Luxury tax on hospitals

The Karnataka State government, as part of this year?s budget, has decided to impose a 8% luxury tax on hospitals. Specifically, hospital rooms with a rent exceeding Rs. 1000 per day would be taxed at 8%.

Excellent move, I say. From a revenue management point of view, at least. For one, this tax attacks only the inelastic part of the curve. To put it in English, a small increase in price doesn?t decrease ?quantity? at these price points.

Secondly, the tax is not too much, which means that the increase in cost is only marginal, and hence the principles of elasticity apply. To recall, elasticity is defined as the change in quantity consumed to a SMALL change in price. 8% is definitely a SMALL change, and won?t have any impact on the ?consumption?.

Thirdly, the tax spares the lower end of the price curve, which is both inelastic and also affects the poor and lower middle class (no, I?m not using the phrase ?common man? to describe them). Having included them into the tax net would have been a political disaster, and also touched a very elastic part of the curve.

And fourthly, and most importantly, the scope of this tax is significant enough to have a significant impact on the government?s revenues.

Kudos to Yediyurappa, and hoping he sticks to this kind of work rather than wasting time, energy and money on ?moral issues? such as lotteries or jackpots.