1990 Yacht Tax

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Democrats in Congress passed a "fair share" luxury tax (30%) on airplanes, cars and yachts (as part of an Omnibus Budget Reconciliation Act of 1990), and promised it would bring in $9B over the next 5 years. What actually happened is:

  • Sales dropped 56% in the first month, and got worse from there -- the larger tax package cooled the economy and contributed to a mini-recession
  • ≈25,000 workers in American Yacht Building lost their jobs, 75,000 more jobs were lost from companies supplying parts and materials to those yacht companies
  • There was also another thousands more lost in small aircraft, and other jobs
  • The government not only didn't come close to target, they had to pay out billions in unemployment and lost income taxes instead
    • We went from net exporter to importer, as the rich just bought their boats made in other countries, and listed their livery in the Bahamas, to get around the taxes: and the industry has never recovered
  • The Democrats (Clinton) ran on George being a liar for promising not to raise taxes, but compromising with the Democrat. And they blamed him for the economic cooling that caused. It cost Bush the Presidency.

More

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1990 Yacht Tax.png
DNC intentions meets the iceberg of reality.

This was the famous quote where George Bush ran against tax and spend democrats with the promise, "Read my lips, no new taxes!". The leftist Press/Democrats got him to compromise -- then railroaded him as a liar for compromising with them. This helps set the tone for future Presidents that could learn from history: never trust or compromise with the Democrats -- they will use it to put a knife in your back. And lest you think it hasn't happened since, when George Bush Jr. compromised with Ted Kennedy on the NCLB (No Child Left Behind), the Democrats did it again -- he passed the bill they wanted, then they attacked him for unfunded mandates and the like -- because he'd passed the funding increases separate from the NCLB itself.

There's some contradictions on facts around this, depending on who you listen to:

  • it was passed in Nov 1990, it went into effect in 1991, and was mostly repealed in 1993 in an emergency tax reform bill... but they left it on autos, which didn't get repealed until 1996 -- so you get different start/end dates
  • There are also different amounts of promises and impacts. In campaigns it was promised to be $9 billion over 5 years (for the entire tax package -- the luxury tax was part of a bigger bill), the luxury part of it was more formally estimated to be $119M over 2 years -- but it was repealed 2 years later, after being a disaster.
  • There's also ambiguity because tax revenues did go up over 5 years (mostly because of other taxes on gas and tobacco or things that offset the luxury tax). But the luxury tax was repealed after 2 years, and hadn't brought in anywhere close to the money -- and had huge offsets in other areas (like payroll, income taxes, and unemployment benefits and so on). The disingenuous will just leave out the offsets, and claim it still made money. Overall the result was that once the luxury taxes were removed, we did bring in a little more money than before the tax. But the spending and deficits rose by even more. (Meaning it was counter-effective). More than that, if we had just stayed on the trajectory we were on BEFORE the tax, tax revenues would have gone up even more -- so we're down many billions over the prior growth rate.

So polemics can flam-flam the numbers and make it not look like the disaster it was, especially for people who want to believe that people don't respond to taxes. But the evidence for the rational is quite the opposite: it killed an industry, it cost jobs, it cost a ton of money -- and was cruel and unfair. The people most hurt were the blue collar workers that were put out of jobs -- and skilled yacht craftsman couldn't find like work easily, so that revenue/life setback was hugely frustrating. Any Democrat that defends the cut, cares more about his political agenda than the people they hurt.

Unintended Consequences
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Every action causes a reaction. Some reactions are pleasant surprises, many are negatives, some are counter productive (perverse) and make the problem worse. Since consequences matter more than intentions, we have a social obligation to plan for them (and avoid them). The phrase "unintended consequences" is used as either a wry warning against the hubristic belief that humans can control the world around them, or more often against a really bad implementation of not-so-smart ideas or implementations. Those that deny unintended consequences are denying science (reality).

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📚 References

The Bill:

Historical articles:

The Consequences: