A Stitch in Haste

Earlier today in another context I blogged, somewhat tongue-in-cheek, the following:

As long as you have a penny in your pocket, they'll want to take it away from you.

Well:

Lawmakers trying to plump up the bottom line are considering a "vanity tax" on cosmetic surgery and Botox injections in Washington, Illinois and other states.

Plastic surgeons and their patients say the idea is just plain ugly.
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"I, too, look in the mirror and see my mother," said Seattle Democrat Karen Keiser, 57. But she thinks cosmetic surgery patients can afford the state's 6.5 percent sales tax. She wants to earmark the money for poor children's health insurance.

"We could do Botox-for-babies parties. It might be the new thing," Keiser said. "Anyone who can afford the money for cosmetic procedures, I don't think they would be deterred by a little sales tax. You pay it on your lipstick."
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The cosmetic surgery tax is a cousin to the "sin taxes" many states slap on drinking, smoking and gambling during tough budget times.
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Seattle surgeon Dr. Phil Haeck noted that 86 percent of cosmetic surgery patients are women. "This is an unfair tax on women," said Haeck, editor of Plastic Surgery News. "The bulk of the people who have procedures are not financially upper-class women. They've saved hard, and this is about restoring their self-esteem."

Now of course there is a fundamental difference between cosmetic surgery and cigarettes: elasticity of demand. The government can, for the most part, tax tobacco almost without limit because, to a great extent, people will continue to smoke regardless of price.

The same is not true of luxury goods, for two reasons. First, the demand for them is relatively elastic -- raise the price and fewer people buy. This is so because of the substitution effect. Slap a tax on luxury cars, the rich will switch to luxury boats. Slap a tax on luxury boats and the rich will switch to jewelry. Slap a tax on jewelry and the rich will...well, you get the idea.

Second is tax competition. We all know stories of people who, when the purchase is large enough, will cross state lines to take advantage of lower sales taxes. If the rich are "not deterred by a little sales tax" (sidebar -- 6.5% is "little"?), then they're also not likely to be deterred by a little travel to a lower-tax state.

This sort of nonsense is exactly what I warned about in the context of whether the federal income tax should be replaced with a national sales tax -- an idea that terrifies me for just this very reason. You start with a no-exemption paradigm, then suddenly diapers are exempt, then food -- but not soda, then clothes -- but not uniforms, then shoes -- but not golf shoes, then educational expenses -- but not extracurricular activities, then medical procedures -- but not liposuction.

And down the road they'll just bring the income tax back anyway and we'll have both a national income and a national sales tax.

I'll say it a third time: As long as you have a penny in your pocket, they'll want to take it away from you.

UPDATE: For those of you too young to remember the great "Luxury Tax Disaster of 1990," here's a classic George Will column on the subject.

Related Posts:
Has Social Security Been a "Success"?
More on the Deductibility of State & Local Taxes
Should Fines be Tied to Income?
New Species Discovered: The Alaskan Tax Vulture
Sales Taxes and "Helping the Poor"

I first blogged about proposals to tax cosmetic surgery back in January. It was in that post that I first coined the "Penny in Your Pocket Rule."

Well, this particular application of the Rule remains alive and well (WSJ - $):

A number of states are considering taxing certain cosmetic surgery procedures, including face-lifts, tummy-tucks and Botox injections. The idea behind the taxes — dubbed "vanity taxes" or "Botaxes" by some — is to boost state coffers and raise revenue for government initiatives such as health care for poor children.
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New Jersey passed the first cosmetic surgery tax law last summer. Since then, lawmakers in states including Texas, Illinois, Washington, Arkansas, Tennessee and New York have introduced bills or budget proposals to install similar taxes, although none of those states has passed the taxes into law.
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The cosmetic-surgery taxes are part of a growing effort by states to tax all sorts of other aesthetic services, including tattoos, body piercing, tanning salon sessions and massages. Twenty-one states taxed tanning salons and 10 states taxed massages as of last July, according to the Federation of Tax Administrators, which tracks state taxes. Last year, Arkansas began imposing a sales tax on body piercing, tattoos and electrolysis.
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No one knows for sure how many New Jersey patients are declining surgery or are going out of state for treatment since the law was passed. The tax hasn't generated as much revenue as New Jersey originally hoped. When the tax was signed into law last June it was expected to generate $24 million this fiscal year. The state now thinks the tax will only generate $7 million this year.

Note that last part. Now the Penny in Your Pocket Rule meets the Politics of the Warm Fuzzy Feeling. The tax didn't raise the revenue that was expected — but who cares? The politicians "did something" — the fact that it's something that's not working is irrelevant. And heck, at least a few "rich" got soaked in the process. (Or did they? Plastic surgeons insist that cosmetic surgery is a predominantly middle class service.)

As I blogged back in January:

Slap a tax on luxury cars, the rich will switch to luxury boats. Slap a tax on luxury boats and the rich will switch to jewelry. Slap a tax on jewelry and the rich will...well, you get the idea. ... We all know stories of people who, when the purchase is large enough, will cross state lines to take advantage of lower sales taxes. If the rich are "not deterred by a little sales tax" (sidebar — 6.5% is "little"?), then they're also not likely to be deterred by a little travel to a lower-tax state.

Hopefully this obnoxious idea will quickly flame out.

More thoughts at Government Bytes.