Pay Their Fair Share

Go back a generation and see one case where Congress acted to make sure rich people "pay their fair share." From the archives circa 1993.

Every now and then Washington does something so breathtakingly stupid that you can't even whistle -- you can only shake your head. The ill-fated ''luxury tax'' -- enacted as part of the 1990 deficit reduction law and largely repealed in this year's budget bill -- is such a thing.

The luxury tax crept quietly into the closed-door negotiations that led up to the 1990 budget deal. Its champions were Democratic Congressmen seeking to ensure that the rich would ''pay their fair share,'' as House majority leader Richard Gephardt put it at the time. Sound familiar? The Bush Administration went along, either cravenly or cynically, and the tax went into effect in 1991 -- a 10% excise on the sale of pricier jewelry, furs, and certain expensive planes and automobiles.

No public hearings were held and little heed was paid to warnings from people in the affected industries that the tax would have dire unintended consequences. The Chicken Littles, it turns out, were right. Consider the case of Beech Aircraft Corp., a Raytheon subsidiary that dominates the small ''owner-flown'' market for new planes. In 1991, Beech sold 80 fewer planes than it had been anticipating before the luxury tax took effect. The cost: $130 million in lost sales and net losses of 480 jobs for that year.

Just to make sure it was the - luxury tax and not the recession that had caused this crash landing, Beech management surveyed its dealers and sales force. They confirmed the anecdotal evidence that the tax was the culprit.

An industry trade group then commissioned Price Waterhouse to go back and document the findings. Meanwhile, the news from the revenue front was equally grim. The Congressional Joint Tax Committee had estimated that the luxury tax would raise $6 million from airplane sales alone in fiscal 1991. The actual take? $53,000.

The tax capsized the boat-building business too. Legislators from nautical states, such as Maine and Maryland, led the repeal effort. This sad tale provides an unusually clear example of one of the foggier concepts in economics: the ''dead-weight loss'' inherent in taxes. A dead- weight loss reflects a cost imposed on some individuals without any offsetting benefit to others -- a pure economic inefficiency.

Professors in the past were usually driven to wacky hypothetical extremes to illustrate the idea -- the impact, say, of a $1 million tax on poodles. No longer. The all-too-real luxury tax had all the elements: People who would have liked to buy new airplanes did not buy them, workers who would have been employed building the airplanes were idle, and the government got next to no revenue.

Heh.