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Why not tax Veblen goods?

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Fides_et_Ratio posted on Sat, May 19 2012 9:23 PM

Veblen goods are goods for which the demand *increases* (instead of decreasing) when the price rises.

Examples include diamond jewels.

So it appears that taxing Veblen goods is a good idea. Suppose that, today, jewlery are tax free. Suppose that a ring with 100g of diamond costs $1000. Suppose that the government then enacts a 40% tax on Veblen goods, such as diamond rings. Now, the jewlery store will sell a $1000 ring with 60g of diamonds. The buyer will extract the same utility from the $1000 ring with 60g of diamonds than people used to extract from $1000 ring with 100g of diamonds, since what matters is the exclusivity that comes from the price tag.

 

This means that the government makes a profit of $400 per diamong ring without reducing people's utility! Extra wealth!

 

How does this fit in Austrian no-taxes teaching?

 

Regards

 

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The buyer will extract the same utility from the $1000 ring with 60g of diamonds than people used to extract from $1000 ring with 100g of diamonds, since what matters is the exclusivity that comes from the price tag.

That is untrue.  It is a vast overgeneralization.

And further, what about diamonds for drills?  Or experimental laser physics?  Your unintended consequences have limited the amount of advanced drilling that can be done as well as weakened the fungability of laser research science.  All because you think people buy diamoinds based on the price.  Why not weight? or purity? or usefulness?

Poor people are the largest demographic.  That is why cigarettes, lottery tickets, adn booze are taxed and regulated so much.  They bring in more revenue than yachts and diamonds.

his means that the government makes a profit of $400 per diamong ring without reducing people's utility! Extra wealth!

Does it?  I thought you just said that the company now sells diamonds at 60g?  You could just have the government increase taxes to 100% and look at the revenue that poors in!  Where's the limit?

You have to realize that proportional drop (the diamond 'g' against the increased taxation) is the consumers utility factor...this cannot be ignored.  Especially based on the emotional claim that "rich people are only interested in visiblity of wealth expenditure."  In my example of the drill the utility factor is the 'g' of diamonds.  60g doesn't perform the same function as 100g (I assume you mean grams).

Veblen goods

Can you even define this without accidentally hindering some function of any good that is somehow not "conspicuous" (as per my examples of engineering and phsyics)?

What is another example of a Veblen good?

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This all sounds like a bunch of nonsense.  "Veblen goods"?  Give me a break.

It's similar to the "inferior/normal goods" nonsense.

 

If this were the case, why the hell don't diamond sellers increase their prices to $700 million per carat?  They'd be filthy rich!!

 

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I don't think that's nonsense. Some goods indeed are used to increase perceived status. That includes jewellery, fancy clothing, fast cars, big houses, pretty women and even higher education degrees. Of course these goods also serve other needs, but the status they give to those having them is for sure part of the value perception. 

They also signal popularity, power, prowess and capability to pay your bills as well as success to others. 

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From what I understand, no demand can slope upwards. This can only happen when the ceteris-paribus restriction is loosened.

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Blargg replied on Wed, Nov 28 2012 10:30 AM

Demand (and ability to pay) can't increase without bound, so there's some upper price for which further price increase lowers profit. Sellers have likely alredy found this price, and thus further increase would decrease sales and thus profit. So the tax would require that sellers lower their price, and thus the tax would be theft as usual.

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Torsten replied on Wed, Nov 28 2012 11:04 AM

Excessive taxes have the same effect like excessive profits. They will be an incentive to circumvention. 

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Demand can actually slope upwards, but only locally.

Occassionally, when confronted with a choice from several not really distinguishable brands, I choose not the cheapest one (but not the most expensive either). Which means, my choice is in fact positively affected by the price being higher than the cheapest!

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Neodoxy replied on Wed, Nov 28 2012 11:38 AM

^

It's important to note that in this is due to imperfect knowledge on behalf of consumer's. It's theoretically possible that I could take my mediocre shrimp, increase the price by a thousand dollars per pound, and everyone would buy my shrimp because they assume that it's the best shrimp in the world... Even though it's not. People assume that it's a different good, for which they will pay more; it's not the same good as beffore. No one will ever pay the same amount and consume more (increase their demand) for a good just because the price increased unless it has some weird affect on income.

