Taxes change incentives and behaviors. What difference might there be in how a sales tax on food and a sales tax on jewelry would change behavior?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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In each case, there would be an incentive to consume less of the product that was being taxed.  However, there would be a difference in the changes in behavior.

A tax on something that is absolutely necessary for human life will not reduce the demand for that product very much.  People might cut back a little on food purchases, but it is very unlikely that they will cut back to a large degree.  Jewelry might well be different.  It is not a necessity.  Therefore, when the tax causes the price of jewelry to go up people will reduce their buying more than they will reduce their food consumption.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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In general, individuals will buy less of something if a sales tax is imposed on that good or service.  This is because the sales tax effectively causes the price to go up and an increase in price leads (all other things being equal) to a decrease in quantity demanded.

But we must realize that the quantity demanded will not drop the same amount for each of these things.  Regardless of whether there is a sales tax, people must eat.  They probably will reduce their food consumption drastically unless the sales tax is really high.  But jewelry is a luxury item.  People can easily do without new jewelry.  Therefore, the sales tax might cause a steep drop in the quantity demanded of jewelry.

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jameelagoodall | Student, Undergraduate | (Level 2) eNoter

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Okay, thank you so much for your help!!

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