Wednesday, July 20, 2011

Tax wedding rings. No one will know the difference.

With our huge budget deficit, there are many ideas on how to raise more government revenue. Most of them involve raising taxes on the highest-earning households. I have a better idea: tax the ultimate in status purchases -- wedding rings.

Not romantic, but practical. The reasoning: wedding rings are purchased largely because they are expensive. No bride wants to feel cheap. Men are usually advised to spend some fixed amount of their income on the ring: somewhere between 5% and two months of salary being the most common advice. If men are looking to spend a certain amount of money, and care very little about the ring's actual attributes, a tax would not affect their purchasing at all!

How much revenue could a wedding ring tax raise? From a little Google-work, here are some starting figures:
If we split the difference on average engagement ring prices (arriving at mean of $2,650) make the heroic assumption that every bride gets both an engagement and wedding ring, and the less-heroic assumption that wedding ring demand is inelastic with regard to price, it becomes fairly easy to estimate revenue from a tax.

Suppose government taxed half the cost of rings. Price of the ring would remain about the same because it's a status purchase; jewelers would use slightly less high-quality gold, diamonds, etc. to make up lost profits from the tax.

For a quick back-of-the-envelope calculation:  
Revenue = ($1,325 + $2,500) * 2,400,000 = $9,180,000,000 or $9.18 billion dollars per year.

It won't balance the budget but neither will most of the proposals floating around, like turds in the political punchbowl, being pushed back and forth by the Obama Administration and Congress. If taxes are going to be raised, I for one think it would be better to choose targets that will impact consumers as little as possible. From this perspective, wedding rings are an easy target.

4 comments:

  1. And hey, this might actually reduce the quantity of people getting married and thus work towards abolishing this ludicrous practice! Who decides they love each other so much they have to get the government, church and family members they don't don't care about involved?

    ReplyDelete
  2. I like the idea but it has a simple flaw, you are instantly cutting the revenues of, from your own estimates, an 18 billion dollar a year industry in half. What few companies survive such a shock to the industry, if any, will have huge amounts of market power and as such the quality of rings sold will decline largely for what would surely be a period of decades. All this really means, however, is that the tax rate needs to be realistic enough that the industry can survive the shock.

    ReplyDelete
  3. Just being cheeky...I think you have the prices of wedding rings and engagement rings around the wrong way! The engagement ring is the more costly item as it is the one with larger diamond/s the wedding ring is a simple band (or may have a pave setting). On a slightly more serious note, how would you tax this item? You could buy the ring as an engagement/wedding ring or it could be a gift for your mum's 60th birthday (or you cheated on your wife and you need to make amends). Does that mean you simple increase the tax on ALL rings? Or do you have to fill out a statutory declaration that it is not a wedding/engagement ring when you purchase it to avoid the tax? ;)

    ReplyDelete
  4. You have a point, although I'd say the tax benefits probably swamp the cost of a ring, if a couple is just considering financial incentives for marriage.

    The institution does have some benefits though - in economic-speak, it's a pre-commitment device so that the married parties can better specialize in relationship-specific goods

    ReplyDelete