The Omnibus Budget Reconciliation Act of 1990 included a stern tax on “luxury items.” In 1990 the Joint Committee on Taxation projected that the 1991 revenue yield from the luxury taxes would be $31 million. The actual yield was $16.6 million. Why? Because —surprise!—the taxation changed behavior.

a. Would buyers or sellers of “luxury items” pay more of the luxury tax?

b. Explain why the luxury tax generated far less tax revenue than was originally anticipated.