The Economist | Italy’s public finances: The boat-tax war

The Italian government has levied a new tax on boats. I cannot believe that what is considered to be a technical government led by and economist would do something like that.

The immediate effect will be to vaporize the order book of the Italian boat manufacturers, and damage the tourism industry: boat rentals, marinas, etc. As a secondary effect, since usually rich people have more resources available, owners will change the matriculation of vessel to other nearby countries, thus further reducing the current taxable yacht population.

Tax on boats is a classic text-book example (Mankiw 2010: 125) of what governments should not do. The Economic concept of elasticity helps to explain this. In intuitive terms, elasticity measures how sensible demand or offer are to variations of prices. For example, when demand is inelastic, buyers will keep on buying even if the product price would significantly increase, it is the case of drugs, fuel or diapers. On the contrary, when demand is elastic, buyers will tend to exit the market if prices would increase, it is the case of luxury goods such as… yachts. Similar concepts and considerations do apply to supply.

As anticipated, in this case, the demand is elastic and the supply is inelastic. That is, if you are the owner of a boat yard, your only options, as no other products can be manufactured, are either to sell boats or close the business. The image below illustrates  the concepts graphically.

Italy has no need of another tax, the government should instead focus on long neglected priorities. In the next days I will post more on what I believe are the real issues with my country.

Mankiw, N.G. and Taylor, M. (2010) Economics: Special Edition with Global Economic Watch, ISBN 9781408021286 (‘MT’)

The Economist | Italy’s public finances: The boat-tax war http://www.economist.com/node/21560920?frsc=dg%7Cd via @theeconomist

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One thought on “The Economist | Italy’s public finances: The boat-tax war

  1. Pingback: No unfortunately it was not only Mr. Berlusconi’s fault. Why Italy does not function? « Paolo's blog

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