Now, define "luxury items", while considering e.g. that in the UK there's VAT on things like tampons (though at the reduced 5% rate), while e.g. imported luxury meat is zero-rated because its food.
It's an incredibly complicated tax to apply, because the rules tend to grow to deal with more and more corner cases.
For example: Are jaffa cakes cakes or biscuits? It took a lengthy court case to determine that they are in fact cakes for the purpose of UK VAT [1] [2].
The reason for this case was that cakes are exempt from VAT as food no matter what, while biscuits are zero-rated in the UK only if they are not covered in chocolate. In the latter case they are considered confectionery, which is standard rated. Here's more on the complexities of this classification [3].
I agree with you, when it comes to applying law to real life it is usually lengthy and pricey process. We should just use a better legal system where these things are not up in the air. You can complicate life with broken legislation, just to keep lawyers busy. You could also just ask: do we need a lawyer to determine that jaffa cakes are cakes or biscuits, or we can pick one and go with it.
On the other note on VAT categories: how about collecting data and letting machine learning decide what is a luxury item? We have excellent clustering algorithms that can find clusters in data human has no chance to find. Lets apply that to purchasing habits and figure out what sort of clusters we have out there, and lets decide how much VAT you pay based on that.
Laws are supposed to be somewhat stable though, so having to update tax systems based on evolving patterns of what rich people are doing kind of breaks that.
The classic UK example is dried fruit. If it's bought in the cake decoration department it's 0% VAT, from the home brewing department 20% VAT.
Also for some items such as gift baskets the food is 0 rated but the basket/bowl is rated at 20% and the VAT is proportionally allocated. (I can't remember if it's cost or sales price)
It's an incredibly complicated tax to apply, because the rules tend to grow to deal with more and more corner cases.
For example: Are jaffa cakes cakes or biscuits? It took a lengthy court case to determine that they are in fact cakes for the purpose of UK VAT [1] [2].
The reason for this case was that cakes are exempt from VAT as food no matter what, while biscuits are zero-rated in the UK only if they are not covered in chocolate. In the latter case they are considered confectionery, which is standard rated. Here's more on the complexities of this classification [3].
[1] https://en.wikipedia.org/wiki/Jaffa_Cakes#Categorisation_as_...
[2] http://www.hmrc.gov.uk/manuals/vfoodmanual/VFOOD6260.htm
[3] http://www.hmrc.gov.uk/manuals/vfoodmanual/VFOOD6200.htm