissonant compositions, he interrupted the
orchestra, saying, "No, no, gentlemen. Even though it sounds wrong, it's
still not right."
Contemporary politics, a kind of atonal music, produces moments like that.
Consider Rep. Patrick Kennedy's (D-R.I.) proposed legislation to succor
the yacht industry and assuage the pains of its most put-upon customers.
The Omnibus Budget Reconciliation Act of 1990 was the budget
agreement by which President Bush broke his "read-my-lips" vow not to
agree to new taxes. The act was, as omnibus bills tend to be, an
eye-of-newt-and-hair-of-toad brew of this and that and some other things,
and it included--in the name of fairness, of course--a stern tax on "luxury
Those items included automobiles, aircraft, jewelry and furs over certain
prices. And yachts costing more than $100,000.
In 1990 there were no luxury excise taxes, all of them having been
repealed in 1965. But perhaps every quarter-century or so government--it
cannot help itself--must go on a "fairness" bender, the memory of the
hangover from similar misadventures having faded.
In 1990 the Joint Committee on Taxation projected that the 1991 revenue
yield from luxury taxes would be $31 million. It was $16.6 million. Why?
Because (surprise!) the taxation changed behavior: Fewer people bought
the taxed products. Demand went down when prices went up. Washington
was amazed. People bought yachts overseas. Who would have thought it?
According to a study done for the Joint Economic Committee, the tax
destroyed 330 jobs in jewelry manufacturing, 1,470 in the aircraft industry
and 7,600 in the boating industry. The job losses cost the government a
total of $24.2 million in unemployment benefits and lost income tax
revenues. So the net effect of the taxes was a loss of $7.6 million in fiscal
1991, which means the government projection was off by $38.6 million.
This illustrates the shortcomings of "static analysis." Concerning which,
consider an imaginary case.
It has been calculated that if the federal government imposed--in the name
of fairness, of course--a 100 percent tax on all the earnings, from the first
penny, of all millionaires, which is to say if the government confiscated all
their earnings, the sum would suffice to run the government for just six
weeks. The problem with that calculation is that it reflects "static analysis."
That is, it does not allow for behavioral changes the tax would provoke:
No one would earn the one-millionth dollar, thereby triggering the
confiscation, so the revenue yield from the 100 percent rate on millionaires
would be zero.
But back to reality. "Practical politics," Henry Adams famously said,
"consists in ignoring facts." But facts are famously stubborn things,
particularly when they involve unpleasantness for one's constituents. In
1993 Congress repealed the excise taxes on boats, aircraft, jewelry and
furs. It also indexed, phased down and scheduled the expiration of the tax
Now comes Kennedy with "The Boat Building Investment Act," which he
calls "exactly the opposite of a luxury tax." Indeed it is.
Its centerpiece is a 20 percent tax credit for purchasers of American-made
luxury yachts more than 50 feet long. So the purchaser of a $1 million
yacht would get a $200,000 credit against his federal income taxes.
However, this would not be an unlimited benefit for the upper crust. The
credit would be capped at $2 million, so the government would help only
with the first $10 million that a purchaser spends on a yacht.
You probably have not heard of Kennedy's legislation. Do you think you
might have heard a media uproar about it if its author were a Republican?
Just a thought.
Kennedy says America lags behind other nations in "supporting" boat
manufacturers, so this bill also would spend $25 million annually on "export
assistance"--for example, marketing American-made yachts at overseas
expositions--and training employees of America's yacht-builders. This is
necessary, Kennedy says, to "continue the revitalization" of the industry
after the "near-fatal experience when the luxury tax was implemented."
This legislation is a matter of fairness, says Kennedy, who acknowledges
that hitherto he has supported "targeted tax cuts" targeted at people of
modest means. But his proposal, as he explains it, is really sort of like that.
The benefit of up to $2 million for each purchaser of a luxury yacht would
benefit the nearly 6,000 Rhode Islanders working in the state's more than
$1 billion-a-year boat-building industry, and workers elsewhere.
You see, the subsidy to the wealthy would, to coin a phrase, trickle
Comment on JWR contributor George Will's column by clicking here.
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©1999, Washington Post Writer's Group