How will a tax on yachts and other luxury goods affect consumers and workers? Under a luxury tax imposed in 1990, the tax on a $300,000 boat increased by $20,000. The idea behind the tax was to collect more tax revenue from rich people who purchase luxury goods such as yachts. But in fact, the tax also affected low-income people who worked in boat factories and boat yards. The tax increased the price of boats, and consumers bought fewer boats. The boat industry produced fewer boats, and the resulting decrease in the demand for boat workers led to layoffs and lower wages for those who managed to keep their jobs. This illustrates the notion of tax shifting: In most cases, a tax is shifted forward to consumers and backward to input suppliers such as workers.

Question.

How does a tax cut affect prices?