An Economic Analysis of the Luxury Car Tax in Australia

Abstract

Luxury cars are a symbol of wealth, succe ss and prestige and are a commodity of a sophisticated monopolistically competitive market around the world. Considering luxury cars to be representative of s uperior goods, you would expect sales to be decreasing during an economic downturn. However, while sales of luxury cars in Europe and the US declined during the GFC, sales within Australia increased substantially. This paper presents a closer inspection of this market in Australia and particularly focuses on how the government has applied the Luxury Car Tax (LCT). It looks at the impact of the LCT on the Australian luxury car market from an economic perspectiv e, and attempts to explain the political rationale for maintaining such a tax.