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The balance between specific and ad valorem taxation

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  • Michael Keen

Abstract

A recurring issue in indirect tax design — most obviously, but not only, for goods traditionally subject to heavy excises — is the appropriate balance between specific and ad valorem taxation. Recent work has developed new perspectives on the issue, which is also one of the oldest in the formal study of public finance. This paper provides a broadly non-technical account of the central considerations that arise in choosing the balance between specific and ad valorem taxation, reviewing and somewhat extending the lessons of theory and experience. There emerge clear presumptions as to the relative effects of the two kinds of tax on such attributes as price, profits, product quality and variety. But the socially optimal balance between them is likely to be quite sensitive to the characteristics of the market at issue.

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Article provided by Institute for Fiscal Studies in its journal Fiscal Studies.

Volume (Year): 19 (1998)
Issue (Month): 1 (February)
Pages: 1-37

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Handle: RePEc:ifs:fistud:v:19:y:1998:i:1:p:1-37

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  1. Myles, Gareth D, 1987. "Some Implications of Quality Differentials for Optimal Taxation," Economic Journal, Royal Economic Society, vol. 98(390), pages 148-60, Supplemen.
  2. Dierickx, I. & Matutes, C. & Neven, D., 1988. "Indirect taxation and cournot equilibrium," International Journal of Industrial Organization, Elsevier, vol. 6(3), pages 385-399.
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  5. Besley, Timothy J. & Rosen, Harvey S., 1999. "Sales Taxes and Prices: An Empirical Analysis," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 157-78, June.
  6. Barnett, Paul G. & Keeler, Theodore E. & Hu, Teh-wei, 1995. "Oligopoly structure and the incidence of cigarette excise taxes," Journal of Public Economics, Elsevier, vol. 57(3), pages 457-470, July.
  7. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  8. Johnson, Terry R, 1978. "Additional Evidence on the Effects of Alternative Taxes on Cigarette Prices," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 325-28, April.
  9. Skeath, Susan E. & Trandel, Gregory A., 1994. "A Pareto comparison of ad valorem and unit taxes in noncompetitive environments," Journal of Public Economics, Elsevier, vol. 53(1), pages 53-71, January.
  10. Dickie, M. & Trandel, G.A., 1993. "Comparing Specific and Ad Vaslorem Pigouvian Taxes and Output Quotas," Papers 431, Georgia - College of Business Administration, Department of Economics.
  11. Fraser, R. W., 1985. "Commodity taxes under uncertainty," Journal of Public Economics, Elsevier, vol. 28(1), pages 127-134, October.
  12. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
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  14. Barzel, Yoram, 1976. "An Alternative Approach to the Analysis of Taxation," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1177-97, December.
  15. Stern, Nicholas, 1987. "The effects of taxation, price control and government contracts in oligopoly and monopolistic competition," Journal of Public Economics, Elsevier, vol. 32(2), pages 133-158, March.
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