The 1990 tax on yachts and other luxury goods was shifted forward to ___________ and backward to ___________. (Related to Application 5)

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Application 5 RESPONSE TO A LUXURY TAX APPLYING THE CONCEPTS #5: How does a tax cut affect prices? How will a tax on yachts and other luxury goods affect con- sumers 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 con- sumers bought fewer boats. The boat industry produced fewer boats, and the resulting decrease in the demand for boat work- ers 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. Related to Exercises 5.1 and 5.5.