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I agree that in my case the imperfect information is the key. Even more, I rely on the other consumers, some of whom may have more time or expertise, to have verified that the medium-priced option is indeed adequate.

Re the OP: I think the people who buy status items indeed derive (some portion of) utility from having something not accessible by everyone. In other words, they enjoy to own the fastest car only because noone has the car that is faster, not because they actually drive it that fast or enjoy driving that fast.

In fact, it may be possible for them to have about the same utility from having the fastest car if all the cars suddenly have their speed reduced in half. Does it mean the government should regulate the cars (e.g., by taxing them in such a way that manufacturers find it profitable to reduce speeds in half)? From purely utilitarian POV, why not, if they can actually do this flawlessly? Except, of course, this will affect the people who actually derive utility from speed, and not from noone else being faster. And I do not see how one can flawlessly separate one kind of utility from another.

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Why should anything be taxed?

 

You've also not shown that a demand curve can slope upwards. Just that price can be taken as an indicator of a good's quality, i.e. differentiating it from other goods of a similar kind. The price communicates that the item is prestigious. In practice, you'll still try and pay the minimum you can for it.

Freedom of markets is positively correlated with the degree of evolution in any society...

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In practice, you'll still try and pay the minimum you can for it.

I think you are right, most of the people would prefer to pay less (even if they prefer their purchase to have a bug price-tag to show off - before the discount, of course).

But certain goods are simply not available for a cheaper price, most often because the status goods are branded, i.e., have a monopolistic producer. Thus, the same producer may conciously produce two brands of comparable quality, but one being easily distinguished from the other, and sold at twice the price. The people who want this status good have to pay more and they know other people know they had to pay more - their demand for this good was increased exactly because of its increased price. They may want to pay less and still get this status good, but if it is not possible, they prefer to pay higher price for the status good than a lower price for the (functionally identical) other good.

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Blargg replied on Wed, Nov 28 2012 3:00 PM

...and sellers can inform buyers that the one branded differently is the same as the classy one just lower price, and thus sell more because it seems like such a good deal in compaison. I've heard the term "debranded" used for this kind of item before.

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But certain goods are simply not available for a cheaper price, most often because the status goods are branded, i.e., have a monopolistic producer. Thus, the same producer may conciously produce two brands of comparable quality, but one being easily distinguished from the other, and sold at twice the price. The people who want this status good have to pay more and they know other people know they had to pay more - their demand for this good was increased exactly because of its increased price. They may want to pay less and still get this status good, but if it is not possible, they prefer to pay higher price for the status good than a lower price for the (functionally identical) other good.

Yes, if there is only one single producer this will hold true, and it is why deBeers is so heavily in bed with governments to try and retain a monopoly on diamonds, for instance. A lot of sellers will heavily "discount" certain premium/luxury goods, though, like Blargg mentioned (seems to be the same thing), and I think they resort to this tactic to avoid the perception that the good has been cheapened.

It's difficult to stop the resale of a good, so whilst the high price of the good may be a part of why it's sought after, individuals will try to source them in the cheapest manner possible. If a price is inflated just to create an element of luxury (i.e. the good's price isn't really wholly attributable to the quality of its constituent materials, its construction, the level of service provided etc., all elements which might genuinely result in it being very pricy), nothing stops competitors from entering the market to cash in on it, and I believe this is why the retailers might initiate the move by offering "discounts" or "seasonal offers" etc. to prevent it from happening. There is also the option of attempting to make the product offering more "modular" and offer varying levels of service and/or product.

I mean it's certainly true that luxury goods are valued in large part for their prestige, and with these goods obviously even more care needs to go into maintaining brand loyalty and reputation. E.g. when Burberry was faced with chavs acquiring some of its goods, the firm didn't react to it very positively since it damaged its brand name in the eyes of its more reputable clients. So the price is an element of it but it's the whole package of qualities that the firm must ultimately seek to safeguard.

Freedom of markets is positively correlated with the degree of evolution in any society...

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...and sellers can inform buyers that the one branded differently is the same as the classy one just lower price, and thus sell more because it seems like such a good deal in compaison. I've heard the term "debranded" used for this kind of item before.

That may work, but I think the more expensive one will still sell well. In fact that's why I think penalty taxes are pretty useless, since they enhance the status of the good. 

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